'We Would Be Adding To Short Positions In US Steel, Cliffs,' Axiom's Johnson Says

Shares of United States Steel Corporation (NYSE: X) have lost more than $7 per share since topping at $27.64 not even a month ago. Despite the downside, Axiom's Gordon Johnson thinks it is still appropriate for investors "be adding to short positions" in both U.S. Steel and Cliffs Natural Resources Inc (NYSE: CLF).

Johnson cited the fact that the market has past peak U.S. HRC (hot rolled coil) prices and offered the following points:

1. Lead times to receive steel is now less than two weeks at some domestic mills versus over eight weeks just two months ago.
2. U.S. service centers shipped less than 2 million tons of carbon flat-rolled steel last month, marking a 10.4 percent decrease year-over-year.
3. Inventory of carbon flat-rolled steel is up 4.6 percent month-over-month at 4.97 million tons.
4. U.S. HRC spot prices are sitting at a premium of $279/s.ton versus a historical premium average of $127/s.ton dating back to 2008.
5. U.S. HRC spot prices are sitting at a $234/s.ton premium to Chinese prices versus a historical average of $109/s.ton also dating back to 2008.
6. U.S. HRC spot prices are sitting at a $183/s.ton premium to North Europe prices versus a premium average of $53/s.ton since 2008.
7. Based on the analyst's own proprietary analysis of spot price premiums, the weakest seasonal months are still ahead.

Related Link: Commercial Metals Steel Business Strong, But Other Divisions Holding Growth Back Says Citi

The analyst suggested that the current steel market is similar to what was seen in 2014 where:

• Step 1: Prices slowly drop.
• Step 2: Imports slowly increase.
• Step 3: Market participants are saying "don't worry."
• Step 4: Prices start to drop at a faster rate.
• Step 5: Imports increase in volume.
• Step 6: Prices begin to collapse.

Johnson stated they are now "well into step 4," and this is best emphasized by a quote from a service center issued to American Metal Market over the weekend, "There was a meteoric rise in prices, which means there is an adjustment coming. We're hoping it's not a meteoric collapse."

Bottom line, Johnson sees downside to steel prices below the $450/s.ton level before "demand catches supply."

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