Is Jefferies The Steel Industry's Virgil In This Not-So-Divine Comedy?
Jefferies released its equity research note on Wednesday, remaining cautious on the steel sector; however, the firm also highlighted that it has a preference for the United States over Europe.
The firm alluded to a key passage from poet Dante in its latest research note in reference to China, "'The path to paradise begins in hell,' but we must determine which level of hell we are at to judge how close we are to the end."
"With Chinese demand contracting, trade policy providing limited salvation and 'bull case' restructuring bringing years of volatility, we have far to go before reaching the ninth circle. We remain cautious but prefer US vs Euro steel," Jeffries noted.
A Look Into A Few Names
Jefferies sees Nucor Corporation (NYSE: NUE), Steel Dynamics, Inc. (NASDAQ: STLD), Reliance Steel & Aluminum Co (NYSE: RS) and Commercial Metals Company (NYSE: CMC) as benefitting from low cost positions and leveraging from the non-resi cycle.
Artisan Partners Asset Management Inc trades at a significant discount to the sector, the firm commented, and Buy-rated ThyssenKrupp AG has de-rated "significantly over the past year" on their estimate.
Jefferies Underperform-rated ArcelorMittal SA (ADR) (NYSE: MT) "continues to trade at roughly stagnant multiples, despite being the worst Euro sector performer of 2015, as deteriorating earnings and FCF trends put consensus earnings/valuation estimates at risk," the firm commented.
Last year, the U.S. and euro steel sectors experienced significant weakness, with the average stock down 29 percent during the year.
Restructuring In China And Hell Versus Paradise
Jefferies sees Chinese restructuring as necessary; however, this may be a double-edged sword.
"While many people say 'If you're going through hell... keep going,' we are left wondering just how close we are to the end at this point. In the terms of Dante's 'Divine Comedy,' when do we reach the ninth circle of hell? And if we survive this process, will steel ever return to paradise?" the firm commented.
"The Chinese government has indeed begun to speak increasingly aggressively about the necessity and benefits of restructuring over the past year, and a newfound focus on environmental policy should prove supportive," Jefferies noted.
"Further, the Chinese steel industry has roughly $520 billion in total debt held largely by Chinese SOE banks; do Chinese banks and policymakers have the stomach to manage an impending default crisis that will naturally come alongside steel plant closures?"
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