The Stealth Rally In Steel

By Mark Whistler | March 18, 2008 AAA

Steel is a boring, bland industry with few technical innovations or new products to get excited about. However, while the broader market is in a torrid tailspin, it is hard to argue with gains in steel stocks this year. The below table shows the stellar performance in steel companies:

Company Symbol Price YTD %
Mechel OAO NYSE:MTL $138.22 42.29%
Olympic Steel Nasdaq:ZEUS $43.2 36.23%
Companhia Sider NYSE:SID $38.62 29.35%
Highveld Steel SMCAP:HSVLY $20.49 26.64%
Metal Management NYSE:MM $55.76 22.47%
Nucor NYSE:NUE $72.47 22.37%
AK Steel NYSE:AKS $55.43 19.87%
Clevland Cliffs NYSE:CLF $120.16 19.21%
Gerdau SA ADS NYSE:GGB $33.34 14.93%
Steel Dynamics Nasdaq:STLD $68.2 14.49%
Great Northern NYSE:GNI $145.91 14.22%
Tenaris SA ADS NYSE:TS $49.89 11.54%
Grupo Simec SAB NYSE:SIM $11.05 6.76%
Gains as of March 14th, 2008.
Source: Barchart.com

The 2008 gains listed above are impressive when considering the Dow is down 7.9%, the Nasdaq has lost 14.65% and the S&P 500 is posting a 3.57% loss for the year. The question now is will steel companies continue to outperform in 2008, or is a reversal on the horizon.

Declining Dollar and Global Growth Good for Steel
When digging into why steel companies are performing, it's really a two-part equation driving the larger picture. The first of the two catalysts is the declining dollar, which is stimulating U.S. exports and commodity-infrastructure abroad. Second, global growth remains strong, even while the United States economy struggles. Much of the aforementioned growth is coming from emerging economies, where a mad dash to build infrastructure is underway. (To find out more about emerging economies, read the article What Is An Emerging Market Economy?)

Case in point, ChinaDaily recently reported China's crude steel demand could rise 11% in 2008 alone. However, crude steel production in the country is anticipated to only grow 6.3%. Fact is, China is consuming more steel than it produces, a significant driver within the industry. And given the run in steel globally, 2008 could see considerable acquisitions within the industry.

Merger Mania... Maybe
A significant portion of the world's steel industry remains slightly segmented, but this could change in the years to come, especially within Eastern and Asian countries. Just recently, China's No.2 steel producer Sinosteel kicked off a $1.1 billion bid for Australia's Midwest Corp. (OTC:MISKF). In Wall Street lingo, the takeover bid is "hostile", as Sinosteel already owns 19.9% of Midwest. (To find out how mergers and acquisitions can increase a company's value, read Mergers Put Money In Shareholders' Pockets, and Mergers And Acquisitions - Another Tool For Traders.)

Further news within the industry is coming from BHP Billiton (NYSE:BHP), which is attempting to purchase Rio Tinto (NYSE:RTP) for $147 billion. However, the merger is generating a substantial amount of industry unrest, as many feel the two companies combined, would create a monopoly on iron ore prices. International Iron and Steel Institute (IISI) Secretary General Ian Christmas has called on the competition authorities to examine the serious pricing implications of a BHP Billiton's revised offer for Rio Tinto. Furthermore, in a press release the IISI said, "This merger is not in the public interest and should not be allowed to proceed."

The Bottom Line
With such bold industry disdain, the merger will likely face substantial hardships before ever actually seeking ink. With all of the aforementioned in mind, the year ahead for steel companies - and investors - will be an interesting and volatile one. Global demand, coupled with merger activity will likely make a few savvy investors very, very happy, but the road could also be filled with unseen curves. At the end of the day, caution is key.

For more information on investing in cyclical stocks, read The Ups And Downs Of Investing In Cyclical Stocks.

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