Analysts at Deutsche Bank recently updated their outlook on the steel industry now that most steel companies have released fourth quarter earnings. Deutsche Bank lowered its average price targets by 12 percent due to plunging steel spot prices, but reiterated its Buy ratings for three big names in the space.
Forecast
Analysts lowered their projected Hot Rolled Coil (HRC) forecast from $600 per short ton to $575. In addition, after incorporating the latest steel prices and the updated Q4 earnings numbers, Deutsche Bank reduced its 2015 EBITDA predictions by about 11 percent.
Downside Risk
U.S. HRC prices have dropped by 21 percent in the past six months, falling to as low as $543 per short ton. Analysts believe that the industry is near an inflection point, and they list four reasons for their hopefulness:
1. Supply-side response
2. Contraction of import arbitrage
3. Seasonal increase in demand
4. Increased protectionism
Deutsche Bank stress tested its model for a full-year HRC price of $550 per short ton ($25 below its forecast) and found that the average downside in expected EBITDA for the companies it covers is about 19 percent.
Steel Demand Expected To Remain Strong
Steel demand will likely remain high in 2015 from both the automotive industry and the construction industry. While falling oil prices have collapsed, steel demand in the energy sector (about 10 percent of total steel demand) and low oil prices have stimulated steel demand in other segments of the economy.
Stock Picks
Even with the 19 percent downside earnings risk related to low steel prices, Deutsche Bank analysts believe the beaten-down stocks in the space offer a compelling risk/reward balance at current prices.
Deutsche Bank lowered price targets, but reiterated its Buy ratings on AK Steel Holding Corp AKS 2.19%, Steel Dynamics Inc STLD 0.16% and United States Steel Corp X 1.02%.
The firm has a Hold rating on Nucor Corp NUE 1.34%.
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