Credit Suisse has turned negative on the steel sector ahead of what analyst Curt Woodworth sees as a peak in flat rolled prices in Q1 2016. Woodworth downgraded the US steel sector from Overweight to Market Weight and cut his rating on three names.

US Steel (NYSE: X) downgraded

AK Steel (NYSE: AKS) downgraded

Steel Dynamics (NASDAQ: STLD) downgraded

Woodworth's team expects a decline in bulk material prices in H2 2017, weak demand trend from the back half of 2016, and minimal impact from infrastructure stimulus to fail to produce any material benefits for US producers. The analyst also sees hot rolled steel price momentum abating, writing to clients that "we forecast HRC prices to average in 1Q-17 at $625/ton and then decline to $535/ton by year-end owing to significant domestic capacity creep by 2Q-17 and declines in bulk material markets, which should pressure US scrap markets."

Adding to the negative tone, Woodworth says demand side fundamentals are a concern, noting "US sheet volumes rose just ~3% in 2016 and total US production was down 1% versus 2015, despite severe weakness in 2H-15. US HRC apparent consumption has been negative the past five months and import penetration has remained relatively high by historical standards."

Woodworth also shares concern that new source of flat rolled supply will enter the US market by the end of Q1 2017. He mentions Big River, Acero Junction, and US Steel Granite City Works as expected "aggressive" capacity rampers, specifically in hot rolled sheets. To wit: "Big River, Acero Junction, and US Steel Granite City Works will be aggressive in ramping capacity, especially for hot rolled sheet. We note that Big River has 1.6mt of capacity, Acero Junction has 2.8mt of hot mill capacity, and US Steel Granite City has ~3.6mt of hot mill capacity. The total size of the US hot rolled market is only ~23mt."

As of the open on Thursday, US Steel traded down nearly 5%, AK Steel down 4.5% and Steel Dynamics down almost 2%.