Steel Analyst Says The Market's Become Too Bearish On China, Upgrades Entire Sector

Credit Suisse analyst Curt Woodworth upgraded the U.S. steel sector from Market Weight to Overweight, citing an overly bearish view of Chinese hot rolled coil and the pending results of the Department of Commerce’s investigation into the industry.

The analyst also upgraded United States Steel Corporation (NYSE:X), Steel Dynamics, Inc. (NASDAQ:STLD) and Nucor Corporation (NYSE:NUE) from Neutral to Outperform.

A Look At Chinese Steel

The analyst reiterated his forecast that hot rolled coil (HRC) will bottom out this summer at $580 per ton, noting that Chinese HRC prices are reverting to normalized levels, but now expects prices to recover in Q3. Rebar prices are also at multi-year highs.

This data along with solid demand lead Woodworth to believe “the market has become too bearish on China.”

See Also: Section 232 Public Hearing Wednesday Is 'Unlikely To Affect Steel Equities'

Section 232

The Department of Commerce has been looking into the effects of steel imports on national security under Section 232 of the Trade Expansion Act of 1962.

“We believe the DoC will find some interrelationship between the health of the US steel industry and US national security, paving the way for [President Donald] Trump to implement additional layers of trade support for the industry,” said Woodworth.

The analyst believes the market is underestimating changes in foreign producer behavior for five reasons:

• Presidential executive orders in support of steel.
• Trump’s proactive “steel triumvirate” of Wilbur Ross, Peter Navarro and Robert Lighthizer.
• The Department of Commerce’s Section 232 investigation.
• The Department of Commerce’s late invocation of the Particular Market Situation rule in the Korea oil country tubular goods (OCTG) ruling.
• Trump's mission to more aggressively enforce trade laws.

Company Highlights

Credit Suisse raised its price target for United States Steel to $29, and sees a pathway to approximately $1.3 billion of EBITDA by 2018 driven by oil country tubular goods.

Steel Dynamics’ price target was upped $7 to $43 and the company is forecasted to see strong volume growth in the coming years as well as potential mergers and acquisitions.

The analyst’s price target for Nucor was raised to $68, stating that the two main concerns — weak fundamentals in long products and excess HRC exposure — are fading.