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15% Downside Seen In US Steel, Cowen Downgrades

15% Downside Seen In US Steel, Cowen Downgrades

Analysts at Cowen turned bearish on United States Steel Corporation (NYSE: X) under the assumption that hot rolled coil steel prices are set to move lower. The firm's Novid Rassouli downgraded U.S. Steel's stock rating from Market Perform to Underperform with a price target lowered from $24 to $20.

Flat rolled iron accounts for nearly 70 percent of U.S. Steel's total EBITDA in 2016 and the company benefited from European prices which were boosted from higher Chinese prices, Rassouli commented in his downgrade note (see his track record here). But now U.S. Steel's "material exposure" to spot flat-rolled prices should have investors concerned as nearly 60 percent of the U.S. flat-rolled segment is exposed to any move in the spot market.

Moreover, U.S. Steel's vertically integrated iron ore supply structure adds another headwind to the story, the analyst continued. The company should be seen as an "undercover iron ore play" because when iron ore prices rise, steel prices normally follows the lead and the company benefits from the fixed price of its internally sourced iron ore.

"This enables margins to expand more rapidly than a steel mill that is having to buy iron ore
in the open market," the analyst explained. "The issue is that when iron ore prices are falling, the company does not benefit from the reduction in input costs that a mill which is short iron ore would be able to achieve.

Bottom line, a decline in HRC prices would prove to be "detrimental" for U.S. Steel's overall earnings power due to its "significant" contribution from the segment.

Related Links:

Barclays Grows More Confident In US Steel, While AK Steel Estimates Soften

JPMorgan Not Bending On Bull Call For US Steel

Latest Ratings for X

Jan 2021Deutsche bankUpgradesSellBuy
Dec 2020Morgan StanleyInitiates Coverage OnEqual-Weight
Nov 2020GLJ ResearchUpgradesHoldBuy

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