What this leading broker thinks of the BlueScope Steel (ASX:BSL) share price

This leading broker weighs in with its analysis on Bluescope shares

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The S&P/ASX 200 index (ASX: XJO) has cooled off over the last month and slipped 2.5% into the red.

Whereas the broad indices have taken a minor hit, the Bluescope Steel Limited (ASX: BSL) share price has lagged well behind its benchmark, and now trades at $21.54.

That’s an 8% drop over the last month, and a further 10% into the red in this past week.

What’s up with the Bluescope share price lately?

The Bluescope Steel share price has been on a rocky ride since the spot price of iron ore took a nosedive in July.

Iron ore’s come off a record high of US$230/Tonne (T) in May, and then US$226/T in July to now trade at US$104.50/T, a 53% drop.

At the same time, the spot price of steel has been in an uptrend since last month. Steel now trades at US$882.80/T, an approximate 15% gain since 19 August.

This disconnect in the price of steel and iron ore appears to have plagued Bluescope’s share price over the past 2 months. As mentioned – it’s been a bumpy road for shareholders.

However, Bluescope hasn’t escaped the elephant in the room, which remains the downward trend in iron ore’s spot price.

Iron ore is one main ingredient used to forge steel, and over 90% of all iron ore mined goes towards the production of steel.

But iron ore seriously appears to be on a one-way ticket to the south pole, having lost US$121.50/T in value over a matter of weeks.

As such, Bluescope shares have dropped a further 10% over successive days since 16 September.

What are analysts saying about Bluescope shares?

One leading broker is taking a more upbeat view on the Bluescope share price, despite the commotion in the commodity markets.

Investment banking giant UBS has weighed in with its view and sees pricing strengths in the steel markets as a plus for Bluescope.

It is bullish on steel prices and sees fundamental drivers propping steel markets higher over the coming periods.

The broker now assumes a US steel spread of US$1,361/T in the first half of FY22, which should favourably impact Bluescope’s financials.

UBS now estimates the steel giant’s earnings before interest and tax (EBIT) for H1 FY22 to come in at A$2.1 billion, which is higher than Bluescope’s guidance of A$1.8billion to A$2 billion.

This scenario is helped by a weaker Australian Dollar, which makes Australian exports cheaper for overseas buyers.

In addition to its steel forecasts, UBS is also keeping a close eye on developments out of China, where steel production has recently been curbed by Chinese authorities.

Whilst it sees “lower Chinese steel production as a positive for Bluescope (on lower Chinese hot rolled coil exports)”, it also does see “some risk that a rapid deterioration” in the Chinese property sector could result in “excess tonnes being exported”.

The Bluescope share price is up 23% this year to date and has gained 68% over the last 12 months – well ahead of the broad index.

The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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