Brace for steel industry 'reckoning': Deutsche Bank

Steel bulls, steel yourselves.

Even after a horrible year for commodities, Deutsche Bank is predicting continued pressure on the space in the year ahead. In a 2016 outlook note entitled "the hour of reckoning," Deutsche research analyst Jorge Beristain forecasts lower steel prices, and consequently cuts his ratings on US Steel, AK Steel and Cliffs Natural Resources to "sell."

"There's an emerging market slowdown underway. And basically, the steel and iron ore sector in the U.S. is on the receiving end of that," Beristain explained in a Thursday segment on CNBC's "Power Lunch." "The mining sector, in hindsight, has massively overshot in terms of their expected delivery for iron ore into China in the next few years."

And to add insult to injury, China has "turned into a big exporter of steel in the last 18 months, which was an unexpected U-turn," Beristain continued. "And that flood of product, whether its steel or aluminum, is looking for a home globally — driving down world prices for those commodities."

Read MoreMark Mobius warns of waning steel demand in China

Due to expectations that prices will continue to be under pressure, Beristain has seriously reduced his expectations for the companies exposed. For AK Steel and US Steel, he cut his 2016 earnings estimates by 74 percent and 62 percent respectively; he then cut his price target on AK to $1 from $3, and on US Steel to $5 from $13. This after each stock has fallen more than 70 percent in 2015.

When it comes to Cliffs, which is mainly an iron ore company rather than a direct steel company, Beristain cut his price target to $1.50 from $3, "given strained balance sheet position and a scenario of constrained cash flows given ongoing weakness in iron or market."

AK Steel, US Steel and Cliffs Natural Resources slid 6.9 percent, 10.7 percent, and 7.6 percent on Thursday, respectively.

Overall, Beristain is markedly bearishness on the industry he covers.

He warns that demand will continue to slow, making "deep supply cuts … immediately necessary."

However, he believes that these cuts will be slower than they need to be, because of several factors including new projects still in the works, cheaper energy and labor costs due to the commodity slowdown, resistance to laying off workers early than necessary, and pressures to continue production on the part of creditors.

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One might retort that some of these stocks are already trading like they're going out of business. Unfortunately, that might not be too far off.

"As Metals & Mining producers continue to come under further stock market pressure, we expect further credit rating downgrades, further dividend slashes, dilutive recapitalizations, possible forced equity raises and distressed asset sales and M&A to feature heavily in 2016," Beristain writes.

In the note's introduction, he further predicts that "outright bankruptcies" could be possible in the metals and mining space.


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