Why Analysts Will Remain Bullish on Steel

Editor's note: The following article is part of a series on analyst ratings of metals stocks. Here is an earlier article that looks at ratings of copper and aluminum stocks.

NEW YORK (TheStreet) -- Analysts could be bullish on steel stocks for the remainder of 2010 because of demand concerns and the offsetting effect of bargaining opportunities.

The key triggers for steel stock ratings changes during the second half will be data provided by American Iron and Steel Institute (AISI) regarding capacity utilization and production at U.S. steel mills, second-quarter earnings of steel companies and economic data from the U.S.

During the first half, Mechel (MTL) and U.S. Steel (X) led the pack of steel stocks receiving improved ratings. Analysts favored steel producers with captive raw materials, in view of the hike in iron ore prices during the second quarter.

Schnitzer Steel Industries (SCHN), Steel Dynamics (STLD), Nucor (NUE) and Worthington Industries (WOR) received stock upgrades during the first half of the year due to rising steel consumption and higher utilization rates in the U.S.

For the period from Dec. 29 to June 21, capacity utilization rates for steel mills in the U.S. increased to 74.8% from 60.6% while production was up 25.1% to 1.80 million tons from 1.45 million, according to data released by AISI.

Ternium (TX), ArcelorMittal (MT) and AK Steel (AKS) received analyst downgrades during the past six months.

Because Ternium and ArcelorMittal derive a majority of revenue from Europe, analysts downgraded these stocks on concerns about the European debt crisis. However, ArcelorMittal received a moderate downgrade, since the company is self-sufficient in iron ore and coking coal supply through long-term contracts with iron ore majors such as Cliff Natural Resources (CLF), a metal stock pick for 2010.

AK Steel was downgraded on concerns that the company did not take into account higher iron ore prices for its second-quarter order book.

Karvy Global Services (www.karvyglobal.com), a subsidiary of the Karvy group (www.karvy.com), provides specialized research in asset classes including stocks, mutual funds and insurance to leading Wall Street firms.