Steel Stocks to Catch Cold as China Sneezes

NEW YORK (TheStreet) - U.S. steel production and prices may decline further during the upcoming weeks, lagging the trends in China's steel industry by two to three months.

For the period from June 21 to July 12, capacity utilization rates for steel mills in the U.S. declined to 71.2% from 74.8%, while production was down 4.8% to 1.72 million tons from 1.80 million, according to data released by American Iron and Steel Institute, AISI.

In the U.S., hot rolled coil and cold rolled coil are currently priced at $625 per short ton and $725 per short ton, down 3.1% and 2.7%, from their early June peaks of $645 per short ton and $745 per short ton, respectively. In China, spot prices of domestic hot rolled and cold rolled steel prices are down 17.2% and 17.3%, respectively, from the peaks attained on April 15.

Steel prices in China may drop 10% for the remainder of 2010 due to high inventory levels and a demand slowdown, as per JPMorgan. China Steel, Taiwan's largest steel producer, lowered prices for the first time since January. Crude steel production in China hit four-month lows as companies cut back production on weakening demand from the construction sector and auto industry. Output was 53.8 million tons in June, down 4.1% from 56.1 million tons in May.

China's big mills, including Wuhan Iron & Steel and Hebei Iron & Steel, are also reducing production, according to Bloomberg. "Big mills will have to cut more production than small mills," wrote Citigroup analyst Scarlett Chen in a July 14 note. "National daily production has shrunk 10% from the peak, but it is still 12% to 18% higher than in the first quarter of 2009, the last time losses were industry-wide."

China's fragmented steel industry is headed for consolidation finding strong support from the central government. On Thursday, four steel companies in the northern city of Tianjin announced merger plans, according to China Daily. China plans to accelerate consolidation and put 60% of production among the top 10 producers by 2015, up from 44% at the end of 2009.

U.S. Steel stocks could remain highly volatile during this month on the second-quarter earnings release and full-year guidance from Steel Dynamics ( STLD), Nucor ( NUE), AK Steel ( AKS) and U.S. Steel ( X). CEOs of Nucor and ArcelorMittal anticipated a demand slowdown for steel during the second half of 2010.

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.

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