Bank Of America: Steel Dynamics A Better Bet Than U.S. Steel

In a recent industry overview, Bank of America Merrill Lynch looked into the U.S. steel industry against the backdrop of the U.S. Commerce Department's preliminary dumping tariff decision.

The document outlined tariffs on HRC imports (hot rolled coil imports) prohibitive as follows:

• Australia: 23 percent
• Brazil: 34 percent
• Japan: 6–11 percent
• Korea: 4–7 percent
• Turkey: 5–7 percent
• The UK: 49 percent

Bank of America considers anything below 10 percent less prohibitive, "depending on the U.S. price premium to other countries."

What It Means

While the final decision is not slated until August 3, the tariff decisions have been in the works since August 2015.

In regards to what the tariff means and what the decisions imply, Bank of America explained, "As a result of the expected tariff decision, imports slowed into year-end 2015."

Related Link: Credit Suisse Bullish On Steel Sector

"These declines in addition to mill curtailments and seasonal demand have contributed to a tighter market. Import volumes already fell on the back of the investigations, yet we would expect some further net declines as Brazil and Australian imports fall, even as Turkish and Japanese tons perhaps rise," said Bank of America.

For the near term, Bank of America anticipates relative strength, but questions its sustainability. "We recently got more conviction on sheet price upward momentum after channel checks this week suggested markets have gotten tighter," stated Bank of America. "While rising prices can invite more imports and capacity to restart, we see a delay before any incremental tons can affect the market. Through May U.S. domestic prices may continue to rise, after which upward momentum could be challenged by seasonally slower demand, restarts, and or/higher imports."

A Few Names

The industry note highlighted Steel Dynamics, Inc. STLD specifically, indicating a 12-month price objective of $23 per share and justified "given the greater cash flow outlook ahead, more diversified geographic/end market mix, and potential Columbus deal-related synergies."

Bank of America currently has a Buy rating on Steel Dynamics.

Other Buy-rated names in the space include:

• Kaiser Aluminum Corp. KALU
• Martin Marietta Materials, Inc. MLM
• Nucor Corporation NUE
• Summit Materials Inc SUM
• Vulcan Materials Company VMC

Neutral-rated names include:

• Alcoa Inc AA
• CNX Coal Resources LP CNXC
• Commercial Metals Company CMC
• Reliance Steel & Aluminum Co RS

Underperform-rated names include:

• AK Steel Holding Corporation AKS
• Allegheny Technologies Incorporated ATI
• Cliffs Natural Resources Inc CLF
• CONSOL Energy Inc. CNX
• Ryerson Holding Corp RYI
• SunCoke Energy Inc SXC
• SunCoke Energy Partners LP SXCP
• United States Steel Corporation X

At time of writing, Steel Dynamics was up 1.34 percent in Wednesday's pre-market trading.