These Steel Numbers Just 'Escalated Quickly,' Are You Buying?

Credit Suisse’s Curt Woodworth said that the global steel market is rebalancing swiftly, after last year’s fallout from the energy market, substantial destocking, and distressed exports from China.

Over the past several weeks, global HRC prices have risen to ~$370/ton, with global CRC prices approaching $500/ton. “Turkish scrap and Chinese billet prices also continue to move higher providing cost support,” analyst Curt Woodworth wrote.

US Flat Rolled

Woodworth expects US HRC prices to reach $480/ton and CRC price to approach $640/ton by the end of 2Q16, before trending lower in the back half of the year, as the supply chain normalizes. The US market has the most robust fundamentals among the global steel market over the rest of this year. Restocking, import share gains and end demand growth are expected to drive domestic flat rolled volumes sharply higher in 2016.

Flat Rolled Import

“In the past two weeks, CIS and China export prices increased by $60-80/tonne for CRC and many foreign mills are restricting export quotes until prices settle in Asia,” the analyst mentioned.

United States Steel Corporation: A Top Pick

Woodworth maintained an Outperform rating for United States Steel Corporation X, while raising the price target from $19 to $22. He said that the company has the highest operating and financial leverage to a recovery in the US steel sector.

Every 5 percent increase in volume and $50/ton move in ASP impacts the company’s annual EBITDA by ~$400mm. The analyst expressed optimism regarding US Steel being able to capture a significant share from imports and the restock opportunity set in 2016.

“Given US Steel's high fixed cost base, we believe incremental margins will be very high near 40-50% as volumes start to recover,” the Credit Suisse report added.

Steel Dynamics

Woodworth maintained an Outperform rating for Steel Dynamics, Inc. STLD, while raising the price target from $25 to $27. He expects the shares to trade above historical average multiples, backed by the company’s “compelling growth potential in value add sheet and product mix upgrades in the long product markets of SBQ and rail.”

The analyst believes that the company is “uniquely positioned” to leverage its robust balance sheet for additional organic growth projects as well as acquisitions.

AK Steel

Credit Suisse maintained an Underperform rating for AK Steel Holding Corporation AKS, while raising the price target from $2.00 to $3.50. Woodworth noted that the company has about 10-15 percent exposure to the direct spot market and about 20 percent of the contract customer base has price levels linked to published indices.

The adjusted EBITDA estimate for 2016 has been raised from $238mm to $352mm to reflect higher volumes and pricing in value add sheet.

Nucor

The analyst maintained a Neutral rating for Nucor Corporation NUE, while raising the price target from $42 to $45. He said that Nucor’s mid-quarter update had beaten expectations and the company had indicated that profitability should improve in 2016.

“We viewed this very positively for Nucor given the large hurdle the company faces on LIFO (~$60mm charge forecast for 2016 vs $467mm benefit in 2015). While we remain cautious on the outlook for long products and plate, Nucor has significant leverage to the flat rolled market where metal spreads have widened significantly over the past month,” Woodworth wrote.