Steel Prices Should Rise Significantly Into First Half Of 2017

Both U.S. and Euro steel prices will likely rise significantly into the first half of 2017, backed by a raw materials cost-push, seasonally stronger demand and lower imports, Jefferies’ Seth Rosenfeld said in a report.

Rosenfeld commented that the steel markets seemed to be hitting “a cyclical sweet spot,” and prices were set to rise into H1 of 2017. The upturn would be driven mainly by:

1. Virgin raw materials inflected in Q3, which supports Chinese and Euro steel prices. U.S. scrap has also recently “followed suit.” Moreover, cost-push steel price inflation seems to have more room to increase.
2. The rise in Asian steel prices have been accompanied by a loss of import competitiveness, “while rising tariffs allow for expanded intra-regional price spreads,” Rosenfeld noted, adding that Trump could fill the emerging policy cracks in the United States, while the EC has launched a critical HDG (Hot-Dip Galvanizing) investigation.
3. In the United States, steel inventories are sub-normal, and moderate in Europe. Thus, with a seasonal improvement in demand into Q1 and structurally growing in infrastructure, restocking is likely.

“While 2H17 will see headwinds from growing US capacity and normalising raw materials, steel equities should continue to be supported in coming months by emerging price/vol momentum,” the analyst commented.

Downgrades

Rosenfeld downgraded the rating on Commercial Metals Company CMC from Buy to Hold, while raising the price target from $20 to $24. He downgraded Worthington Industries, Inc. WOR from Hold Underperform, and raised the price target from $42 to $45.

Despite the upward revision in estimates for U.S.-exposed mills and distributors, there seems to be “limited upside for some equities” and there is risk of near-term pullback in view of the recent sector rally.

Although Commercial Metals offers attractive construction exposure, valuation seems stretched and margins could come under pressure. Worthington Industries is trading at peak multiples, and upside is limited by autos appearing poised to plateau and low construction/O&G exposure, the analyst mentioned.

Top Picks

Rosenfeld cited the following as the top picks in the sector, while maintaining their Buy ratings and raising their price targets:

• AK Steel Holding Corporation AKS: from $7.50 to $13.00.
• ArcelorMittal SA (ADR) MT: from €7.25 to €9.50.
• Nucor Corporation NUE: from $55 to $77.
• Steel Dynamics, Inc. STLD: from $32 to $45.