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U.S. Steel Stock Has Had a Tough Year. It Could Get Worse.

U.S. Steel Stock Has Had a Tough Year. It Could Get Worse.


News is brought to you by Mr. Shailesh Karia


Published on 15th May, 2019


United States Steel (ticker: X) shares caught another downgrade from Wall Street on Wednesday, as UBS warned the stock could slide another 35% from current levels to $10.


It is no secret the stock is struggling, down 15% year to date, compared with the 11% gain of the Dow Jones Industrial Average. What’s more, the stock is only up 1% from its 52-week low.


On Wednesday, UBS analyst Andreas Bokkenheuser threw in the towel on U.S. Steel stock, downgrading shares to Sell from Neutral with a $10 price target.


Bokkenheuser is worried higher capital spending by the company will decrease near term cash flow. He also has concerns about the expansion of lower cost, electric-arc furnaces by steelmakers like Nucor (NUE) and Steel Dynamics (STLD), which could hurt U.S. Steel ’s long-term profit outlook, too.


The back story. U.S. Steel shares have been volatile largely since the Trump administration aggressively placed tariffs on steel imports to the U.S., claiming foreign steel mills were dumping product—selling steel for below prices charged to local customers—in America.


What’s new. Bokkenheuser points out in a research report published Tuesday night that electric-arc furnaces have increased U.S. market share by 10% in the past 10 years. And he doesn’t see that trend abating because of plans for additional electric-arc capacity announced in recent months.


“Due to their higher cost model, we expect BOF production capacity reductions, as market share shifts over time,” Bokkenheuser writes. BOF is short for basic oxygen furnace, the process used by steelmakers like U.S. Steel which converts pig iron—produced in a blast furnace—into steel. Electric-arc producers remelt scrap, for the most part, to produce steel.


It wasn’t all bad news from Bokkenheuser, though. He upgraded shares of electric-arc steelmaker Steel Dynamics to Buy with a new $47 price target, about 40% higher than recent levels.


Looking ahead. Analysts were bullish on U.S. Steel stock earlier in the year after iron ore supply problems in Brazil were expected to push steel prices higher in America. Iron ore is a key raw material in steel making. Iron ore prices are up 33% year to date, but hot rolled steel sheet prices are down 10%.


It is very difficult for any commodity-linked stocks, steel included, to perform well when the underlying commodity is dropping. That is what investors have experienced this year.


In basic industries, it is often a good investment strategy to stick with the lowest-cost producers. Steel Dynamic fits that bill.


Still, U.S. Steel is trading below the replacement value of its assets, close to the worst valuation in the past seven years. 


Source : https://www.barrons.com//


 





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