Impact of a Possible Infrastructure Bill on Steelmakers

Our U.S. steelmaker coverage rallied in response to a Bloomberg article indicating the Trump Administration plans to announce a $1 trillion infrastructure spending plan. We've long held the view that U.S. infrastructure spending would inflect upwards, particularly due to the notion that this topic typically receives bipartisan support within the U.S. government. Accordingly, rising nonresidential construction activity is already accounted for in our steel models and our fair value estimates are unchanged in light of this development. We aren't particularly surprised by the potential timing of this announcement, as the FAST Act, a $305 billion five-year infrastructure bill passed during the Obama administration, is set to expire in September.

The prospect of increased infrastructure spending raises our conviction that steelmakers with the greatest leverage to the nonresidential construction end market will be best-positioned in the coming years. Meanwhile, we expect companies with exposure to the automotive and energy end markets will continue to face the most significant headwinds from a demand perspective.

We don't see risk-adjusted upside for any operator we cover across the U.S. steel industry. However, steel mills with meaningful exposure to the nonresidential construction end market are trading at or close to our fair value estimates. These include Nucor NUE, Steel Dynamics STLD, and Commercial Metals CMC, each of which is trading only slightly above our fair value. We continue to view U.S. Steel X as overvalued as it is now trading nearly double our $5.50 per share fair value.

Although our volume outlook likely doesn't differ meaningfully from the range of consensus expectations, we maintain a bearish outlook for steel prices. This is driven by our view for softening fixed asset investment in China as well as our forecast for weakening cost support as steelmaking raw material prices also fall. Overall, we would encourage investors to seek greener pastures elsewhere.

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