A Bull Made Of Steel

|
Includes: AKS, CLF, MT, MTL, NUE, RS, SCHN, SLX, STLD, VALE, X
by: Option Dragon
The New Shanghai
shanghai-at-night.png
shanghai-during-the-day.png
The New Dubai
dubai-before-in-1991-and-dubai-after-in-2005.png
“May you live in interesting times.” -Ancient Chinese proverb
If oil is the blood of the global economy then steel represents the ever expanding skeleton. Even during this “slowdown”, the skeleton grows in an unprecedented manner, please pay attention to history in the making. The emerging markets are still growing rapidly and is the main cause of booming demand for steel. This booming steel demand has even outstripped growing steel supply. The Middle East is growing by leaps and bounds. In Dubai, The World’s man-made islands are created it seems overnight. In Dubai, they are slated to complete the tallest man-made structure in the world in 2009 called the Burj Dubai. Skyscrapers in China are growing like weeds. The running joke is that the building crane is considered the national bird. In 15 years, the New Shanghai was created from rice fields to skyscrapers. The facts are there to justify a continuing trend. Despite the U.S. slowdown, global steel demand is rising about 5% a year. The China Daily recently reported China’s crude steel demand could rise 11% in 2008 alone. Yet, crude steel production in the country is anticipated to only grow 6.3%. Last year, Vale (NYSE:
RIO) shipped almost 100 million tons of iron ore products from Brazil to China, its largest client, or five times the volume in 2002.
shanghai-from-rice-fields-to-skyscrapers-in-15-years.png
Business Week wrote- In February, Vale won 2008 price increases of between 65% and 71% for its ore products from big clients around the world, including in China. Iron ore prices have more than tripled over five years. China’s steel use nearly tripled between 2000 and 2006. China now consumes almost half of the world’s iron ore. Last week, Citigroup (NYSE:C) analysts in Japan canceled previous estimates that iron ore prices may finally stop rising in 2009, and instead predicted another 30% rise next year.
What is important is that these massive history making buildings weren’t financed with mortgages but cold hard American cash (oil money, consumer products revenue). Now some of that money cycles back to our economy like a river to our steel companies. American experience and business acumen in this industry is unparalleled. It is up to the investor to recognize such a phenomenon, locate the talent and profit from it by riding that river. I believe the pace and trend will continue for the next several years.
Globally I expect more acquisitions in 2008 due to strong industry fundamentals, the BHP-RTP merger deal is only a primer to what is yet to come. Case in point, on Friday Russian steel company OAO Severstal said it would buy Baltimore’s Sparrows Point steel mill from ArcelorMittal for $810 million in cash. The purchase will make Severstal the fourth largest steel producer in the U.S.
On Thursday, Goldman Sachs analyst Aldo Mazzaferro upgraded the sector citing higher-than-expected U.S. steel prices. He wrote, “Global markets appear to reflect a physical steel shortage, in our view,” and that, “strong global demand trends are trumping U.S. weakness, and the net-short U.S. market needs to raise imports, being already very low on supply.”

Of importance is that Goldman raised its U.S. HRC price outlook to $850 a short ton by this summer from $700 and 2009 to $806 from $660.
Also on Thursday, Fast Money talked about steel. Guy Adami commented that steel companies have pricing power and can benefit form strong global demand. “The steel story is real”, he said.
Cramer also loves steel and noted that they are near their 52 weeks highs although the conventional wisdom was that you don’t buy steel stocks going into or during a recession. He wrote that steels are supply-constrained with worldwide demand strong, that commercial construction is holding up and the U.S. export market is white-hot.
Of course he is Lightning Round bullish of X, NUE and RS.
shanghai-skyline.png
Looking forward I prepared a list of the best steel stocks globally to keep an eye on as well as the underperforming ones.
United States Steel Corp. (NYSE:X)
Goldman Sachs analyst Aldo Mazzaferro raised his rating on the stock to “Buy” from “Neutral” and increased his price target to $150 per share from $128. Mazzaferro wrote that the company “has high sensitivity to steel pricing and low input cost exposure.”
analyst Charles Bradford from Soleil Securities Group raised his price target to $110 from $105 but kept his “Hold” rating on the shares. He wrote to clients, “U.S. Steel may be the lowest cost flat rolled steelmaker in the U.S., given its strong iron ore position and major coke-making operations. We expect the company to experience single-digit cost increases, which compares with the recent pellet deal between Vale and Ilva of Italy that will increase prices by 86.7 percent for fiscal 2008.”
On March 14th, UBSW issued positive comments after meeting with management believing business is stronger than expected.

x-chart.png
Nucor Corp. (NYSE:NUE)
On March 17th, JP Morgan raised its price target to $82 on increasing metal spreads. They believe that rising metal spreads are likely to result in significant margin expansion for NUE. They maintain an Overweight rating.
Nucor makes steel from recycled metal. Nucor recently bought Metal Recycling Services Inc. and said the deal provides additional growth in the scrap metal sector. Metal Recycling Services expects to process 220,000 tons of steel annually.
“Nucor’s buying spree highlights the importance of scrap processors to steelmakers,” Canaccord Adams analyst Eric Prouty wrote in a client note. “Nucor’s acquisitions, which are just the latest transactions in an industry that continues to undergo significant consolidation, underscore the growing trend toward vertical integration in the steel industry.”
nue-chart.png
Steel Dynamics Inc. (NASDAQ:STLD)
On March 17th, Soleil rose their price target to $80 from $58 on rising steel prices but maintained their “Hold” rating.
On March 11th, STLD rose Q1 guidance to $1.25-$1.30 from $1.10-$1.20. Consensus estimates for Q1 are $1.18. The company raise FY08 EPS guidance to $5.25-$5.75 from $5.00-$5.50 vs. consensus of $5.40.
On March 4th, STLD announced a 2-for-1 stock split and dividend increase. The company expects to distribute the additional shares on or about March 28, 2008. They also authorized a 33% increase in the company’s quarterly cash dividend and payable to shareholders of record at the close of business on March 31, 2008.

