Credit Suisse Sees Steel Prices Nearing Bottom, Downgrades US Steel Anyway

Ever have those moments where you read an analyst report and are left scratching your head? Well, Credit Suisse’s downgrades of US Steel (X) and Nucor (NUE) today fit the bill.

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First, let Credit Suisse analyst Nathan Littlewood and team explain why they not only downgraded US Steel and Nucor, but lowered their EBITDA forecasts for AK Steel (AKS), Commercial Metals (CMC) and Steel Dynamics (STLD), as well:

We are downgrading 2014 earnings estimates for all US steel names, and downgrading ratings on US Steel to Underperform and Nucor  to Neutral. We expect MarQ14 guidance from [AK Steel, Steel Dynamics and Nucor] released next week may serve as a catalyst for the rest of the street to follow suit. Although the US domestic demand situation is unquestionably improving, we simply do not feel that this is sufficient to offset slower EM growth and the influence of imports that this implies.

In our view, X’s recent outperformance of its closest peer [ArcelorMittal (MT), and the iron ore price, will reverse over coming months. Unlike 2012/13 when iron ore prices rebounded to $160/t post the destock, we see the iron ore price settling at a structurally lower level in 2H2014. Finally we note that X needs a ~4x increase in the pace of its 'Project Carnegie' initiatives in order to maintain its position on the US domestic cost curve

So far, so good. Now the puzzling part: Littlewood writes that the "Buying Opportunity Might Be Closer than We Thought." He explains:

Although we are cautious the steel names near term, we can see signs that a floor in pricing may not be too far away. CRU's assessment of US domestic HRC pricing is now approaching the actual import price as implied by DoC trade data.

I'll leave you to puzzle that one out.

As an aside, Littlewood also states a preference for Steel Dynamics over Nucor. He explains why:

[Nucor] usually defines the top of [Steel Dynamics'] valuation range and [Commercial Metals] the bottom. Right now [Steel Dynamics] is trading at the bottom of this range. Whilst we continue to admire [Nucor] for its raw materials strategy and see it as best-in-class in terms of business quality, the valuation differential between [Nucor] and [Steel Dynamics] has become too big to ignore.

Shares of US Steel have dropped 1.2% to $24.11 at 3:41 p.m., while Nucor has fallen 0.4% to $48.44, AK Steel has gained 1.2% to $6.16, Commercial Metals has dipped 0.2% to $18.74, Steel Dynamics has ticked up 0.1% to $16.56 and ArcelorMittal has gained 0.3% to $14.90.