Amid imports targeting the U.S. market and inventory destocking planned by customers, analysts at Bank of America Merrill Lynch trimmed their Q4 2016E US HRC spot price estimate by $50 and also trimmed their H2 volume assumptions. Timma Tanners and team said in their September 15 research piece titled “Cutting U.S. steel mill H2 ests on lower steel price outlook as imports are back” that they believe the widening price gap between the U.S. and the rest of the world for premium sheet will be unsustainable.
BAML lowers sheet forecast for Q4E
Tanners and colleagues highlight that benchmark U.S. hot-rolled coil has dropped more aggressively than anticipated thanks to an unprecedented sheet premium as compared to the rest of the world. They add that even though imports have been dissuaded by new trade cases, foreign tons will increasingly target U.S. shores to shrink the outsized U.S. premium. Considering the recent shorter lead times, the analysts have trimmed their Q4 2016E US HRC spot price to $520/st from $570.
Alluding to the gap between U.S. and global sheet prices closing more quickly, the BAML analysts have also lowered their sheet forecasts for Q4E while raising HRC for 2017E. The following table captures the BAML analysts’ U.S. steel price forecasts:
In a recent article, CNN highlighted that the U.S. steel industry produced about 79 million tons of steel in 2015, while consumption remained higher at about 130 million tons of steel.
The BAML analysts expect the recent rebound in steel imports in the U.S. to continue into Q4E:
As imports target the U.S. market, the BAML analysts expect the unusually high premium commanded for U.S. cold rolled sheet prices relative to China and Europe to drop. They highlight that the CRC premium has retreated from $400/t relative to China, which could still elicit a $100-200/t correction.
BAML prunes steel price objectives for U.S. steel companies
Resonating their expectations of increased volume from additional domestic supply and discounted imports, Tanners and team lowered their steel price objectives for U.S. steel companies.
As the BAML analysts expect U.S. Steel management to lower their 2016E EBITDA scenario during their upcoming Q3 conference call, they have reiterated their Underperform rating on the company and trimmed their price objective from $21 to $16.
Tanners and colleagues also reiterated their Underperform rating on AKS and X, considering the companies’ exposure to falling sheet prices and relatively high fixed costs. The analysts anticipate that both the companies will witness relatively flat volumes y/y into 2017E on the back of a more stagnant auto volume outlook.
However, enthused by outsized dividends and diversified product mix, the BAML analysts prefer RS and NUE among their Neutral-rated companies.