Commodities & Metals

Credit Suisse Sees Absolute Destruction in American Steelmakers

Jon C. Ogg

Published: April 15, 2020 12:59 pm

If any business is very cyclical in the United States, the steel and specialty metals segments within metals certainly fit the bill. After all, if sales of planes, trains, cars and capital equipment are slowing to depression-era levels, then it’s pretty hard to get excited about steel.

A new Credit Suisse report outlines what it calls a perfect storm for steelmakers. That is the trifecta of a U.S. recession, an energy paradigm shift and an excess of available sheet supplies. That perfect storm is not a win for any players in the industry, which is now viewed with great caution. Only one company is viewed favorably in this environment.

The U.S. energy segment is seeing absolute demand destruction now that oil and gas prices are so low. The segment accounts for close to 9% of all U.S. steel demand, and Credit Suisse sees demand sharply lower in 2020 and 2021. For the auto sector, steel demand may be down as much as 70% to 90% in the second quarter of 2020. One theme throughout the report is that steel likely will remain in oversupply, given overcapacity versus demand trends.

As for the steel makers as a whole, Credit Suisse’s report from Curt Woodworth said:

In our view, the impact of COVID-19 and the collapse of U.S. energy is a black swan event for domestic steel companies for which recovery will take time. However, time is running out on the shot clock as 8.0 metric tons of new sheet capacity is set to enter the U.S. over the next 12 months to 18 months. This is a perfect storm for steel companies, which have a high degree of operating leverage and rising financial leverage via major capital investment plans and/or acquisitions.

According to Credit Suisse, Commercial Metals Co. (NYSE: CMC) is the only domestic steel stock rated as Outperform. Still, its shares were down almost 9% at $15.00 on Wednesday. The positive noted there was its volumes on a strong free cash flow profile and infrastructure leverage. Credit Suisse has a $24 price target.

Nucor Corp. (NYSE: NUE) was downgraded to Neutral from Outperform, with Woodworth calling for lower free cash flow and higher construction spending risks for 2021. Nucor shares were down over 7% at $35.65 on Wednesday, and Credit Suisse’s price target is $45.

Cleveland-Cliffs Inc. (NYSE: CLF) was reinstated with a Neutral rating, with Credit Suisse noting that its high auto exposure will limit the company’s medium-term free cash flow generation. Cleveland-Cliffs traded down almost 15% at $3.63 per share.

Credit Suisse remains Neutral on Steel Dynamics Inc. (NASDAQ: STLD) which was down 7% at $21.60 on Wednesday. The firm’s price target is only $24.

Credit Suisse maintained its Underperform rating on United States Steel Corp. (NYSE: X), based on its rising financial leverage. Shares of U.S. Steel were down almost 6% at $6.48, and the firm’s price target of $3.00 shows expectations that much worse is coming.

Recessions are generally brutal for the steel and specialty metals industry. The difference between now and the glory days of past decades is that there seem to be increasingly fewer domestic steel giants that can stand up to international competition. If one group needs a massive U.S. infrastructure package sooner rather than later, look no further than steel.

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