Ahead of the Bell: Steel Sector

Economic recovery too slow to boost prospects for steelmakers in the short-term, analyst says

• On 8:55 am EDT, Wednesday October 28, 2009

HARTFORD, Conn. (AP) -- The economy is recovering too slowly to help U.S. steel manufacturers boost profitability soon, an analyst said Wednesday.

Mark L. Parr, an analyst at KeyBanc Capital Markets, said ferrous scrap prices could continue to decline over the next couple of months. He cited a recent $30 per ton decline in export scrap pricing.

"Domestic mills and export buyers remain on the sidelines, likely dampening the ability to substantially maintain or raise hot-rolled pricing realizations over the near term despite low supply chain inventories," Parr said in a client note.

Hot-rolled steel is used in autos, office furniture and appliances and is considered the industry's benchmark product.

Parr reduced his ratings for AK Steel Holding Corp. and U.S. Steel Corp. to "Hold" from "Buy," saying fourth-quarter outlooks from the two steel makers Tuesday were "somewhat disappointing."

"The outlooks clearly imply profit is very levered to pricing," Parr said. "With a more subdued pricing recovery unfolding, profit recovery will likely also be more gradual in nature."

U.S. Steel said Tuesday it expects better results in the fourth quarter, but it also said it plans to idle two blast furnaces.

AK Steel said it expects shipments to rise in the final three months of the year. But its average selling price is expected to fall because it forecasts a higher percentage of carbon steel sales relative to more expensive stainless and electrical steels.

The two companies posted sharply lower third-quarter results Tuesday as demand for the metal used in manufacturing and construction remained muted amid the global economic downturn.

Parr said steel service center and restocking also may be hampered by a continuing lack of credit.

"In our view, these issues put a premium on companies that are nimble, low-cost producers and those in place to support sporadic levels of demand as the recovery unfolds," he said.

He reiterated "Buy" ratings on Steel Dynamics Inc., Reliance Steel & Aluminum Co. and Olympic Steel Inc.

"We are concerned the rate of real economic recovery in North America is occurring too slowly relative to current market expectations," he said.

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