Goldman Sachs boosted its rating on US Steel (X) to Buy from Sell, along with that of AK Steel (AKS) and Steel Dynamics (STLD). Axiom Capital Management’s Gordon Johnson responds with a great big “huh?” in regards to the US Steel upgrade, especially as it relates to OCTG–oil country tubular goods.
Reuters Here is what Goldman’s Sal Tharani and Chelsea Bolton write about US Steel and OCTG:
…we see continued strength in the flat rolled markets in the upcoming seasonally strong steel demand period as another driver of the stock in the near term. By our estimate, closure of three steel plants owned by bankrupt RG Steel, and the permanent shut down of Hamilton plant by US Steel, has more than offset the new capacity additions in the flat rolled market since 2008. As demand improves through continued recovery in auto and industrial markets, and new OCTG capacities under construction in the US begin to ramp up, we see a market improvement in flat rolled steel demand making this market tight in the coming months, from over-supplied just a few months ago.
Now, here’s Johnson’s “huh.” He writes:
Goldman argument – added OCTG capacity creates OCTG demand: Huh? Again… Huh? This is also among the most confusing/perplexing of the arguments made. One of X's largest earnings contributors is its OCTG segment. The GS report argues that more OCTG capacity will create more OCTG demand. Huh? Rig counts create demand, not the build-out of OCTG capacity (this makes absolutely NO sense to me – someone please correct me if I'm wrong here). Further, if more OCTG capacity is built, this is be a negative for X's most profitable segment. Thus, I don't see how this is a positive. This is one of the points I just did not get at all.
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