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Steel Stocks Put in Good March

The S&P 500 Steel Index continued to build on its strong performance and gained 10% during the past month. In comparison, the NYSE composite index advanced only 3.7% during the month.

The S&P 500 Steel Index continued to build on its strong performance and gained 10% during the past month. In comparison, the NYSE composite index advanced only 3.7% during the month.


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Mechel OAO

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Schnitzer Steel

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led the pack of major steel producers with one-month returns of 15.3%, 12.3%, and 11.0%, respectively.

Other major steel producers

U.S. Steel

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gained 10% and 5.7%, respectivel,y during the month. In contrast however,

AK Steel

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Worthington Indutries

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lost 2.4% and 9% of their market values over the past month, respectively.

Last week, Nucor acquired Ocala Recycling LLC, marking its first deal since September 2008. Steel industry experts anticipate such small deals to precede bigger deals during this year.

On Thursday, AK Steel increased the spot market base prices of carbon steel products by $40 per ton for all new orders. The price increase was in response to an increase in demand for carbon steel, in an attempt to compensate for higher steelmaking costs.

Last week, Worthington Industries reported a net loss of $17.7 million for the third quarter of fiscal 2010 ended Feb. 28, as opposed to a net profit of $1.6 million in the same period of the previous fiscal year. Worthington's loss during the quarter is attributable to pre-tax impairment and restructuring charges totaling $35.5 million and $4.9 million in charges and legal fees related to the litigation with BernzOmatic. The third quarter of fiscal 2009 included $16.3 million in pre-tax restructuring charges and an $8.3 million pre-tax gain on the sale of Aegis.

Excluding these extraordinary items, Worthington's Q3 fiscal 2010 earnings were $0.10 per share compared to earnings of $0.06 per share in Q3 fiscal 2009 and earnings of $0.29 per share in Q2 fiscal 2010. Following the weaker-than-expected third-quarter results, Credit Suisse lowered its EPS estimate from $0.83 to $0.73 for fiscal 2010. Worthington Industries' steel processing, metal framing, pressure cylinder and other businesses accounted for 45%, 25%, 20%, and 10% of net sales during fiscal 2009, respectively. Steel processing's net sales of $232.2 million increased 29%, or $39.7 million, over the prior year quarter.

Higher volumes increased sales by $69.4 million, while lower average selling prices reduced sales by $29.7 million. Sales volumes grew 49% over the prior year quarter and 3% vs. the previous quarter due to increased sales to the automotive, agriculture and construction markets and the February contribution from the Gibraltar strip steel acquisition. The decline in the average selling price was primarily due to the impact of fixed contract pricing and the mix of tons shipped.

Commenting about the segment, Chairman and CEO John P. McConnell of Worthington said "Steel Processing has been rapidly and successfully integrating the Gibraltar strip steel acquisition, which strengthens our cold-rolled strip strategy and is already contributing to earnings. January was Steel's strongest shipping month since October of 2008. Steel Processing has clearly seen results from the Transformation effort. We believe we will see further improvements in the profitability of our Steel Processing business where demand is picking up and steel prices are on the rise."

On Wednesday, Schnitzer Steel reported diluted earnings per share from continuing operations of $0.62 for second quarter fiscal 2010 ended February 28. Q2 EPS earnings are $0.16 higher than the Bloomberg consensus estimate of $0.46.

Metals recycling, auto parts, and steel manufacturing businesses accounted for $489 million, $55 million, and $56 million of sales during the second quarter fiscal 2010, respectively. These businesses reported operating incomes of $29 million, $13 million, and operating loss of $2 million, respectively.

The steel manufacturing business of Schnitzer was impacted by the overall weak domestic demand during the quarter ended February. Revenue from continuing operations remained unchanged compared to the first quarter of 2010, but increased 75% over the second quarter of fiscal 2009. Operating margins of 23% were higher than the 19% in the first quarter, in comparison to negative margins in the second quarter of fiscal 2009.

"Market demand on the U.S. West Coast for manufactured steel products remained weak in the second quarter of fiscal 2010, leading to low levels of sales volumes," said Tamara Lundgren, president and CEO of Schnitzer. "We continued our successful cost containment efforts and were able to pass through price increases to bring this business closer to breakeven while further positioning it to take advantage of improvements in demand as infrastructure spending resumes."

Schnitzer anticipates all-round improvement in sales, pricing, and margins during the third quarter of fiscal 2010. Management expects the sales volume to improve 10-20% during the quarter.

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