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Global iron ore prices have increased to a five-month high, confirming that Chinese steelmakers, the leading worldwide consumers of iron ore, are increasing their steel production. Excess iron ore inventories had been overhanging the global market. But the excess inventory has decreased and is reflected in the price for iron ore. The benchmark price for iron ore delivered to China has increased approximately 50% from its low of $88.75 a metric ton reached in September.

In September, China's iron ore imports rose to 65 million metric tons, a 20 month high. Colin Hamilton, the head of commodities research for Macquarie in London, indicated that China's smaller steel mills have been restocking their depleted inventories.

With the low prospects for economic growth in the United States and the Eurozone, it's increasingly likely that China will be the engine that will fuel global economic growth next year. Any analysis of China's economic prospects leads one directly to the country's steel industry, which accounts for approximately 46% of global steel output.

The China Iron and Steel Association, has stated that of the 81 Chinese steelmakers it tracks, nearly half recorded losses in the first seven months of this year, but the future for many of China's steelmakers is definitely changing.

As the turn-around in China's steel industry continues, a few China steelmakers are worthy of investor consideration:

Sutor Technology Group Limited (NASDAQ:SUTR)

Sutor Technology Group manufactures and distributes finished steel products and welded steel pipes. The Company converts steel manufactured by other companies to finished steel products, including hot-dip galvanized steel, pre-painted galvanized steel, acid-pickled steel, cold-rolled steel and welded steel pipe products.

For the three months ended September 30th, Sutor Technology's revenues were $117.2 million, a decrease of $13 million or 10% from the same period of last year. Sutor Technology's net income for the third quarter was $1.8 million, a decrease from $3.2 million for the same quarter of last year. What is important is that Sutor Technology remained profitable for the quarter, even though its profits were down compared to the same quarter of last year.

Sutor Technology is definitely a smaller capitalization company. The company's market capitalization is $39 million and its shares are trading at a P/E of 4.39.

China Industrial Steel Inc. (OTCPK:CDNN)

China Industrial Steel produces and sells steel billet, steel plate and steel bar primarily for the domestic Chinese market. The Company has four production lines on approximately 1,000 acres in Handan City in Hebei Province.

The company's steel plate, steel wire and steel bar are primarily used in the construction of buildings and in large scale infrastructure projects, including roads and bridges. The company's steel plate is also utilized by the ship building industry, and in the construction of pipelines. An additional company product is steel billet, a semi-finished product, which is utilized as a raw material by other steel manufacturers.

The company's revenues for the first nine months of this year were $475 million, which resulted in a net income of $2.8 million. The revenues and net income were substantially down from the comparable period of 2011, reflecting the overall softness of the Chinese economy earlier this year.

While perhaps a speculative conclusion, as China's economy continues to grow, it's also a possibility that China Industrial Steel returns to, or exceeds its 2011 levels of revenues of $823 million and net income of $45.8 million.

China Industrial Steel is definitely a smaller capitalization company, with a stock market capitalization of $70 million. The company has a current P/E of 5.79.

The trading activity of the company's shares is minimal. It's not on the radar screen of most investors, and could be considered to be an orphan stock. But it's worthy of investor interest as a way to participate in China's continuing growth, and China Industrial Steel is an interesting Chinese basic industry opportunity.

China Gerui Advanced Materials Group (NASDAQ:CHOP)

China Gerui Advanced Materials Group is a China based, value-added, steel processor. The Company produces specialized cold-rolled steel products, which are not standardized, commodity items. Instead, the company manufactures specialized products based on specific customer requirements. The company's customers include companies involved in food and industrial packaging, construction and household materials, electrical appliances, and wire manufacturers for the telecommunications industry.

China Gerui Advanced Materials' third quarter financial results were disappointing. The company's revenues decreased 44.5% to $56.1 million, from $101.1 million for the same quarter of last year. The decrease in revenues was primarily due to two factors, a decrease in the average selling price per ton, as well as a 17.3% decrease in the tonnage of steel sold.

China Gerui Advanced Materials' net income was $2.4 million for the third quarter, or $0.04 per fully diluted share, compared to $21.4 million, or $0.37 per share for the same quarter of last year.

The company's market capitalization is $109 million. The company has a current P/E of 2.47.

Despite the significant decline in the quarter's revenues, the company was able to maintain profitability in the third quarter, which to me is significant. The company's manufacture of specialized products is a significant capability, and one that provides the company with the potential for higher margins than are typically usual for most steelmakers.

Conclusion:

Investing in China's steel producers is a way to participate in the country's increasing economic growth. But, it's also appropriate to make a quick comparison of China's producers compared to a major, U.S. based global steel producer.

U.S. based Nucor Corp. (NYSE:NUE) is the second largest U.S. steel manufacturer. The demand for the company's products has declined due to a number of factors. These factors have included America's low growth economy and lackluster American manufacturing, both of which have impacted the demand for steel. These factors have negatively impacted Nucor despite the recent growth of America's auto industry, which is a large user of steel.

Nucor's net revenues for the three months ended September 30th were $4.8 billion, compared to $5.25 billion for the same quarter of last year. For the first nine months of this year, the company's net revenues were $14.98 billion, compared to $15.2 billion for the first nine months of last year.

Earnings are another matter. For the three months ended September 30th, Nucor's earnings were $191 million, compared to $284 million for the same three month period of 2011. For the first nine months of this year, the company's earnings were $633 million, compared to 1.02 billion for the same nine months of last year.

It's interesting to note that Nucor is trading at a P/E of 27.65, and the recent decline of revenues and earnings causes one to wonder whether the company should justify that high a P/E. The company's forward P/E of 15.46 for the year ending December 31st of next year, more realistically highlights the company's current and likely future financial performance. The forward P/E is perhaps a better metric, and a confirmation that Nucor's shares are overvalued.

But, the value proposition becomes clearer when one compares Nucor's P/E to the three Chinese steelmakers discussed above. The P/E of Sutor Technology is 4.39, the P/E of China Industrial Steel is 5.79, and the P/E of China Gerui Advanced Materials is 2.47.

Keeping in mind that China's economy is growing at an annual rate of around 7.6%, and America's economy is growing at a rate of around 2.6%, it causes one to wonder how Nucor's shares can justify such a high P/E. It also leads one to the conclusion that these three China based steelmakers, with significantly lower P/Es than Nucor's, are significantly undervalued and therefore worthy of investor consideration.

Caution

Investing in smaller-capitalization companies, as well as investing in companies in emerging markets, including China, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.

The companies discussed above include a major global steel producer, Nucor. It also includes smaller capitalization companies with Chinese operations. But the Chinese companies, whose shares trade in the U.S. are all U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.

Source: Increased Iron Ore Prices Are Bullish For 3 Steel Producers