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By Andrew Lane | 11-17-2015 01:00 PM

Steelmakers: Investors Should Seek Greener Pastures

With steel prices expected to remain lower for longer, every steelmaker in our coverage universe now operates with a no-moat rating.

Andrew Lane: Amid strong headwinds related to low steel prices and rising export volumes from China, we recently reassessed our outlook for steelmakers. Although short-term challenges can often lead to attractive investment opportunities, our outlook for steel is less optimistic, as the challenges facing the global steel industry appear to be more structural than cyclical.

Accordingly, we've cut our long-term steel-price forecast, and we contend that steel prices will remain "lower for longer." Per our forecast, inflation-adjusted steel prices will remain below the 2015 average through the end of the decade--a level well below the trailing 10-year average.

In this environment, even low-cost players will be hard-pressed to generate returns on invested capital above their cost of capital. Although we had previously ascribed narrow economic moat ratings to Nucor (NUE), Steel Dynamics (STLD), and CSN (SID) on the basis of cost advantage, we've now downgraded each of them to a no-moat rating. As a result, every steel company under our global coverage universe now operates with a no-moat rating.

For those interested in steel exposure, Nucor is the figurative "best house in a bad neighborhood," and shares are trading modestly below our $46 per share fair value estimate. The company has a strong management team, a solid business model, and offers a healthy dividend that will provide investors with income until the operating environment stabilizes.

However, when taking into account the high degree of uncertainty associated with the industry, none of the steel companies under our coverage is currently trading at a highly attractive entry point. We'd encourage investors to seek out greener pastures.

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