America's Next Top Steel Stock: Update - TheStreet

NEW YORK (TheStreet)- During the past one-month, since we published an article recommending U.S. steel stocks, U.S. Steel (X) - Get Report declined 9.0%. In comparison, Nucor (NUE) - Get Report, AK Steel (AKS) - Get Report and Steel Dynamics (STLD) - Get Report were down 6.3%, 2.5% and 4.3%, respectively, during the past month.

Nevertheless, going forward, we anticipate U.S. Steel to outperform its peers on bargaining opportunities and iron ore price hike for the third-quarter.

Underperformance of U.S. Steel can be attributed to its high beta value

of 1.68, in comparison to Nucor's 1.10, AK Steel's 1.57 and Steel Dynamics' 1.35. Nucor's low equity beta value is

attributed to its high dividend yield

, which reduces the risk of the stock. Accordingly, Nucor

performed better than U.S. Steel and AK Steel on risk-adjusted basis

over the past six months.

Seaborne iron ore prices surged 90% in the second-quarter and will like increase around 25% in Q3.

Baosteel

, China's second largest steel maker, was reported to have agreed for a 23% increase in the third-quarter iron ore supply from

BHP Billiton

( RTP) and

Rio Tinto

( RTP). Although there has been a disagreement on this news, the three mining giants led by

Vale

( RTP) are reported to have been seeking for a 25% increase in iron-ore prices for the third-quarter.

In the current inflationary environment of rising iron ore prices, U.S. steel with a captive source will likely dominate its domestic peers. AK Steel will likely suffer the most, since the company did not account for

higher iron ore prices for the second-quarter order book

.

Among the international players,

ArcelorMittal

(MT) - Get Report

with

the company's 45% self-sufficiency in iron ore

and through long-term contracts with players such as

Cliff Natural Resources

(CLF) - Get Report

,

our metal stock pick for 2010

, will likely generate attractive gains for investors.

We are concerned on the operating rates of Nucor for the second-quarter. According to company's second-quarter guidance, operating rates at the company's steel mills are expected to be similar to the first quarter, with some improvements at the beam mills and plate mills. However the operating rates at U.S steel mills have improved significantly during the second quarter. Capacity utilization rates for U.S. steel plants reported by the American Iron and Steel Institute (AISI) during second quarter were in the range of 70.8% to 74.6%, in comparison to the first quarter's range of 61.5% to 71.7%.

Meanwhile, Nucor anticipated the second-quarter earnings in the range of 20-25 cents per diluted share, in comparison to the earnings of 10 per diluted share for the first quarter of 2010 and loss of 43 cents per diluted share for the second quarter of 2009. The guidance is well below the earnings of 33 cents per share, according to consensus estimates of analysts polled by

Bloomberg

.