Goldman Sachs Downgrades US Steel, Upgrades Cleveland-Cliffs Ahead Of Steel Market Mean Reversion

U.S. steel prices have skyrocketed in 2021, and steel stocks have mostly followed suit.

One major Wall Street firm adjusted its coverage of steel stocks on Wednesday ahead of an anticipated correction in the steel market in the months ahead.

The Steel Analyst:

Goldman Sachs analyst Emily Chieng made the following adjustments to her steel stock coverage:

• United States Steel Corporation X downgraded from Neutral to Sell, price target cut from $34 to $21.
• Nucor Corporation NUE downgraded from Buy to Neutral, price target cut from $123 to $108.
• Commercial Metals Company CMC upgraded from Sell to Neutral, price target raised from $31 to $33.
• Cleveland-Cliffs Inc CLF upgraded from Neutral to Buy, price target cut from $26 to $24.

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The Steel Thesis:

In the new note, Goldman raised its 2021/2022 hot rolled coil (HRC) steep price forecasts from $1,399/$950 per ton to $1,572/$1,013 per ton. In the longer-term Goldman reiterated its $700-per-ton price forecast for 2023 and beyond.

“In spite of our positive longer term outlook relative to historical levels, we note that the path towards our higher normalized price forecast must trend lower at some point,” Chieng said.

Given expectations of a softening in steel prices, Chieng recommended investors take a more defensive approach to steel stocks heading into the fourth quarter. She is bearish on U.S. Steel largely due to its negative free cash flow. For Nucor, Chieng said the stock’s additional upside is limited following its 105.9% gain in the past year.

Commercial Metals shares have lagged steel stock peers, and Chieng said the company has relatively low HRC exposure. In addition, she said auto contract repricing, accelerated deleveraging and a discounted valuation make Cleveland-Cliffs an attractive buy at current levels.

Benzinga’s Take: Benzinga’s Take: The VanEck Vectors Steel ETF SLX is already up 65% in the past year, so the excess cash flow generated from higher prices in the industry may already be priced into the stocks to a large degree.

The big question for steel stock investors is when steel prices start to pull back and how deep that pullback will be.