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More Pain Ahead for U.S. Steelmakers

We disagree with the consensus that the worst is over for steel, and expect prices to move materially lower by the end of this year.

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Andrew Lane: With U.S. steelmaker stocks having rallied sharply after a painful 2015, shares are now pricing in much better times ahead. Given the impact of higher steel prices, the perception of improved supply discipline in China, and a flurry of protectionist trade cases, the consensus narrative now argues that the worst is over. However, we strongly disagree and see more pain ahead for U.S. steelmakers.

Barring a significant improvement in demand, we're hard-pressed to buy into the thesis that elevated steel prices are sustainable. Instead, we expect prices to move materially lower by the end of 2016. Based on our outlook, every U.S. steelmaker we cover is trading above fair value. In particular, we urge investors to avoid highly leveraged blast furnace operators such as AK Steel, U.S. Steel, and ArcelorMittal, as their future cash flows are most sensitive to falling steel prices.

Andrew Lane does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.