Despite recent strength surrounding the U.S. steel sector on optimism from the Trump administration's efforts to boost the industry, one team of analysts on the Street says the group has reached "the end of the line." (See also: Icahn Sold Steel-Related Stock Ahead of Tariffs.)
According to analysts at UBS, President Donald Trump can do very little to delay a 17% decline in U.S. steel prices through the end of 2019, and that spells bad news for shares of industry leaders such as United States Steel Corp. (X) and AK Steel Holding Corp. (AKS). While both stocks spiked Wednesday on rising commodity prices across the board, up 3.1% and 2.3% respectively, UBS analyst Andreas Bokkenheuser remains bearish on the sector, initiating coverage of X and AKS at sell.
Tariffs "in the U.S. resulted in lower imports and limited supply, creating volatility, but we expect the market to return to equilibrium," wrote the analyst. He noted that, "even if imports fall (e.g., because of quotas), we caution that end-demand (manufacturing) will likely trend down driven by higher prices."
Pointing to 'Structural Decline'
UBS foresees shares of U.S. Steel sinking 20% from $37.50 at Wednesday close to reach $30, while his 12-month price target on AKS stock, trading at $4.82, implies an approximate 33% downside. AKS has underperformed the S&P 500's 1.1% incline year-to-date (YTD), falling 14.8% over the period, while X has returned 6.6% to shareholders in 2018.
"We closely track China as a primary leading indicator of U.S. steel prices (by one month), and conclude that risk to prices and the domestic spread is to the downside," stated Bokkenheuser. He sees Beijing maintaining its role "in the driver's seat" in terms of global pricing power given its relatively massive demand and production of steel. The country accounted for half of global steel production in 2017, compared to America's 5% contribution, noted Bokkenheuser, adding that China's steel exports equate the total of U.S. demand and half of the global seaborne market.
The analyst also started coverage on Steel Dynamics Inc. (STLD) and Nucor Corp. (NUE), issuing both a neutral rating as he expects the larger industry to suffer a "structural decline." (See also: US Infrastructure Bill May Spark GM Outperfomance.)