Commodities & Metals
Credit Suisse: 'Let's Not Split Hairs' Over the Steel Supercycle
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From a low of around $450 a ton in late August last year to more than $1,200 a ton by March 1 of this year, the spike in steel prices certainly qualifies as a supercycle. Or as a cycle that is super from a steelmaker’s point of view.
In a new review of the steel industry, analysts at Credit Suisse note that the past year has been “extraordinary” for global steel markets, with prices for flat-rolled steel reaching record highs last month. The analysts comment, “Demand is strong across virtually all major verticals and years of capacity rationalization and consolidation have finally collided with a synchronous global demand recovery, leaving steel in shortage in many regions.”
Credit Suisse believes the cycle has more room to run and the U.S. producers are in the best position to take advantage of the strong demand for steel. Analyst Curt Woodworth writes that currently “US prices are the highest and raw material costs are the lowest, a virtue of the US being very net long scrap, iron ore, and coking coal.” U.S. prices for hot-rolled coil steel are about $400 a ton higher than European prices.
Credit Suisse has made the following changes in its ratings and 12-month price targets for six steel companies.
U.S. Steel
The rating on United States Steel Corp. (NYSE: X) rose from Underperform to Outperform, and the firm raised price target from $15 to $35.
Saying that recent “structural changes” at the company, as well as in the global steel market, favor U.S. Steel, the analysts raised their rating two notches “to account for significantly higher earnings estimates and a higher target multiple.” The company’s decision to end its upgrade project at the Mon Valley plant, combined with the acquisition of Big River Steel, were major drivers of the upgrade.
Cleveland-Cliffs
Credit Suisse upgraded Cleveland-Cliffs Inc. (NYSE: CLF) to Outperform from Neutral and raised price target from $21 to $24.
The analysts write that Cleveland-Cliffs “has put together three best in class mining/steel companies, to create a powerhouse steel entity [and] is now remarkably well balanced with four electric arc mills, eight blast furnaces, and 100% backward integration into iron ore pellet/HBI [hot briquetted iron].”
Nucor
The Outperform rating on Nucor Corp. (NYSE: NUE) was maintained, but the frim raised its price target from $75 to $95.
The analysts expect continued “strong growth potential given sizeable organic growth spend with high IRRs [internal rates of return] and history of accretive M&A which we expect to accelerate.” Nucor “is a clear winner from rebar consolidation and the rebar micro-mill investments appear well timed.”
Steel Dynamics
Steel Dynamics Inc. (NASDAQ: STLD) shares were maintained Outperform as well, but the firm raised the price target to $72 from $61.
The analysts are expecting a “step function increase of ~50% to [Steel Dynamics’s] sheet existing flat rolled footprint.” The company is also expected to generate more than $6 per share in free cash flow in each of 2021 through 2023, allowing for “material capital return to shareholders as well as to fund further opportunistic growth.”
Stelco
Over-the-counter-traded Stelco Holdings Inc. (STZHF) was maintained at Outperform and its price target was raised from C$26 to C$38.
Canada-based Stelco “will sustain a significant cost advantage vs peers, especially in a higher scrap price environment which we see continuing in the medium term.” Beginning in 2022, the analysts expect Stelco to “pivot more maintenance capex spending levels which coupled with the strong FCF [free cash flow] windfall projected in 2021, should allow for substantial special dividends to be paid out” beginning in the second half of this year.
24/7 Wall St.Commercial Metals
The Outperform rating on Commercial Metals Co. (NYSE: CMC) was lowered to Neutral, even though the firm raised the price target from $25 to $33.
Commercial Metals is a steel recycler, long-steel (bars, rods, rails, and so on) producer and steel and metal fabricator with operations in the United States and Poland. Higher capital costs are possible following a $300 million micro-mill investment and “the impact on FCF yield could limit relative value argument.” Valuation multiples have jumped due to optimism over the U.S. infrastructure bill, but Credit Suisse believes that work won’t begin on any projects until late next year.
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