Credit Suisse: 'The US Steel Industry Is Changing'

“The US Steel Industry Is Changing, and the way we think about the space needs to change with it,” writes Credit Suisse analyst Nathan Littlewood.

Domestic steel prices have been much higher than Littlewood expected, driven by outages in integrated mills and strong demand. Further, the import parity pricing model is not working.

Credit Suisse focuses on the domestic steel market because high barriers of trade separate global markets. This has been keeping domestic prices high in the midst of an international slowdown, especially in China. Nonetheless, No single “macro conditions are enough to make the US steel sector interesting,” but several at once draw investor interest.

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Littlewood also commented on industry consolidation, which he believes is helping US producers. Reasons include improved pricing power and a better return on capital. One risk is that unprofitable business lines will be supported within the large companies.

For these reasons, Littlewood argues that steel investors need to think about US companies separately. Shares of United States Steel X, which Credit Suisse uses as a proxy for domestic producers, are up 26 percent in 2014.