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Nucor (NYSE:NUE) -2.1% and Steel Dynamics (NASDAQ:STLD) -1.3% in Tuesday's trading after J.P. Morgan started coverage of the U.S. steel producers with Underweight ratings, citing unfavorable non-residential construction exposure, which may cause a "meaningful correction in downstream earnings that we believe is not currently reflected in shares."
While Nucor (NUE) and Steel Dynamics (STLD) are among the premier U.S. steel producers, JPM said it sees lower steel prices and tighter metal margins coinciding with softness in non-res construction to drive weaker earnings,
The two companies have ~50% exposure to non-residential construction, which JPM said could become a headwind for mini mills because of to rising interest rates and tighter lending standards.
Integrated mills U.S. Steel (X), Cleveland-Cliffs (CLF) and Stelco (OTCPK:STZHF) are rated Neutral on near-term earnings upside and exposure to the ongoing auto recovery cycle.
Graphite electrode producer GrafTech (EAF) also is a Neutral, given a likely near-term earnings inflection and leverage to a global secular shift toward electric arc furnance steelmaking.
JPM said the steel industry has seen structural improvement, but the firm takes a broadly cautious approach toward the sector as it anticipates a cyclical downturn and unfavorable pricing environment in the back half of 2023 and into 2024.
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