UBS analyst Andreas Bokkenheuser upgraded shares of United States Steel to Hold from Sell on Friday. He doubled his price target to $30 a share from $15.
Shares of United States Steel (ticker: X) aren’t reacting to the upgrade. They are down 0.2% in recent trading, at $25.84, while the S&P 500 is up 0.6% and the Dow Jones Industrial Average is up 0.3%.
A call to Hold a stock isn’t as bullish as a call to Buy, but the reason shares aren’t up is probably because they have already had an incredible run. U.S. Steel stock is up 54% year to date and up 153% over the past 12 months.
Soaring steel prices are the reason. Hot-rolled steel coil prices—a key benchmark—are up more than 60% year to date and 200% over the past 12 months. Steel demand is rebounding from pandemic-induced lows, and the strength of the economic recovery has allowed steel mills to raise prices aggressively.
The problem for any commodity producer, such as U.S. Steel, is that commodity prices can’t stay above the cost of production for a long time. That truism implies steel prices will eventually fall from roughly $1,100 a ton to $500 a ton. Falling commodity prices always weigh on commodity-related stocks.
That’s generally true for commodity industries, but each cycle is different—and Bokkenheuser sees a few things about this steel price cycle that helped change his mind about U.S. Steel stock.
For starters, he sees supply growth constrained. More steel isn’t coming.
More important, Bokkenheuser points out, China is considering an export tax for steel, trying to keep more of its product domestically to drive down local prices. China is the largest steel producer and exporter on the planet, and the Chinese export price is the effective price setter for the rest of the world. An export tax could be a “game changer,” according to the analyst.
Still, there is no guarantee the export tax will happen or be maintained for a long period. That’s what keeps him on the sideline regarding U.S. Steel.
With the upgrade, four analysts rate U.S. Steel Buy, seven rate it Hold, and three rate it Sell. A year ago, things were looking more dire. U.S. Steel shares had zero Buys, eight Hold ratings, and seven Sell ratings. The average Buy-rating ratio for stocks in the S&P is roughly 55%.
Write to Al Root at [email protected]
