Why Key Analyst Sees Major Steel Losing Momentum

By Chris Lange Updated Jan 13, 11:41AM EST · Published Mar 21, 1:35PM EDT

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Why Key Analyst Sees Major Steel Losing Momentum — © Thinkstock

While steel prices in the United States may see some near-term upside, driven by seasonal restocking, gradual demand growth and mounting protectionist trade barriers, one key analyst fears that momentum may run out of steam into summer. After a strong run of equity performance for U.S. steelmakers, these valuations are increasingly hard to justify, and as a result the firm is making a few downgrades.

Jefferies downgraded Reliance Steel & Aluminum Co. (NYSE: RS), Commercial Metals Co. (NYSE: CMC) and Olympic Steel Inc. (NASDAQ: ZEUS) to Hold, and United States Steel Corp. (NYSE: X) to Underperform. Steel Dynamics Inc. (NASDAQ: STLD) and Nucor Corp. (NYSE: NUE) remain top picks.

Following a painful 2015 with falling demand and shipments, 2016 should benefit from an end of destocking and sustained growth in non-resi construction, offset by further oil and gas contraction. In the firm’s proprietary Steel Survey, 62% of respondents have seen higher quarter-over-quarter demand in the first quarter, and looking forward into the next quarter, 58% expect higher demand and 81% expect higher prices in the coming three months.
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In the report Jefferies detailed:

Global steel prices have recently recovered strongly boosted by seasonal restocking, hopes for Chinese capacity closures and mounting protectionist policies. With Chinese exports set to remain elevated, Chinese prices are the key starting point for global peers. Notably, Chinese steel spreads over raw materials, which halved in 2015, have now recovered toward the bottom-end of the historical range. From here, incremental moves will be driven by riskier supply/demand trends and dragged down by an expected roll-over in iron ore prices into summer. While higher Chinese prices should “allow” for stronger near-term US prices, momentum may fade in the months ahead.

Reliance shares were trading down 2% at $68.87 on Monday, with a consensus analyst price target of $64.30 and a 52-week trading range of $50.08 to $71.34.

Shares of Commercial Metals traded down 4% at $16.47, with in a 52-week range of $12.44 to $17.76. The consensus price target is $17.06.

Olympic Steel shares were trading down 1.2% at $16.68. The consensus price target is $13.00, and the 52-week range is $6.40 to $20.93.

Shares of U.S. Steel were down 3.9% at $15.15, with a consensus analyst target of $8.66. The 52-week range is $6.15 to $27.68.

Steel Dynamics shares were up 0.7% to $22.04. The consensus price target is $22.58, and the 52-week range is $15.32 to $23.17.

Shares of Nucor traded down 0.9% at $46.26, with a consensus price target of $46.29 and a 52-week range of $33.90 to $50.70.

About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.