Trump's Infrastructure Policies Bringing Sexy Back to Steelmakers

Domestic steelmakers are getting a boost from President-elect Donald Trump's as the infrastructure policies he has promised to implement should vastly change the landscape of the industry.

The 70-year-old billionaire businessman has promised to "create thousands of new jobs in construction, steel manufacturing and other sectors" to build the infrastructure needed to "enable new economic development in the U.S., all of which will generate new tax revenues." Trump also plans to "put American steel made by American workers into the backbone of America's infrastructure."

Given Trump's proposed policies, a number of steelmakers are being upgraded, such as United States Steel (X) , AK. Steel (AKS) , and Cliffs Natural Resources (CLF) , as Morgan Stanley equity analysts see meaningful undersupply for the first time since global financial crisis.

"For the first time in a decade, we see a credible long-term investment case for steel equities," wrote the Morgan Stanley analyst team in a research note Monday. "While specificity and details are still scare, we believe Trump's plans for infrastructure spending and trade protection ... should benefit the U.S. steel industry by both adding to demand and curbing import supply," they continued.

The firm upgraded X and AKS to Overweight from Equal Weight and increased CLF to Equal Weight from Underweight. Shares of X and AKS were up by as much as 8% and 9%, while CLF shares were also gaining during the trading session Monday.

Trump has proposed a $550 billion stimulus plan for infrastructure, which the Morgan Stanley analyst team lead by Evan Kurtz believes will increase steel demand by 20% annually, or approximately 22 million tons, for 5 years. Furthermore, the analysts think steel trade protection will likely increase, meaning higher premiums for U.S. steel over global pricing.

Considering these policies, the Morgan Stanley analysts see the most upside to mid-cycle value at U.S. Steel and A.K. Steel.

"While they have less direct sales to construction end markets, about 20% of flat-rolled products go into construction, which should push up pricing across the entire flat-rolled product family regardless of the end market, and the higher fixed costs at X and AKS offer more leverage to an infrastructure cycle," the analysts wrote. They raised their price targets to $11 (from $5) for AKS and $46 (from $19) for X.

Meanwhile, the Morgan Stanley analysts reiterated their Overweight rating on Steel Dynamics (STLD) , as it also provides "significant upside along with the lower risks associated with a mini-mill operation."

As for Cliffs Natural Resources, the company has leverage to hot-rolled coil steel prices through its price contracts, the analysts say. That's in addition to their forecast for higher blast furnace operating rates, which the analysts think will benefit the company's volumes. They increased their price target to $9.

"From a tactical perspective, we believe we are about to kick off a steel price rally that could last into mid-2017," the Morgan Stanley analysts said.

Even though the analysts say near-term demand remains "a question mark," they are looking for a 2.7% increase in the underlying demand growth for 2017 as the analyst team now sees energy changing from a headwind to a tailwind. They anticipate demand to be 6.6% next year.

"It is conceivable that by the end of this decade we could see steel operating rates near the 90% mark for the first time since the global financial crisis," the analysts added.

However, that all hinges on Trump's infrastructure spending bill and how much he'll be able to get out of the Republican majorities in Congress.

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