stld-chart.png
Cleveland-Cliffs Inc. (NYSE:CLF)
On March 19th, JP Morgan raised estimates on CLF and said the company could become an increasingly attractive acquisition target for its North American steel customers. Shares are Overweight rated.
On March 11th, CLF announced a two-for-one common stock split to shareholders of record as of the close of business on May 1, 2008.
On March 3rd, Deutsche Bank wrote they believe CLF is a leveraged play on the bulk commodities’ momentum. They initiated CLF with a Buy, target $135.
clf-chart.png
AK Steel Holding Corp. (NYSE:AKS)
On March 5th, AK Steel said that it will increase spot market prices for its carbon steel products by $70 per ton for all new orders accepted for shipment May 1, 2008 and later. They also advised its customers that a $375 per ton surcharge will be added to nvoices for electrical steel products shipped in April 2008. Zack’s came out with a strong endorsement.
aks-chart.png
Schnitzer Steel Industries Inc. (NASDAQ:SCHN)
SCHN recently made Ken Fisher’s 5 Super Stocks noting a P/E ratio of 12.8 and Price/sales ratio of 0.72.
schn-chart.png

Reliance Steel & Aluminum Co. (NYSE:RS)
On March 18th, Longbow upgraded RS to a “Buy” from Neutral. Longbow recently downgraded NUE, SCHN, and STLD mostly on valuation but likes RS. On February 21st, RS reports Q4 EPS $1.06 vs. consensus of $1.01. Reports Q4 revenue $1.71B vs. consensus of $1.61B and increases the dividend 25% to 10c per share. On Seeking Alpha, another fellow writer made a strong case for strength in the steel sector and RS.
rs-chart.png
Arcelor Mittal (NYSE:MT)
On February 22nd, Deutsche Bank upgraded the shares as they believed iron ore prices and the coke integration should help the company outperform in 2008. Target to $90 from $72. On February 21st, MT announced a further price increase for its flat carbon products in Europe of 40 €/t. This takes the minimum base price to EUR600/t for hot rolled coil and to EUR680/t for cold rolled/coated products. That announcement follows the final settlement for the 2008 iron ore contracts. ArcelorMittal indicated in a recent release announcing price increases of some 12 – 15% and that further increases might be required as a result of the final outcome of the ongoing negotiations. ArcelorMittal is the world’s largest and most global steel company, with 310,000 employees in more than 60 countries.
mt-chart.png
Mechel Open Joint Stock Company (NYSE:MTL)
On February 25th, MTL was upgraded to Buy from Hold by Deutche Bank to a target of $150.
On March 3rd, MTL said it is considering a buyout of Oriel Resources PLC. Goldman Sachs analyst Vasily Nikolaev said, “Given we believe there could be a strategic fit with Oriel assets, our first take is that the acquisition could be a positive for Mechel,” he said.

Nikolaev kept a “Buy” rating on Mechel ADRs, with a price target of $112 per share. He has the stock on the Pan-Europe Buy List, a portfolio of recommended European ADRs.
mtl-chart.png
Companhia Vale do Rio Doce (RIO)
On March 19th, mining giant Vale secured an 86.67 percent increase in pellet prices for 2008 from Italian steelmaker Ilva.
RIO has taken notice as it is negotiating with Chinese steelmakers on its iron ore. Dry Bulk shippers like DRYS have been suffering due to the wait. The 86% hike is above expectations. Morgan Stanely wrote, “We believe most investors expected pellet price increases to be equal to or less than the 65-71 percent increase on iron ore fines announced in February, and this news could come as a surprise to the market.”
Reuters recently wrote,
Rio has been pushing its customers to pay a premium for Australian iron ore to compensate for a price differential on shipping costs versus material from Vale’s Brazilian mines amid high demand for ore.
It costs more than $60 a tonne to ship ore to China from Brazil versus about $20 a tonne from Australia.
The shipping premium has so far faced resistance from mills, disrupting the tradition of all miners going along with the first settlement by a major miner, in this case Vale.
Beijing has waded in on the talks with Australian miners by blocking expensive spot material at ports as it tries to limit price hikes for its steel industry.

This unexpected higher price is good for CLF as well, who is also an iron ore producer. Cramer recently added on Mar. 14th that he “likes RIO because it is the leading producer of iron ore and has the world’s largest deposits of nickel. The company recently made a bid for European mining company Xstrata, and while the deal doesn’t seem like it will happen, Cramer says this is a good thing because RIO will avoid arbitrage overhang that would send the stock lower. RIO is currently 4 points off of its 52-week high and Cramer would buy it on the way down. He agrees with Goldman Sachs which predicts the stock could reach $57, $23 higher than its current price.”
The recent tense contract negotiations with China including port holdups and delays have weighted on the stock price but if they can finally settle this negotiation, DRYS (dependent upon resumption of high volume shipments of iron ore) and RIO should resume back up.
rio-chart.png
Now some laggards in the sector due to technicals are PKX, ATI, USAP, RTI.