Axiom's Johnson Says U.S. Steel Mills Have Gone Too Far With Current Regulations; Maintains Bearish Outlook

United States Steel Corporation X reported its second-quarter results after Tuesday's market close, which proved to be better than expected.

United States Steel wasn't alone in reporting a better-than-expected earnings report, and many of its peers also surprised to the upside.

Benzinga reached out to Axiom's Gordon Johnson to discuss what is going on in the steel sector.

Gordon Johnson On Steel

According to Johnson, steel investors shouldn't hold on to an optimistic view moving forward. The analyst stated that the second quarter of a calendar year typically marks "peak optimism" in the steel space.

Related Link: Credit Suisse Sees 26% Upside In U.S. Steel

Meanwhile, auto demand (a key sector client of most steel clients) is "weakening," imports are on the rise, oil prices are moving lower and there will be an impact from the Brexit vote — "no matter how small."

Johnson added that the market is "ignoring" all of these industry headwinds and it won't last forever.

The analyst also suggested that the dividends offered by steel companies are not safe for the foreseeable future. Many steel companies are highly leveraged and operate with high fixed costs associated with plant maintenance.

Finally, Johnson doesn't see any new regulation that could support steel prices. He stated that imported steel into the United States is "now seen as on par" with U.S. produced steel to the point where it is "hard for steel mills not to buy imports."

"The US mills have went too far, and now there will be a flood of imports in 2H16 pushing steel prices lower yet again," the analyst concluded. "Steel is a commodity, and the US is not the price setter. It is the price taker."

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