The New Shanghai
The New Dubai
“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
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.
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.
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
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.
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)
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.
Nucor Corp. (NYSE:NUE)
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
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.
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
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.
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.
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.
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.
AK Steel Holding Corp. (NYSE:AKS)
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.
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.
Reliance Steel & Aluminum Co. (NYSE:RS)
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.
Arcelor Mittal (NYSE:MT)
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.
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.
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.
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
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.
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,
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.
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.
Now some laggards in the sector due to technicals are PKX, ATI, USAP, RTI.