Ahead of the Bell: Steel Sector

HARTFORD, Conn. (AP) — Domestic steel prices are on the rise as demand increases and inventories remain weak, though investors may be cautious as prices for Chinese steel declines in the short term, an analyst said Wednesday.

KeyBanc analyst Mark L. Parr said the fundamentals of domestic flat-rolled carbon steel — a sheet-like product used for auto and appliance production — "appear increasingly intact over the near term."

Prices are near $550 to $560 a ton for September-October delivery, up from about $525 a ton for deliveries now, he said in a client note.

Service center inventories remain well below normal levels and issues related to restarting operations have pushed steel production orders to November and December, Parr said.

"We sense the confluence of these dynamics, in tandem with the dichotomy of the improved financial condition of the industry vs. previous cyclical troughs and the increasing difficulty of smaller, private buyers to obtain capital, will continue to enhance pricing power through year-end despite generally anemic demand patterns," he said.

U.S. flat-rolled carbon steel markets have modestly improved into the third quarter, Parr said. However, a recent drop in spot hot-rolled pricing in China followed a price increase for September announced by Baosteel "may induce some investor cautiousness as more clarity begins to emerge over the next several weeks," he said.

He said the U.S. industry is "well-positioned" to maintain tight supplies and he expects pricing power to remain intact as demand increases and automotive orders improve.

Gibraltar Industries is Parr's top pick due to cost reductions, stabilizing demand in home repair and remodel markets, strengthening automotive demand in the second half of this year and improved financial flexibility.

And he said GrafTech International Ltd. has an excellent balance sheet and ample liquidity on its revolving debt.

Parr said he expects a more delayed recovery in profit for steel makers such as Gerdau Ameristeel Corp., Nucor Corp. and Reliance Steel&Aluminum Co., which have greater exposure to commercial construction markets.