Skip to Content
Stock Analyst Update

Despite Revised Forecast, Steelmakers Still Overvalued

We now expect prices to rise in 2017 before declining in real terms through our midcycle forecast.

We've updated our steel price forecast to better align our estimates with changes to the steelmaking cost curve stemming from higher input costs. To arrive at our annual world export steel price forecasts, we employ a cost benchmarking approach by which we estimate the unit costs of the marginal producer of steel and set prices in line with this figure.

Relative to our prior forecasts, which pointed to declining steel prices (in real terms) each year through the end of the decade, we now expect prices to rise in 2017 before declining in real terms through our midcycle forecast. The 2017 price increase is driven primarily by cost support stemming from higher iron ore, met coal, and scrap prices. 

Although our 2017 price forecast is roughly in line with consensus, our medium-term forecasts and midcycle outlook are well below consensus. This is driven mainly by our bearish outlook for Chinese fixed-asset investment and the presence of structural overcapacity.

Because the benefits of higher steel prices will be largely offset by higher raw materials costs, the impact on our steelmaker fair values is very modest. U.S. Steel and AK Steel are the biggest beneficiaries thanks to their varying degrees of raw material self-sufficiency but still remain materially overvalued. Accordingly, we think minimill operators will be better able to best navigate the looming "lower for longer" steel price environment, a dynamic that is reflected in price-to-fair value ratios across our steel coverage.

Overall, even after updating our steel valuation models, every steelmaker under our coverage is trading above our fair value estimate. For U.S. steelmakers, we contend that the benefits of trade protectionism, new political leadership, and the potential for higher infrastructure spending are already reflected by share prices. As a result, although the range of potential outcomes is likely wider than ever before, we see asymmetrical risk to the downside across the industry.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.