Saturday, June 19, 2010

Barron's touts the steel names

WORRIES ABOUT AN ECONOMIC slowdown in China , debt problems in Europe and the potential for a double-dip recession in the U.S. have pounded steel stocks in recent months. But the correction appears to have run its course, leaving the shares of U.S. Steel, Nucor, Steel Dynamics and AK Steel at depressed—and attractive—levels.

"Within the next 12 months, we'll see a new high" in steel prices, contends Michelle Applebaum, an independent analyst based near Chicago. "I don't think China is going to slow below a 5% GDP growth rate, and the commodity hunger that China has isn't going to go away."

...China consumes about 35% of the world's steel and has 60% of the world's steel-producing capacity, so analysts watch it closely. Chinese production rose 20% in April. If April's production numbers are annualized, global steel output could hit 1.5 billion metric tons this year, exceeding expected consumption of 1.3 billion metric tons, according to the World Steel Association...

But if Beijing can successfully slow its economy, then it's also capable of accelerating the growth rate if the slowdown seems too drastic. It's also quite possible that steel prices will continue to fall, but demand—and thus volume—will keep rising, pushing up profits. Indeed that's what happened in the second half of 2009, notes Brian Yu, Citigroup's metals and mining analyst.

Capacity utilization in the U.S. steel industry has bounced back nicely from the depressed levels seen in the recession. It now stands at roughly 74% and has dipped only slightly in recent weeks, even as prices have slipped. That's far from 2008's horrible 33%, which sent most of the industry skidding into the red.

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