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Olympic Steel Inc. Message Board

  • hammer1582 hammer1582 Apr 8, 2005 8:57 AM Flag

    Real News from Goldman! Part 2

    The March 26 Barron's column by Alan Abelson caused some concern this
    week, mostly due to its reference to some tariffs that are due to expire
    on steel imports over the next two weeks unless extended. These are the
    old tariffs left over from the Asian crisis, which were set in 1999 and
    are scheduled to expire now. We believe almost everyone expects them to
    expire, but there will still be the headline impact which a short-seller
    focuses on. If the tariffs expire, as expected, we see little impact on
    steel prices in the US because of (1) near capacity run rates for steel
    mills in Brazil and Japan, (2) strong local demand there (Toyota
    production rates are up 11% and Nissan and other carmakers in Japan have
    complained of low steel supply), and (3) the fact that there are much
    better pricing opportunities for steel in Asia and Europe than in the US
    at the moment. We estimate that even excluding the small tariff penalties
    in place from the old restrictions, global steel traders would still lose
    money on the Asia to US steel trade.

    The Barron's article also focused on US Steel (X - OP/A) as the best steel
    stock to short sell, partly due to a sharp rise in iron ore and other raw
    materials. We see X as probably the wrong pick because X, somewhat unique
    to the industry, is actually LONG most raw materials. And, although not
    the company's stated intentions at this time, X could become even longer,
    and a bigger seller of iron ore, with relatively modest investment. Bottom
    line: the 71.5% iron ore hike is bullish for X, not bearish. In addition,
    also somewhat unique to the sector, X has exposure to oil country tubular
    goods (i.e. drill and other energy pipe), which is becoming a very strong
    market, and also should benefit from rising unit volume at its low cost
    central Europe mills. Consequently, we see X as having one of the best
    chances for upside earnings surprises in the near term.

    We think Barron's got the China comments wrong too. We believe inventories
    in China have been declining for a year, and are actually at low levels.
    Steel production in China has also been under control recently, with the
    China Iron and Steel Association (CISA) a quasi-government steel trade
    organization, predicting "only" 300 million tonnes of production in 2005.
    That level would be up about 11% from 2004 and below most market
    forecasts. It would also ensure China does not become a net exporter near
    term, although we believe it would be physically impossible to sustain net
    exports from China before 2009. Market prices for steel have been rising
    in Asia mostly due to the improving China market, in our view. Today,
    China announced that it would eliminate the VAT tax rebate on exports of
    semi-finished steel products like blooms, billets and slab, which should
    reduce further the likelihood that it becomes a net exporter. The vast
    majority of its net exports in 2004 were semi-finished, and we believe
    most of that reflected inventory drawdown.

 
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