Monday, August 30, 2010

U.S. Steel (NYSE:X), AK Steel (NYSE:AKS), Nucor, (NYSE:NUE) - All Under Pressure

The steel industry is under pressure as a surplus of steel and slowing Chinese demand puts pressure on companies like U.S. Steel (NYSE:X), AK Steel (NYSE:AKS) and Nucor (NYSE:NUE).

Credit Suisse (NYSE:CS) recently said that U.S. Steel and AK Steel are particularly vulnerable to a fall in prices.

On the China part of the issue, much depends on how they continue to go forward with the cooling off of the real estate market in urban areas. At this time about growth is about 3 percent lower than before, and that definitely cuts into steel demand.

Another bit of news that has yet to be confirmed on China is they may now direct stimulus efforts to the rural areas of the country which could make up for a lot of the slowdown in urban areas. If that's the case, it could change the dynamics, although it would take time to ramp up.

On the other hand, if steel production in China start to increase again, that could offer support, although it wouldn't be anything that would push prices up dramatically, even in the best case scenario.

Even with the expected increase of steel prices in September of up to $30 a ton (probably), in the fourth quarter expectations are scrap prices will come under pressure and drop. That is based on the belief scrap steel supply will increase during that period.

The recent increase in scrap prices should also push more steel into scrap yards, which will of course bring more supply than needed, driving steel prices back down.

This could create a domino effect in other steel products and cut into margins and earnings.

Ak Steel has been cutting capacity in a low steel demand market, and U.S. Steel has a high debt load which cuts back on their flexibility and has made it extremely difficult to be profitable, as the last six quarters have shown.

On the other hand Nucor and Steel Dynamics (Nasdaq:STLD) have been able to turn a profit in slow times, and are positioned strongly to be able to at least be profitable whatever way the market turns, which should be down in the short term.

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