steel coils
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Pricing for hot-rolled coils of steel has sizzled in the economic recovery, and the heat has carried over into steel stocks. United States Steel (ticker: X) and Cleveland-Cliffs (CLF) are up a respective two and three-times the S&P 500’s 15% gain this year, while Nucor (NUE) is up nearly 80%. A Wednesday note by Credit-Suisse analyst Curt Woodworth says the stocks won’t cool down soon.
Tight production supply has lifted the industry benchmark price of hot-rolled coils to $1,600 per short ton, from the year-ago price of $500. A number of industry analysts have downgraded their ratings to Holds, as they recalled how transitory the industry’s past pinches proved, once imports crashed the party. Woodworth believes today’s upcycle will endure for a couple more years—and argues that investors should therefore rerate the stocks and award them higher multiples.
“The rebirth of the U.S. Steel sector is a real event,” he writes.
Even at today’s appreciated price of $93, Nucor stock could have almost 25% upside to Woodworth’s target price of $115. Steel Dynamics (STLD) and Graftech International (EAF) have around 45% upside to his targets, while he thinks United States Steel could rise more than 80% from today’s $22 level. He rates all those stocks as Outperforms, as he does Cleveland-Cliffs, which he sees rising by a third from its $21 price.
Imports will remain subdued, says the Credit-Suisse analyst, because of the cheap dollar and China’s curb of polluting blast furnaces. Domestic supply will only rise slowly, he adds, through a gradual ramp-up of electric arc furnace capacity. Woodworth expects demand from auto makers and renewable energy developers to keep hot-rolled coil prices well above $1,000 through 2022. Steelmakers can make fat profits at those price levels. Even if 2022 steel prices fall below $1,000, his profit forecasts make today’s stocks look cheap.
Based on the industry’s history, Woodworth thinks Wall Street is discounting a very sharp correction in steel prices. But there is a new normal, he writes.
“Steel stocks are especially cheap,” concludes Woodworth.
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