Citi Steals The Thunder From Steel, Downgrades Sector

The firm downgraded steel stocks AK Steel Holding Corporation AKS and United States Steel Corporation X.

Steel Prices To Decline In 2H07; Citi Not Outrightly Bearish

Analyst Alexander Hacking noted implied EBITDA per tons are close to peak 2007–08 levels in AK Steel and U.S. Steel. The analyst expects steel prices to decline in the second half of 2017 based on increased domestic supply, limited demand growth, lower raw materials and import parity.

That said, the firm said it would not turn outright bearish due to potential structural positives such as Chinese supply side reform and U.S. government policy, having the potential to generate further upside.

Raising Price Forecast

Citi raised its 2017 average hot rolled coil steel price forecast to $567 per ton from $514 per ton. Nevertheless, the firm said it is cautious about buying into the last price increase, with $100 per ton downside in prices expected in the second half. Citi also noted that the import arbitrage with Turkey and Black Sea exports is now at over $150 per ton.

Demand To Rise Modestly

The firm expects U.S. steel demand to rise 3.5 percent in 2017, with current capacity, plus, new supply from Big River sufficient to absorb the demand, even with structurally low imports.

Policy Support May Be Long Time Coming

Citi sees support from new policies on trade, taxes and infrastructure. Given that details on policies are short, the firm said it is hesitant to overpay without more clarity. According to Citi, incremental demand from infrastructure would be 6 mtpy, although it is not expected at least until 2018.

Ratings/Price Targets

• AK Steel: Downgraded to Sell from Neutral/price target raised to $8 from $5.
• Commercial Metals Company CMC: Downgraded to Neutral from Buy/price target raised to $21 from $20.
• Nucor Corporation NUE: Maintains at Neutral/price target raised to $65 from $50.
• Steel Dynamics, Inc. STLD: Maintains at Buy/price target raised to $43 from $30.
• U.S. Steel: Downgraded to Neutral from Buy/price target raised to $37 from $21.

At Last Check

• United States Steel was down 1.66 percent at $34.35 in pre-market trading. Immediately prior to publication, the stock was down 4.71 percent at $33.28.
• AK Steel was slipping 3.57 percent in pre-market trading. At last check, it was down 4.87 percent at $9.58.