J.P. Morgan's metals whiz Michael Gambardella is downgrading the North American Metals & Mining space this morning:
Among the most interesting names:
- Cliffs Natural (NYSE:CLF) to Neutral from Overweight with $36 price target (prev. $55)
- U.S. Steel (NYSE:X) to Neutral from Overweight with $29 price target (prev. $43)
- Others downgraded include AKS, RS and MUSE.
Since Friday September 7, the steel stocks (including CLF) are up roughly 13% compared to a 2% gain in the S&P 500. Gambardella thinks this jump is largely from the announcement of China's infrastructure spend and QE3 which likely pressured the extremely negative consensus view held by most investors on the group. However, he views the recent move up in the stocks largely as short covering, notably the recent appreciation of CLF after short interest as a percent of float reached levels last seen in late 2007. He does not think the fundamentals are supportive of a continued move higher beyond this recent short covering and expects steel prices to decline soon.
Steel prices likely to decline further
After their run up from the high $500/ton range several months ago to recent highs of around $670-680/ton, JPM expects hot-rolled sheet steel prices in the U.S. to decline further from current levels of roughly $645/ton despite relatively positive supply/demand fundamentals. In their view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as NUE and STLD to drop their flat-rolled prices. They also believe that some of the recent run up in steel prices could be partially due to increased buying as a precaution ahead of the possibility of a strike at X and/or MT as they renegotiated their labor contracts. However, both X and MT have reached tentative agreements, and they think buyers are likely to move to the sidelines over the next month. The election season is also likely to weigh on demand, as consumers of steel are likely to be cautious until the election is over and there is some resolution on whether the "fiscal cliff" will be averted. Most importantly, JPM also believes that raw material prices (iron ore, met coal and scrap) will not be supportive of higher global steel prices given their recent declines and their forecasts for not much of a rebound.
Demand is near pre-crisis levels. Gambo doesn't believe that demand is a significant contributor to still weak (compared to pre-crisis levels) steel earnings. Total steel apparent consumption (both flat and long products) YTD July 2012 is at 93% of comparable 2008 level. Flat-rolled apparent consumption YTD in 2012 is at 94% of comparable 2008 levels. On the supply side, he does recognize that a significant reduction on North American capacity could potentially benefit the industry, but don’t foresee any significant cuts in the near-term beyond the June bankruptcy of RG and shutdown of its assets.
Downgrading AKS, CLF, MUSA, RS and X to N from OW. JPM thinks AKS, CLF and X's fixed cost advantages will be muted in a lower priced steel and raw material cost environment while MUSA and RS’ earnings should be squeezed by lower steel prices and are trading at or near their 52 week highs.
Notablecalls: Gambardella is the Axe in the space and his decision to back off from his positive stance will hurt the space today and in the coming days.
- Cliffs Natural (NYSE:CLF) has been the poster boy of the recent squeeze, with the stock up almost 50% in mere 10 days. I have counted at least 5 firms trying to chop it down with downgrades and their clients sure have the tire marks on their backs to prove it.
Now Gambo comes in and says it's all been a big squeeze. Nothing fundamental. It's not getting any better from here. That's the beauty of the call. That's why Gambo is the Axe.
- U.S. Steel (NYSE:X) will also work. I see CRT also cutting smaller peer AKS after their recent well-timed upgrade as steel price headwinds worsen (AKS warned on Friday). That will add fuel to the fire.
I see X, CLF down 6-8% today. The squeeze is over. Use any bounces to scale in (I hope there will be some!)
Among the most interesting names:
- Cliffs Natural (NYSE:CLF) to Neutral from Overweight with $36 price target (prev. $55)
- U.S. Steel (NYSE:X) to Neutral from Overweight with $29 price target (prev. $43)
- Others downgraded include AKS, RS and MUSE.
Since Friday September 7, the steel stocks (including CLF) are up roughly 13% compared to a 2% gain in the S&P 500. Gambardella thinks this jump is largely from the announcement of China's infrastructure spend and QE3 which likely pressured the extremely negative consensus view held by most investors on the group. However, he views the recent move up in the stocks largely as short covering, notably the recent appreciation of CLF after short interest as a percent of float reached levels last seen in late 2007. He does not think the fundamentals are supportive of a continued move higher beyond this recent short covering and expects steel prices to decline soon.
Steel prices likely to decline further
After their run up from the high $500/ton range several months ago to recent highs of around $670-680/ton, JPM expects hot-rolled sheet steel prices in the U.S. to decline further from current levels of roughly $645/ton despite relatively positive supply/demand fundamentals. In their view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as NUE and STLD to drop their flat-rolled prices. They also believe that some of the recent run up in steel prices could be partially due to increased buying as a precaution ahead of the possibility of a strike at X and/or MT as they renegotiated their labor contracts. However, both X and MT have reached tentative agreements, and they think buyers are likely to move to the sidelines over the next month. The election season is also likely to weigh on demand, as consumers of steel are likely to be cautious until the election is over and there is some resolution on whether the "fiscal cliff" will be averted. Most importantly, JPM also believes that raw material prices (iron ore, met coal and scrap) will not be supportive of higher global steel prices given their recent declines and their forecasts for not much of a rebound.
Demand is near pre-crisis levels. Gambo doesn't believe that demand is a significant contributor to still weak (compared to pre-crisis levels) steel earnings. Total steel apparent consumption (both flat and long products) YTD July 2012 is at 93% of comparable 2008 level. Flat-rolled apparent consumption YTD in 2012 is at 94% of comparable 2008 levels. On the supply side, he does recognize that a significant reduction on North American capacity could potentially benefit the industry, but don’t foresee any significant cuts in the near-term beyond the June bankruptcy of RG and shutdown of its assets.
Downgrading AKS, CLF, MUSA, RS and X to N from OW. JPM thinks AKS, CLF and X's fixed cost advantages will be muted in a lower priced steel and raw material cost environment while MUSA and RS’ earnings should be squeezed by lower steel prices and are trading at or near their 52 week highs.
Notablecalls: Gambardella is the Axe in the space and his decision to back off from his positive stance will hurt the space today and in the coming days.
- Cliffs Natural (NYSE:CLF) has been the poster boy of the recent squeeze, with the stock up almost 50% in mere 10 days. I have counted at least 5 firms trying to chop it down with downgrades and their clients sure have the tire marks on their backs to prove it.
Now Gambo comes in and says it's all been a big squeeze. Nothing fundamental. It's not getting any better from here. That's the beauty of the call. That's why Gambo is the Axe.
- U.S. Steel (NYSE:X) will also work. I see CRT also cutting smaller peer AKS after their recent well-timed upgrade as steel price headwinds worsen (AKS warned on Friday). That will add fuel to the fire.
I see X, CLF down 6-8% today. The squeeze is over. Use any bounces to scale in (I hope there will be some!)
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