Rally in Steel Stocks Has No Legs - Analyst (AKS) (X) (MT) (NUE) (CLF) (MUSA)
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Price: $44.87 -0.24%
Rating Summary:
9 Buy, 6 Hold, 0 Sell
Rating Trend:
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Today's Overall Ratings:
Up: 8 | Down: 12 | New: 30
Rating Summary:
9 Buy, 6 Hold, 0 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 8 | Down: 12 | New: 30
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Since Sept. 7th steel stocks have gained 13 percent, outpacing a gain of only 2 percent in the S&P 500. The rally is tied in part to $157 billion in planned infrastructure spending in China and QE3 in the U.S. Despite the gains, analysts at JPMorgan don't think steel fundamentals are supportive of a continued move higher, which they say began largely as short covering. As a result, they downgraded a number of steel stocks to Neutral from Overweight.
"We expect hot-rolled sheet steel prices in the U.S. to decline further despite relatively positive supply/demand fundamentals," said analyst Michael Gambardella in a research note today.
"In our view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as Nucor (NYSE: NUE) and Steel Dynamics (Nasdaq: STLD) to drop their prices," added Gambardella.
In his view, some of the recent run up in sheet steel price was due to speculation about a strike at United States Steel (NYSE: X) and/or ArcelorMitta (NYSE: MT).
"However," notes Gambardella, "both X and MT have reached tentative agreements, and we think buyers are likely to move to the sidelines over the next month."
Finally, and perhaps most importantly, the investment bank believes that raw material prices will not be supportive of higher global steel prices given their recent declines. Based on fourth quarter settlements, the raw material cost per ton of crude steel is now $308, down $154 (or 33%) from the mid-2008 peak. In JPMorgan's view this does not support further upside in steel stocks.
AK Steel (NYSE: AKS), Cliff's Natural Resources (NYSE: CLF), Metals USA (NYSE: MUSA), Reliance Steel and Aluminum (NYSE: RS) and United States Steel were all downgraded by JPMorgan to Neutral from Overweight.
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"We expect hot-rolled sheet steel prices in the U.S. to decline further despite relatively positive supply/demand fundamentals," said analyst Michael Gambardella in a research note today.
"In our view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as Nucor (NYSE: NUE) and Steel Dynamics (Nasdaq: STLD) to drop their prices," added Gambardella.
In his view, some of the recent run up in sheet steel price was due to speculation about a strike at United States Steel (NYSE: X) and/or ArcelorMitta (NYSE: MT).
"However," notes Gambardella, "both X and MT have reached tentative agreements, and we think buyers are likely to move to the sidelines over the next month."
Finally, and perhaps most importantly, the investment bank believes that raw material prices will not be supportive of higher global steel prices given their recent declines. Based on fourth quarter settlements, the raw material cost per ton of crude steel is now $308, down $154 (or 33%) from the mid-2008 peak. In JPMorgan's view this does not support further upside in steel stocks.
AK Steel (NYSE: AKS), Cliff's Natural Resources (NYSE: CLF), Metals USA (NYSE: MUSA), Reliance Steel and Aluminum (NYSE: RS) and United States Steel were all downgraded by JPMorgan to Neutral from Overweight.
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