One of the main trends in 2015 has been stumbling commodity prices, and this has laid waste to multiple industries over the course of the year. Merrill Lynch was once positive on some of the major players in the steel industry, but now it believes these falling prices could spell disaster for AK Steel Corp. (NYSE: AKS) or United States Steel Corp. (NYSE: X).

The lower steel price forecast from Merrill Lynch reflects an acknowledgement that steel demand has disappointed and any restocking will be later and perhaps slower than expected. Imports also have been slow to taper, and lower prices in China have continued to keep Asian offers low relative to domestic U.S. prices. Further currency devaluation in China can serve to make Asian products more competitive.

The firm continues to assert that trade cases have yet to make an impact, but that ultimately blocking or limiting tons from overseas will boost U.S. sheet prices. Considering that, lower input costs merit a lower steel price, and the United States is not a completely protected island, hence Merrill Lynch expects a muted recovery. The sharp drop in steel prices in 2015 does not appear to be fully reflected in consensus steel mill estimates, and Merrill Lynch expects cautious guidance from U.S. Steel and AK Steel could disappoint investors. Other major steel companies that Merrill Lynch has its eyes on are Nucor Corp. (NYSE: NUE), Reliance Steel & Aluminum Co. (NYSE: RS) and Steel Dynamics Inc. (NASDAQ: STLD).

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Merrill Lynch downgraded AK Steel to an Underperform rating from Neutral and lowered its price target to $1 from $4. This call is primarily based on a forecast for lower steel prices in the days to come. Also the firm now forecasts a loss per share of $0.65 in 2016, down from a prior $0.30 earnings per share (EPS) and versus the consensus estimate of a $0.10 per-share loss.

At the same time, Merrill Lynch anticipates modest free cash flow of $40 million in 2016 and $45 million in 2017. A lower capital expenditure outlook and $200 million year-over-year drop in legacy spending are supportive. However, the firm is concerned over the tight cash flow position amid steep net debt/2016 estimated EBITDA of 7.5 times.

Although AK Steel has no maturities until late 2018, Merrill Lynch sees challenged operations and little breathing room so long as benchmark steel prices remain low. Another threat would be any pressure to its non-nickel bearing stainless or electrical steel sales, which the firm believes has been protected by annual contracts.

Merrill Lynch gave its rational behind the downgrade as:

• An insecure balance sheet.
• Challenged pricing ahead, set to fall more into 2016E.
• A fragile but improved free cash flow story as estimated 2015 project spending falls sharply year over year. AK Steel is the only beneficiary of lower iron ore prices of our coverage universe, yet still relies on somewhat rigid contracts with Cliffs Natural Resources Inc. (NYSE: CLF) for more than half of its needs.

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Shares of AK Steel were last seen trading down 7.5% at $2.46 Monday. The consensus analyst price target is $3.60, and the 52-week trading range is $2.05 to $8.00.

U.S. Steel shares were down 3.9% at $11.27 just after the opening bell. The stock has a consensus price target of $20.00 and a 52-week range of $9.66 to $42.25.

Shares of Nucor were down 1.2% at $42.98, within a 52-week trading range of $36.76 to $55.31. The consensus price target is $48.94.

Reliance shares were relatively flat at $60.62, with a consensus price target of $65.56 and a 52-week range of $50.63 to $67.63.

Shares of Cliffs were down 2.5% at $2.59. They have a consensus price target of $3.11 and a 52-week trading range of $2.28 to $11.70.

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