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US Steel downgraded by Bank of America on tariff retaliation fear

  • Bank of America Merrill Lynch lowers its rating to neutral from buy on United States Steel shares, citing concerns about a global trade war.
  • "With good news from potential tariffs known, backlash should emerge, and we see X especially vulnerable," the firm's analyst writes.

Operations at U.S. Steel
Source: United States Steel Corporation
Operations at U.S. Steel

United States Steel shares are less attractive after their recent surge this year, according to one Wall Street firm.

Bank of America Merrill Lynch lowered its rating to neutral from buy on U.S. Steel shares, citing concerns about a global trade war.

President Donald Trump said Thursday that the U.S. will impose tariffs of 25 percent for steel and 10 percent for aluminum as early as next week.

The "proposed 25 percent Section 232 tariffs will have a limited benefit to 2018E due to previously contracted tonnage locking in lower prices, and by 2019E we expect steel prices slide due to; 1) likely WTO challenges and threats of trade retaliation; 2) domestic capacity restarts; and 3) potential demand degradation as downstream products containing steel content could be imported," analyst Timna Tanners wrote in a note to clients Friday. "With good news from potential tariffs known, backlash should emerge, and we see X especially vulnerable."

The company's stock closed 1.3 percent lower Friday after the report. The shares are up nearly 29 percent this year through the close.

Tanners increased her price target for U.S. Steel shares to $50 from $47, representing 9 percent upside to Thursday's close.

The analyst predicts the tariff plan will be "diluted" and include exemptions for the other NAFTA countries. She noted Korean steel exports will not be affected by any tariffs because the Asian country's product has "limited alternative destination."

On the flip side, another Wall Street firm believes that if the tariffs are implemented U.S. Steel earnings will surge. J.P. Morgan told its clients the firm's 2019 earnings per share estimate for the company could possibly double due to tariffs.

"U.S. Steel … has the greatest leverage to higher steel prices," analyst Michael Gambardella wrote in a note to clients Thursday. "We do think that tariffs at these levels would help reduce the downside risk to domestic steel prices from sharp increases in imports, and therefore should support higher steel stock prices."

Gambardella reiterated his overweight rating on United States Steel shares and his $48 price target. He said the stock could rise to as much as $85 per share under an "optimistic scenario" after tariffs.

United States Steel did not immediately respond to a request for comment.