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Tuesday, September 15, 2009

US Steel, Alcoa and PCU likely to get a pullback on oversupply

Steel Prices Drop, Reversing Course in Sign Mills Ramped Up Too Quickly
After a brief, summer-long stretch of rising demand, steel prices are starting to decline, indicating that moves to increase production may have been too much too soon.

Hot-rolled steel, a benchmark grade that typically is processed into cars, building structures or appliances, cost about $600 to $620 a metric ton in August. Now it can be had for about $550-$570 a ton, a drop of about 8%, according to World Steel Dynamics, a steel research firm.

Joann Jamison, left, prepares a shipment at Arcelor's plant in Weirton, W.V.
Steelmakers, with their exposure to a wide variety of end markets, from consumers to industrial users, are generally a leading indicator of economic strength. The fall in steel prices also has broader ramifications, affecting the prices of iron ore and shipping rates.

When governments, especially China, rolled out stimulus packages, steelmakers saw an opportunity to bring production back online, after having made steep cutbacks earlier in the recession. ArcelorMittal, the world's largest steelmaker by output, began firing back up its mills in the U.S., Europe and elsewhere. Baosteel Group Co., the largest steelmaker in China, started to increase production to meet rising consumer demand. Appliance sales in China increased 12% in July from a year earlier, while auto sales increased 52%.

The quick return to falling prices after a short upturn underscores the tenuous and uneven nature of the world's economic recovery, with some countries and markets showing strength and others remaining flat or weak. It also illustrates the uncertainty of whether real demand is returning or whether customers and producers are simply replacing inventory, only to stop purchasing if demand doesn't increase from car makers, construction companies, appliance makers and other end users.

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