UBS Analyst Downgrades U.S. Steel
UBS steel analyst, Timna Tanners, sent a note to her clients today removing U.S. Steel from her short-term buy list.
In a note to her clients obtained by Steel Market Update, Ms. Tanners reports, "We are removing our short-term Buy rating as we believe the recent run-up in steel prices is now more priced in. When we added our short-term Buy we believed X was a way to play higher steel prices, and HRC has since moved from $520/t to an announced $600-$610 as of Jan. 1. We target HRC rising another $40-$50/t for 2011." (Note: HRC = hot rolled coil)
Here is the gist of the reason for Ms. Tanners to remove U.S. Steel (X) from her Buy list:
"While captive iron ore is a boon. X has failed to post profits for 6 of its past 7 qtrs. We think break even sheet costs are ~$625/t, and $15-20/t higher y/y met coal add to pension/health care costs. Capex at $1B/yr for 3 yrs can yield ~$400M+ FCF [free cash flow] use in 2011/2012 and we see X needing to raise $750M in Capital through 2012. X finds profits challenging below 80-85% utilization, and we model 76% for 2011."
Essentially, the UBS steel analyst is saying she does not believe U.S. Steel will make any significant profits during calendar year 2011 if they are unable to get their utilization rates (steel production capacity needs to improve) to a rate at least 10% to 15% above today's industry rates.
Earlier this week the American Iron & Steel Institute (AISI) reported raw steel capacity utilization rates of 68.3% down from the prior week's 70.3%.
Steel Market Update does not do financial analysis on steel stocks. Our focus is on steel pricing, market trends and industry news and information. However, we believe buyers and sellers of steel need to be aware of the performance of the various mills as you watch price increase announcements and evaluate the determination of the producing mills to collect those increases (and the potential for them to ask for more in the future).
Market conditions - led by demand and supply balance will ultimately come into play to determine whether price increases "stick" or fail to stick in the future.
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