American metallurgical stocks are going through a difficult year. US Steel Corporation (X), Cleveland-Cliffs (CLF) and Nucor (NUE) closed this week with declines of 3.9, 1.7 and 2.8 percent, respectively. The plunge in steel stocks should be viewed in the context of broader markets, which also closed in negative territory on 23 May. Against the backdrop of falling markets, the downgrade of Credit Suisse ratings affected the shares of American steelmakers.
Credit Suisse downgraded Steel Dynamics (STLD) to Neutral from Excellent. Exchange prospects for AK Steel (AKS) were the most gloomy. Credit Suisse has downgraded its stock from excellent to weak, the share price is expected to be slightly worse than market performance, and has lowered its target price from $ 3.50 to $ 1. The forecast drop is more than 50 percent compared to the closing price of AK Steel on 23 May. US Steel Corporation also faced a sharp downgrade this year.
Rating
While AK Steel's stock valuation may sound compelling, it carries a huge debt burden. As a result, the price /earnings ratio is somewhat redundant. AK Steel's leverage ratios are the highest among US steel companies. The company's market capitalization is well below its debt burden. Adding to AK Steel's problems is the emergence of companies such as Nucor in its core competitive automotive market.
Automotive
AK Steel's contract prices for rolled metal products for the automotive industry have long disappointed the markets. In addition, the US auto industry is expected to continue to contract sales in 2019. For two consecutive years, this segment of the US industry has reported a drop in sales, which is definitely not helping AK Steel. While the company managed to post better-than-expected earnings in the first quarter, there were some worrisome aspects.
Profit forecast
AK Steel halved its net profit forecast to $ 76-96 million from the previous range of $ 160-180 million. The adjusted EBITDA forecast was also lowered to $ 505-525 million, from the previous forecast range of $ 515-535 million.
Impact of import
Last Friday, the Trump administration announced that it had reached an agreement to lift tariffs on imports of Canadian and Mexican steel. On Monday, Canada and Mexico reciprocated by officially lifting their own steel tariffs against US exports. Thus, while tariffs remain on steel imports from China, tariffs on possibly more important imports from countries closer to the United States, with lower transport costs for steel, are now absent.
Credit Suisse thinks this could be bad news for AK Steel and possibly Steel Dynamics, and could encourage neighboring producers like Canada's Stelco to compete more aggressively for US steel supply contracts, putting pressure on steel prices in the USA.
