Credit Suisse Bullish On Steel Sector

Credit Suisse’s Curt Woodworth initiated coverage of the US Steel Sector with a bullish view. He mentioned that the US market seemed to be close to a cyclical low point for volume and pricing, and the outlook for both is very strong for the rest of 2016.

Global demand seems to be in a strong recovery mode, backed by a seasonal upswing in Chinese demand, while there has been a slow ramp in global supply following curtailments during end-2015.

Global prices have surged over the past several months and “we believe US prices are likely to experience the strongest recovery as not only will prices increase with the global market but premiums to foreign material should expand from trade case protection,” analyst Curt Woodworth wrote.

Outperform Ratings

The price target for Steel Dynamics, Inc. STLD is at $25. The company is America’s lowest cost flat rolled producer, with the highest earnings leverage to a recovery in the US flat rolled market. The analyst expects EAF metals spreads for sheet products to widen significantly in 2Q, providing EPS upside to Street expectations. Steel Dynamics has strong potential for organic growth on mix upgrades.

The price target for United States Steel Corporation X is at $19. The company is expected to generate high incremental margins as volume recovers. Woodworth believes that States Steel would beat FCF and EBITDA expectations for 2016. The company has the highest leverage to spot market recovery, he added.

Neutral Ratings

The price target for Commercial Metals Company CMC is at $16. Metals spreads in rebar and MBQ are weakening, while US non-residential construction trends remain mixed, the analyst said.

The price target for Nucor Corporation NUE is at $42. Although the company’s sheet exposure is merely 40 percent of volume, it is well positioned for robust growth in mid-2016, Woodworth mentioned. He added, however, that plate markets remained very weak and there was significant import pressure in rebar and MBQ.

Underperform Rating

The price target for AK Steel Holding Corporation AKS is at $2. “AK Steel’s high fixed cost base, slab short position, and Ashland outage are major headwinds” and the company is expected to burn cash at rate of $43mm in 2016 and $109mm in 2017, Woodworth commented.