NEW YORK (TheStreet) -- Shares of U.S. Steel (X - Get Report) rose sharply Tuesday on the back of an upgrade by Deutsche Bank (DB), but it seems a rift has developed between stock-market observers and those on the ground within the steel industry.Deutsche analyst David Martin put out a lengthy research report on the U.S. steel sector Tuesday, arguing that economic recovery looks to be real and that demand for steel products, both globally and in North America, will grow in 2010, pushing share prices higher. Still, Martin admitted that "visibility in the supply chain remains limited" and that "most of our trade contacts remain skeptical of the recent recovery." Technical traders, meanwhile, placed short-term bets on U.S. Steel stock after seeing indications that the shares were set to test the 52-week high notched last Monday, said Steven Spencer, a trader and partner at SMB Capital in New York. A rash of short covering has also likely boosted U.S. Steel shares; as of Dec. 31, short sellers held nearly 23% of the stock's float. Deutsche Bank's Martin joins a handful of other sell-side stock analysts covering steelmakers in issuing bullish calls since the New Year, including Goldman Sachs ( GS). U.S. Steel shares have nearly doubled since early November. Investors and analysts have been particularly enamored of the company's iron-ore mining assets in North America. Because it has its own ore sources, U.S. Steel can keep costs down as raw materials costs prices spike for rival steel producers.
In support of his view, Martin said he expects 2010 steel consumption to grow 11% worldwide and 15% in North America compared with a year ago. That forecast was at least partly based on Deutsche's own in-house GDP growth projections for 2010. Also, because inventories have fallen to just below 7 million tons, or a two and a half month's supply -- 46% below inventory levels in August 2008 -- Martin expects distributors will soon need to restock. Martin also said that rising raw materials and shipping costs have led to a worldwide increase in steel prices. He tweaked his own predictions for 2010, lifting his target for hot-rolled coil steel to $625 a ton, up 17% from the average price in 2009. The analyst raised his rating on U.S. Steel to buy from hold, based mostly on the relative cheapness of its stock compared to the company's steelmaking peers. He boosted his 12-month price target to $77 from $44. Martin expects U.S. Steel to lose money when it reports fourth-quarter results on Jan. 26. In fact, he widened his bottom-line target to a loss of $1.76 a share from a previous estimate of 98 cents. The consensus among Wall Street analysts calls for a fourth-quarter loss of $1.40 a share. U.S. Steel shares closed Tuesday's session up 5.5% at $65.44 on volume of 14 million shares. The average daily turnover is 11.2 million.
Elsewhere, Warren Buffett will reportedly increase his stake in the Korean steel giant Posco ( PKX - Get Report). The company's New York Stock Exchange-listed issues were up 3.8% to $136.02. Among other steel names, shares of Worthington Industries ( WOR - Get Report), Nucor ( NUE - Get Report) and ArcelorMittal ( MT - Get Report) all rose by more than 1%. Meanwhile, the volatile NYSE-listed American depositary shares of the Russian steelmaker Mechel ( MTL) jumped more than 6% to $26.43. -- Written by Scott Eden in New York Follow TheStreet.com on Twitter and become a fan on Facebook.