Sell Nucor and Steel Dynamics Stocks. Steel Has Tough Days Ahead.

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Wall Street is shunning steel stocks, especially shares of Nucor and Steel Dynamics.

Tuesday, J.P. Morgan analyst Bill Peterson launched coverage of the five steel producers. He doesn’t really like any of them.

His rating for the more traditional steel producers

United States Steel

(X),

Cleveland-Cliffs

(CLF) and

Stelco

(STLC.Canada) are all Hold. Peterson recommends selling shares of mini-mill companies Nucor (NUE) and

Steel Dynamics

(STLD).

Mini-mills are called mini because they are smaller than operations from traditional steel producers such as U.S. Steel.

A traditional steel producer processes iron ore and coal in a blast furnace and refines the pig iron by blowing oxygen through it in a furnace. The liquid steel is then cast and rolled.

A mini-mill doesn’t need a blast furnace. It melts scrap or other metallics using electricity. The liquid steel coming from an electric-arc furnace is then cast and rolled.

It’s cheaper to build and maintain a mini-mill compared with a traditional steelmaking footprint. What’s more, scrap metal is typically cheaper than the equivalent pig iron produced from a blast furnace, giving mini-mill producers a cost advantage.

Products produced at mini-mills tend to skew toward construction industries. Traditional steel mills might sell more to the automotive and appliance industries.

Construction exposure is why Peterson isn’t high on Nucor and Steel Dynamic stocks today. “We expect a slowdown in non-res construction, the industry’s largest end market, but see support in auto and infrastructure,” wrote the analyst, adding that the auto industry is still shipping below pre-Covid levels.

U.S. car sales totaled roughly 15 million units in 2022, down from about 17 million units in 2019.

At the margin he favors traditional steel makers, but still rates them hold. His concern about construction is demand related. His concern regarding the traditional mills is about supply. Too much new capacity is hitting the market, wrote Peterson. He sees 20 million tons of new flat-rolled capacity, roughly 26% of the industry total, coming on line by 2026.

So-called flat-rolled steel products are used to make things such as car doors and washing machines. So-called long products are things such as rebar and beams used in construction.

His price targets for U.S. Steel, Cleveland Cliffs, and

Stelco

are $24, $18, and 48 Canadian dollars ($35), respectively. U.S. Steel shares are at $21.50 in premarket trading, down 1%. Cliffs stock is down 0.1% at $14.85. Stelco stock is down 1.8% at 44.55 Canadian dollars.

S&P 500
and

Dow Jones Industrial Average
futures are down 0.1% and 0.2%, respectively.

Peterson’s price target for Steel Dynamics and Nucor shares are $82 and $130, respectively. Both targets are below where shares are trading currently. Steel Dynamics stock was down 1.4% in premarket trading Tuesday at $95.88. Nucor shares dropped 0.9% at $138.73.

Steel stocks aren’t all that popular with the Street these days. Only 20% of analysts covering Steel Dynamics stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 53%. One-quarter, or 25%, of analysts covering Nucor stock rate shares Buy.

The Buy-rating ratio for the mini-mill producers are among the lowest in the steel industry, but none of the stocks are particularly popular. The Buy-rating ratios for Cliffs, U.S. Steel, and Stelco are 50%, 23% and 25%, respectively.

The Street has its concerns about steel.

Write to Al Root at [email protected]