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Nomura Sees Steel Reversing Back to $600/ton (AKS) (X) (NUE) (STLD)

July 3, 2013 7:59 AM EDT Send to a Friend
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Steel strategists at Nomura sees a reversal of supply side conditions by the fourth quarter driving hot-rolled coil (HRC) steel back to $600/ton, versus the current level of around $630/ton. The firm trimmed estimates on the group and lowered price targets on a couple steel names.

Analyst Curt Woodworth notes: "US steel and scrap prices recently reached a three-year low in May and have since recovered sharply, driven by supply outages and a lull in import flows from the negative arbitrage condition in 2Q. While various supply side disruptions have arrested the YTD price decline, the key question is whether these prices will last and, more importantly, what is fair value for US HRC in the context of quickly shifting global cost curves as seaborne iron ore and met coal prices correct lower. We believe sharply contracting margins globally is a function of increased Chinese supply impacting margins in Asia and a much flatter cost curve leveling the playing field as bulk material prices contract. We believe that the recent negative inflection point in the non-residential construction market is likely to represent a cyclical pause before the next leg of growth ensues, which is likely to occur in early 2014 in our view. We believe global steel prices are driven by marginal cost dynamics with iron ore the key input. We continue to like Buy-rated STLD/NUE; however, we do see some risks in the short run if non-residential data and long product metal margins remain weak."

The analyst cut estimates and his price target on steel stocks:
  • AK Steel (Neutral) price target from $6 to $3; FY13E EPS from ($0.34) to ($0.50); FY14E EPS from $0.40 to $0.05; FY13E EPS from ($0.50) to ($0.65); FY14E EPS from $1.45 to $0.50.
  • US Steel (Neutral) price target from $20 to $18; FY13E EPS from ($0.50) to ($0.65); FY14E EPS from $1.45 to $0.50.
  • NUCOR (NYSE: NUE) (Buy) $56 price target maintained; FY13E EPS from $1.55 to $1.50; FY14E EPS from $3.40 to $3.00
  • Steel Dynamics (NASDAQ: STLD) (Buy) $18 price target maintained; FY13E EPS from $1.06 to $0.95; FY14E EPS from $1.55 to $1.20




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