Investing

Ditch steel stocks as the industry nears 'the end of the line' despite Trump's efforts, says UBS

Key Points
  • Tariffs imposed by President Trump should do little to delay a 17 percent slip in U.S. steel prices through the end of 2019, UBS wrote.
  • Tariffs "in the U.S. resulted in lower imports and limited supply, creating volatility, but we expect the market to return to equilibrium," analyst Andreas Bokkenheuser wrote.
  • Bokkenheuser initiated coverage of AK Steel and US Steel with sell ratings.
Steel rolls at the US Steel Works in Gary Indiana.
Justin Solomon | CNBC

The United States steel sector has reached "the end of the line" despite efforts by the Trump administration to revive the industry, UBS told clients on Tuesday, advising investors it may be time to ditch the metal stocks.

U.S. steel prices should decline 17 percent through the end of 2019, UBS analysts predict, even after tariffs announced earlier this year by President Donald Trump are imposed on some foreign producers .

"Section 232 in the U.S. resulted in lower imports and limited supply, creating volatility, but we expect the market to return to equilibrium," analyst Andreas Bokkenheuser wrote. "Even if imports fall (e.g., because of quotas), we caution that end-demand (manufacturing) will likely trend down driven by higher prices."

"We closely track China as a primary leading indicator of U.S. steel prices (by one month), and conclude that risk to prices and the domestic spread is to the downside," he added.

Assuming the predicted fall in prices and a "structural decline" in U.S. steel demand, Bokkenheuser initiated coverage of AK Steel and US Steel with sell ratings. His $30 price target on US Steel and $3.25 target on AK Steel represent 17 percent downside and 31 percent downside, respectively, over the next 12 months.

Shares of AK Steel, which are down more than 14 percent since January, rose 2.3 percent Wednesday following the UBS note. US Steel's stock, up more than 6.5 percent this year, closed up 3.1 percent Wednesday.

China's voracious demand for and production of steel puts Beijing "in the driver's seat" when it comes to global pricing power, UBS said. The country accounted for half of global production in 2017 versus 5 percent in the U.S.; China's steel exports alone are equivalent to the total of U.S. demand as well as half of the global seaborne market.

"Credit support is slowing in China putting downward pressure on construction growth and upward pressure on steel exports," he added. "Moreover, the U.S. to import price spread should correct to more normalized levels, as additional clarity on trade protectionism, namely Section 232, materializes post May 1."