Are Steel Prospects Rustier Than Goldman Would Like You To Believe?
Always searching for a positive inflection point to upgrade the living daylights out of, Goldman now sees major upside in steel stocks, with X making the Conviction Buy (aka GS Prop Desk Conviction Sell) list. Below is a chart of US steel imports in value and tonnage over the past 3 years.
Goldman present the following favorable points:
- #1 – Steel stocks have sharply underperformed other cyclicals.
- #2 – US steel prices have bottomed.
- #3 – Scrap prices (key leading indicator) are moving up.
- #4 – Rising lodestar China prices are pulling up global prices.
- #5 – Rising iron ore and coking coal prices provide cost push.
- #6 – The BDI (another leading indicator) is sharply up.
- #7 – Continued dollar weakness deters imports/boosts exports.
- #8 – Domestic industrial activity is expected to improve in 2010.
- #9 – Steel makers should maintain discipline when raising supply.
- #10 – Inventories are close to a “pinch point.”
- #11 – Demand from other emerging markets, even ex-China, is improving.
- #12 – Multiples have contracted/could expand as prices rise.
- #13 – Margins should recover and expand as we exit the bottom.
- #14 – Steel has already decoupled from other commodities.
Whether all these are sufficient to offset a 70% drop year over year in US imports, even as service centers had been feverishly restocking inventory into H2, is unclear. Frankly, all of the points above by Goldman are irrelevant: the only open question is how much more Krugman-adored stimuli will the US economy see in the next year. Extrapolate from that all the information you need.