Tight Supplies Have Driven Up Steel Prices. One Analyst Says...

Tight Supplies Have Driven Up Steel Prices. One Analyst Says That Could Last Awhile.

Pricing for hot-rolled coils of steel has sizzled in the recovery, and the heat has ignited steel stocks. United States Steel and Cleveland-Cliffs are up two and three times the S&P 500 index’s 15% gain this year, respectively, while Nucor is up nearly 80%. And, as Credit Suisse analyst Curt Woodworth sees it, steel stocks aren’t cooling down soon.

Tight supply has lifted the benchmark price of hot-rolled coils to $1,600 per short ton from $500 a year ago. A number of analysts downgraded their ratings to Hold, recalling how quickly imports crashed supply-constrained periods in the past. But Woodworth believes that today’s upcycle will endure for a couple more years—and that investors should award the stocks higher multiples. “The rebirth of the U.S. steel sector is a real event,” he writes in a note.

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On a Roll

As economic activity has revived in 2021, U.S. steel prices have steadily risen.

U.S. Midwest Domestic Hot-Rolled Coil Steel Futures, Year to Date

On a Roll

As economic activity has revived in 2021, U.S. steel prices have steadily risen.

U.S. Midwest Domestic Hot-Rolled Coil Steel Futures, Year to Date

Source: Investing.com

At today’s $97 a share, Nucor stock have almost 20% upside to Woodworth’s target price of $115. Steel Dynamics and Graftech International have about a 45% upside to his targets, while United States Steel could rise 80% from today’s $24, and Cleveland Cliffs by a third from $22. He rates all of these stocks as Outperform.

Imports will remain subdued, he says, because of the cheap dollar and China’s curb on polluting blast furnaces. Domestic supply will rise slowly, he adds, through a ramp-up of electric-arc furnace capacity. Demand from auto makers and renewable-energy developers will keep hot-rolled coil prices well above $1,000 through 2022. Steel makers can make fat profits at those prices—or even lower ones.

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Steel Returns

After a pandemic plunge, the big U.S. steel stocks have been lifted by stronger pricing.

United States Steel, Cleveland Cliffs, and Nucor Stock, 2020 to YTD 2021

Source: FactSet

Woodworth thinks that Wall Street is discounting a sharp correction in steel prices. But there is a new normal, he writes. “Steel stocks are especially cheap.”