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U.S. Steel Preview: Have Steel Stocks Bottomed Out?

It's bleak out there for steel stocks as one of the industry's old-line firms, U.S. Steel, gets set to report third-quarter results that no one expects much from, not even the company itself.
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) -- When

U.S. Steel

(X) - Get United States Steel Corporation Report

reports third-quarter results before the opening bell Tuesday, it will feed its numbers to an investing public as bearish on the hot-metal industry at it's been at any point since the recession began.

No one expects U.S. Steel, the Pittsburgh-based icon of the nation's diminished industrial might, to offer encouraging guidance for the quarters ahead. Short interest remains high (18% of the company's 142 million-share float). Steel executives almost universally expect steel prices to weaken further in the fourth quarter. And last week,


(NUE) - Get Nucor Corporation Report

boss Dan DiMicco, a famous poor-mouther, said that the fourth period "may indeed turn out to be the most challenging quarter of the year," even as his company reported disappointing third-quarter results.

In other words, the environment for steel stocks is, without question, grim.

Part of the problem has been supply: lots of steel entered the market earlier this year when producers began ratcheting up capacity based on what they then believed was a burgeoning economic recovery in the U.S. Prices have remained weak, despite a well-publicized curtailment of capacity in China, where government officials have shut down (mostly temporarily) old, energy inefficient plants.

During the third period, the price for hot-rolled sheet steel, the chief product of the big Great Lakes blast furnaces, fell as low as $540 a ton -- well below the already bearish expectations from industry observers earlier this year. By comparison, at the 2008 pre-crisis peak, hot-rolled sheet steel was fetching $1,000 a ton.

Also plaguing the industry has been the high cost of raw materials costs -- iron ore for the unintegrated blast furnace operators like

AK Steel

(AKS) - Get AK Steel Holding Corporation Report

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and scrap metal for the mini-mill operators like Nucor and Steel Dynamics.

Even the integrated U.S. Steel has been stung by high feedstock costs: the price of metallurgical coal has risen sharply as well, lifted higher by Chinese demand.

The sell-side analysts on Wall Street are predicting a bottom line of 23 cents a share for U.S. Steel, which would represent the company's first black ink since 2008. The company lost $2.11 a share in the year-ago quarter. On the top line, analysts are calling for revenue of $4.53 billion, up 60% from $2.82 billion a year ago.

Regardless, analysts have consistently gotten it wrong over the last few quarters, optimistically forecasting that the company would swing to a profit -- but, each time, being fooled by another period of losses.

Sentiment didn't improve when U.S. Steel CEO John Surma gave a presentation at a

Credit Suisse

(CS) - Get Credit Suisse Group AG Report

conference in New York in late September and suggested that the third quarter was stacking up even worse than the company had expected, with demand weaker than previous forecasts.

The ubiquity of all that negative sentiment has given rise, of course, to the inevitable musings as to whether steel stocks have bottomed out, U.S. Steel's in particular.

"Steel stocks have just been such laggards this year, you've got to feel that some of this has been priced in," said Rick de los Reyes, metals and mining analyst at

T. Rowe Price


U.S. Steel shares, trading at about $40.23 Monday, are down 40% from their 52-week high of around $71, reached in April. Certainly the stock could go lower, Reyes said, but, "Anytime you get this level of pessimism, it's hard for a stock to go down too much."

AK Steel also reports earnings Tuesday morning. Analysts are expecting a per-share loss of 34 cents on revenue of $1.54 billion. A year ago, AK posted a profit of 6 cents a share on revenue of $1.04 billion.

-- Written by Scott Eden in New York


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