Zacks Industry Outlook Highlights: U.S. Steel, POSCO, Vale, Rio Tinto and BHP Billiton

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Jun 29, 2011, 09:30 ET

CHICAGO, June 29, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Steel industry, including: U.S. Steel Corporation (NYSE: X), POSCO (NYSE: PKX), Vale (NYSE: VALE), Rio Tinto (NYSE: RTP) and BHP Billiton (NYSE: BHP).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at http://www.zacks.com/stock/news/56067/Steel+Stock+Review+%26amp%3B+Outlook+%96+June+2011

The steel industry has long witnessed volatility in prices with a large spot market. Steel prices rose steadily for most of 2008, after which there was a downtrend. Lower prices had an adverse effect on steel producers, who recorded lower revenues and margins, and had to write down finished steel and raw material inventories.

The period witnessed major steel producers slashing production to minimize inventory accumulation. The U.S. Steel Corporation (NYSE: X), the eleventh-largest steel producer worldwide, slashed production by almost 62% during the second quarter of 2009, while Korean steel maker POSCO (NYSE: PKX) cut production by about 15%. This was the first time in its history that POSCO was forced to adopt such a measure, which is a proof of the adverse operating environment.

Although steel prices have been stabilizing since the latter part of 2009, they are significantly below the pre-crisis level. We believe that a sustained recovery in steel prices remains uncertain in the backdrop of sluggish economic activity.

Factors Affecting Steel Prices

Chinese Imports: The steel industry is also affected by fluctuations in steel import–export and tariffs. China is the largest steel producer globally, and balances its domestic production and consumption, which is an important factor in global steel prices.

Consumers in the U.S. are importing cheaper steel from China, which is forcing domestic steel producers to sell at lower prices, and even at a loss, sometimes. To this end, the U.S. government has been imposing anti-dumping duties on Chinese steel imports.

Economic Sustainability: Concerns about the sustainability of economic recovery and queries regarding China's growth momentum come into play in the pricing equation. This relatively uncertain Chinese outlook, coupled with a still tentative recovery in the developed world, is expected to weigh on prices.

Threat from substitutes: Steel has many substitutes like aluminum, which replaces it in the automotive markets. Cement, composites, glass, plastic and wood are also used as steel substitutes. This significantly influences market prices and demand for steel products.

Raw Material Trends

The key input for steel production is iron ore. Apart from this, coking coal and coke, scrap, electricity and natural gas are also used as inputs in steel production. The raw materials industry is highly concentrated with only three major players -- Vale (NYSE: VALE), Rio Tinto (NYSE: RTP) and BHP Billiton (NYSE: BHP) -- having significant pricing power. The risk lies in further consolidation among raw material suppliers. For instance, the announced iron ore joint venture between mining companies BHP Billiton and Rio Tinto would further increase the pricing power of both the suppliers.

Steel makers would face higher production costs if suppliers shift to sales based on spot prices from the long-term fixed price contract system, as spot prices for most of the raw materials, especially iron ore, remained high from 2006 through 2008. Iron ore prices dropped 5.7% to $168 a ton for ore with 62% iron content delivered to China.

Iron ore prices have remained volatile during most of 2010 and are expected to rise sharply in 2011. ArcelorMittal's iron ore and coal mining projects have been a key focus in the recent years and this focus is only expected to intensify in the medium term, as the company has a goal to secure 100 million tons of iron ore supply from its own mines and under strategic long-term supply contracts on a cost-plus basis. As part of this strategy, in January 2011, the company announced the acquisition of Baffinland, which holds a substantial undeveloped iron ore deposit in the Canadian territory of Nunavut.

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