Latest / Bloomberg Intelligence / KeyBanc's Gibbs Advises Broader Caution on Steel Demand (Audio)

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KeyBanc's Gibbs Advises Broader Caution on Steel Demand (Audio) · Bloomberg Intelligence

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  Speaker 1: you very much. We'll be all over those earnings, Bill Maloney.
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  Speaker 1: I'm Charlie Pellett. That's subloom Bred business slash June listening
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  Speaker 1: to taking stock with Bim Box and Kathleen Hayes on
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  Speaker 1: Bloomberg Radio. And I'm alex A Baranca here for Kathleen
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  Speaker 1: Hayes today and we have Glencore on the mind. The
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  Speaker 1: company posted its lowest profit in its five year history,
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  Speaker 1: and it's seen as a reflection of the dire state
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  Speaker 1: of the mining industry. Here to tell us more is
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  Speaker 1: Phil Gibbs, vice president and equity research analysts focusing on
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  Speaker 1: the industry at key Bank Capital Markets. Phil, what does
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  Speaker 1: this say about what's going on right now with raw
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  Speaker 1: material prices and and in the industry in general. Hey, Alex,
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  Speaker 1: good to be with you. From a high level, I
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  Speaker 1: think there's a common set thread from the release to
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  Speaker 1: the rest of the global medals and mining world, and
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  Speaker 1: and I think there's a little bit of cautious optimism.
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  Speaker 1: There was a clear recognition from Glencore that commodity prices
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  Speaker 1: have come off the bottom and broader second half profit
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  Speaker 1: performance should improve a bit versus the first half. However,
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  Speaker 1: no one is jumping for joy given the world remains
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  Speaker 1: fragile and the long transition in China, which we've just
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  Speaker 1: gust in previous calls here from an infrastructure led economy
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  Speaker 1: to a consumer based economy is just starting and that
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  Speaker 1: should be a long transition. So Glencore appears to continue
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  Speaker 1: to be managing the business in a very conservative manner,
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  Speaker 1: focus on reducing their leverage, maintaining their low cost position,
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  Speaker 1: selling non core assets, and keeping their previously curb capacities
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  Speaker 1: offline until better days are ahead and seen. I would
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  Speaker 1: say year to date at the US steel industry, which
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  Speaker 1: I follow more closely, has shown similar supply side discipline
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  Speaker 1: to how Glencore has managed their zinc supply, which has
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  Speaker 1: supported steel prices domestically. But we think that's changing what
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  Speaker 1: zinc and coal prices? What are they up about? That
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  Speaker 1: is all driven by what the production cuts, as well
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  Speaker 1: as attempts by Bastions government to stimulate the Chinese economy.
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  Speaker 1: It could be um him, I think I think the
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  Speaker 1: key factor here is probably more on on the supply
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  Speaker 1: side um. And my my view is more on the
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  Speaker 1: on the U S steel industry, where where we've become
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  Speaker 1: a bit more cautious as of late. I mean, after
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  Speaker 1: that big run for let's say U S steal tell
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  Speaker 1: us about what's going on in the U S steel market,
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  Speaker 1: didn't they sort of have a bountiful time because of
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  Speaker 1: the imposition of import tariffs they did? Um, I think
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  Speaker 1: we were cautiously optimistic on the industry, I would say
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  Speaker 1: balanced the cautiously optimistic most of this year. As of
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  Speaker 1: late Friday, however, we now believe that's supplying demand, particularly
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  Speaker 1: for the U S sheet producers, where U S steal
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  Speaker 1: would be one UH that market we see now tipping
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  Speaker 1: the modest oversupply based on our view of peaking demand
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  Speaker 1: and bottoming supply. So we think now after the run
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  Speaker 1: and steel prices which steel prices UH called hot rolled
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  Speaker 1: steel has been up over six off the bottom, we
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  Speaker 1: think pricing is now poised to more aggressively correct over
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  Speaker 1: the course of the balance of the year here, which
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  Speaker 1: did lead to downgrades on our views of U S Steel,
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  Speaker 1: A k UH Steel Dynamics, and Olympic. And I think
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  Speaker 1: this environment could also create modest downside risk to seventeen
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  Speaker 1: fixed price automotive contracts, which I think many many investors
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  Speaker 1: at this point hope and believe are are are would improve.
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  Speaker 1: Is there a catalyst that would tip some of the
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  Speaker 1: sentiment around this industry back into more optimism versus maybe
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  Speaker 1: a we are not out of the woods yet uh
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  Speaker 1: situation that we seem to have right now. Yeah, I think, Alex,
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  Speaker 1: it's really all based on on the supply and demand balance,
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  Speaker 1: and that's really what we what we hang our hat on.
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  Speaker 1: And we really wanted our most recent survey to tell
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  Speaker 1: us that the man was stabilizing let's say, incremental supply
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  Speaker 1: wasn't going to be a factor, but that's not really
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  Speaker 1: what it said. UM. Unfortunately, our our survey came came
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  Speaker 1: across and and said that, uh, there was more potential
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  Speaker 1: for sub seasonal growth and key en use markets including
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  Speaker 1: automotives and including non residential construction, which make up about
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  Speaker 1: six of US steel demand. And I'd also say that
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  Speaker 1: US distributor daily sheet volumes are down three and a
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  Speaker 1: half percent here to date. This comes despite modest restocking
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  Speaker 1: in the second quarter. And and really what drove us
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  Speaker 1: to change our view is that our distributor context now
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  Speaker 1: expect below normalized seasonal demand patterns in both the third
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  Speaker 1: and fourth quarters, which is what really troubled us. And
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  Speaker 1: some of that which which was new was that we
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  Speaker 1: are starting to see some some more some some new
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  Speaker 1: weakness and non residential construction. And you also have had
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  Speaker 1: the called the lethargy and the in the mining, rail,
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  Speaker 1: agg and energy UH sectors already. So I think broader
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  Speaker 1: caution from US in terms of what we're seeing in
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  Speaker 1: in the US economic indicators as it comes from our
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  Speaker 1: U steal channel omnia on the demand side. So you're
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  Speaker 1: saying maybe just underweight the whole sector for a while.
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  Speaker 1: We are um, I think we're we're telling people to
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  Speaker 1: take a little bit of money off the table until
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  Speaker 1: we get uh some more some more visibility on the
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  Speaker 1: demand front over the next called forty five to sixty days.
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  Speaker 1: And I think that there's also some natural uncertainty and
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  Speaker 1: caution in front of the US election. This is a
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  Speaker 1: very important election for for folks, and and that could
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  Speaker 1: also lead to some some more subdued capex over the
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  Speaker 1: next Like I said, um, thirty to sixty days, we've
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  Speaker 1: got to leave it there. Phil Gibbs is vice president
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  Speaker 1: and equity research analysts for Medals and Mining for Key
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  Speaker 1: Bank Capital Markets. Talking about the steel industry, this is Bloomberg.
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