We're Still Bearish on the U.S. Steel Industry

Andrew Lane: The Trump administration's highly publicized steel tariff program has driven U.S. steel prices sharply higher. In mid-February, to incorporate the impact of these tariffs on our steel price deck, we increased our forecasted spread between U.S. steel prices and global marginal cost. Accordingly, we raised our fair value estimates for every U.S. steelmaker we cover. However, we still expect global marginal cost to decline materially in the coming years, driven by decelerating Chinese fixed-asset investment, waning Chinese stimulus effects, and faltering cost support from steelmaking raw materials. Therefore, even though we've increased our steel price assumptions, we maintain a bearish outlook for the broader steel industry. Every U.S. steelmaker we cover is trading above fair value.

Additionally, the steel tariff program appears to have less bite than many initially feared, as a number of key steel exporters to the U.S. have now received temporary exemptions. Those exempt include Canada, Mexico, the E.U., Argentina, Australia, Brazil, and South Korea. Together, these countries accounted for 65% of U.S. steel imports in 2017. The Trump administration has indicated that additional countries and individual product types could receive exemptions going forward, but also that these existing exemptions could be rescinded at any time, pending the outcome of further trade negotiations. Therefore, although the situation remains fluid, U.S. steel stocks appear to be pricing in continued profitable growth, and we believe valuations are stretched. Accordingly, we'd encourage investors to seek out greener pastures.