Credit Suisse has downgraded US Steel from “neutral” to “underperform” this week, citing the effects of the Section 232 tariffs against steel imports and a future “sheet tsunami.”
“As the price of hot-rolled coil steel falls over the next several years, US Steel simply doesn't have the ability to maintain its current earnings nor valuation,” an analyst from the agency said.
“The step-function rise in unit costs the past several years coupled with loss of automotive share suggests [the company] is in a weaker competitive position versus peers entering the ‘Sheet Tsunami’ period in the US from 2021-2022,” the analyst said.
According to Credit Suisse, the “Sheet Tsunami” refers to a flood of new low-cost US steel production capacity that will come online in the next several years that analysts predict will drive HRC prices down to the $610/nt level by 2022.”
Additionally, US Steel has ramped up its Flat Rolled capex from $111 million in 2016 to $820 million in 2018, yet free cash flow is reportedly negative $1.25 billion over that two year stretch.
After the downgrade was announced, US Steel’s stock traded lower by 4.7 percent to $18.82 per share on Tuesday.