Cleveland-Cliffs Inc (NYSE:CLF) shares fell 2.4% in premarket trading on Monday after Morgan Stanley downgraded the steelmaker to Equalweight from Overweight, while modestly increasing its price target to $12.50.
The brokerage’s more cautious stance comes despite a stronger outlook for steel prices, with analysts arguing that much of the recent improvement is already reflected in the stock’s valuation.
Higher Steel Price Forecasts Support Near-Term Outlook
Morgan Stanley analyst Carlos De Alba raised the firm’s steel price expectations, citing a rally driven largely by supply-side constraints.
The bank now expects steel prices to remain elevated through the second half of 2026 before moderating in 2027 and 2028 as domestic production and imports gradually respond to stronger pricing conditions.
Morgan Stanley increased its forecast for hot-rolled coil steel prices to $1,200 per short ton for both the third and fourth quarters of 2026, representing increases of 21% and 25%, respectively, from previous projections.
The firm now expects average hot-rolled coil prices of $1,112 per short ton in 2026, $1,012 in 2027 and $900 in 2028.
Valuation Seen as Reflecting Strong Market Conditions
Although the steel market backdrop has improved, Morgan Stanley believes investors have already factored much of that optimism into Cleveland-Cliffs shares.
“We believe expected high steel prices are already reflected in equities and thus downgrade CLF to EW,” De Alba wrote in a research note.
The downgrade follows a strong rally in the stock, with Cleveland-Cliffs shares gaining approximately 50% since April 1.
Supply Constraints Have Driven Recent Gains
The recent advance in Cleveland-Cliffs has been supported by improving expectations for U.S. steel prices.
Analysts pointed to supply limitations in the domestic market and disruption linked to the conflict in the Middle East, which has pushed up import costs and reduced the availability of foreign steel.
These factors have strengthened pricing conditions for North American producers and boosted sentiment across the sector.
Risk-Reward Profile Viewed as More Balanced
Morgan Stanley raised its target price on Cleveland-Cliffs from $12.00 to $12.50 but argued that the stock now offers a more balanced risk-reward profile.
The firm said its revised view places Cleveland-Cliffs alongside other Equalweight-rated steel producers, including Steel Dynamics and Nucor.
Commercial Metals remains Morgan Stanley’s only Overweight-rated steel stock in North America.
Potential Catalysts Remain
Despite the downgrade, the bank highlighted several factors that could support further upside.
Morgan Stanley noted that Cleveland-Cliffs could outperform expectations if it secures a favourable agreement with POSCO under a previously announced memorandum of understanding.
The firm also said the shares could benefit if steel prices remain elevated for longer than currently anticipated, providing additional earnings support beyond existing forecasts.