Ahead of the Bell: Steel recovery seen

HARTFORD, Conn. - A recovering economy in China, rising prices and easing inventory destocking are expected to help bolster earnings of steel companies despite numerous other troubles in the industry and U.S. economy, an analyst said Friday.

Mark L. Parr of KeyBanc Capital Markets wrote in a client note that a "domestic resurgence" in China and increased prices for raw materials such as ferrous scrap and iron ore have sparked a rally in pricing of global flat-rolled steel — a sheet-like product used in autos and appliances — from a low point in the first half of the year.

He also said capacity utilization has improved at steel mills from below 40 percent to more than 50 percent, "with further upside to the 65 percent level still achievable."

"We sense these dynamics will support second half 2009 earnings upside despite ongoing end demand weakness, tight credit markets, rising unemployment and the new administration's reluctance to chum for job growth or stimulate tax relief," Parr said.

He favors AK Steel Holding Corp., U.S. Steel Corp., Olympic Steel Corp., Steel Dynamics Inc. and GrafTech International Ltd.

Parr said he believes a recovery in profit will be more delayed for companies with more exposure to commercial construction markets. He cited Gerdau Ameristeel Corp. and Reliance Steel and Aluminum Corp.

Separately, Yvonne M. Varano, an analyst at Jefferies & Co. Inc., cut her 2009 earnings estimate for Reliance Steel and Aluminum to $1.60 per share from $2.45 per share on weak demand and pricing. The reduction reflects a more conservative view toward the second half of the year, she said in a note to investors.

She maintained her estimate of $4.40 per share for 2010.

Varano said she expect earnings in the second and third quarters to be challenging across the industry due to destocking and weak demand, particularly in the auto market.

"However, July and August price increases are clearly a positive sign for the industry," she said.

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