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Stock Strategist Industry Reports

Steelmaker Valuations Fall

A reduction in our long-term steel price forecast has an outsize effect on more-leveraged firms.

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A further flattening of the cost curve since we last updated our steel price deck has prompted a reduction to our long-term steel price forecast. For benchmark U.S. hot-rolled coil, which now trades at $430-$440 per ton, we now forecast a long-term price of $460 per ton in constant 2015 dollars. That's down from a prior forecast of $510 per ton and far below the trailing five-year average of $665 per ton. Although we continue to expect rising capacity utilization rates to drive price improvement, a currency-induced flattening of the cost curve suggests a more modest uptick than we had previously anticipated.

While we've reduced our long-term benchmark steel price by only 10%, our steel company fair value estimate reductions are, in several cases, far greater. This reflects the industry's high financial leverage. Because creditors' claims on free cash flow are unchanged, even a modest reduction in operating profits can have a meaningful impact on equity value for a company with a debt-heavy capital structure.

Andrew Lane does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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