Steel once again a hot commodity

The struggling economy hasn't prevented one part of the Rust Belt from looking like somebody gave it a good shining with a steel wool pad.

Once a landscape littered with job losses and plant closures, the steel industry is back in a big way. Prices for hot rolled band steel, a widely followed benchmark, have nearly doubled from the beginning of last year to a record of more than $1,100 a ton, Metalprices.com and SteelBenchmarker say.

And rather than being the Who's Who of Chapter 11 companies that they were a decade ago, steel companies are seeing their stocks soar. The Market Vectors Steel exchange traded fund, which mirrors the industry's stocks, is up 62% over the past 12 months and 23% this year. That blows away the 7% drop in the benchmark Standard & Poor's 500 index the past 12 months and 4% drop in 2008.

"Steel was seen as a mature cyclical business not showing much growth," says Mark Parr, analyst at KeyBanc Capital. But now, steel "has become a legitimate growth sector again."

Or, as Olympic Steel zeus CEO Michael Siegal puts it: "There's not a lot of rust anymore."

Steel's recovery is certainly another example of how global demand for commodities is breathing new life into raw materials ranging from potash to wheat and corn. Steel is just one of the latest metals to get swept up in the worldwide metals boom, says David Behr of Metalprices.com.

Globalization is certainly a big reason why steel is enjoying some of its best days since Andrew Carnegie's era. Much of steel's success also speaks to how a seemingly down-for-the-count industry reinvented itself after a painful restructuring process that took decades to unfold. The key events that have polished steel in the minds of investors include:

Booming global demand.

Perhaps the best thing going for steel is the world's insatiable appetite.

In the USA, companies use about 130 million tons of steel a year. Of that, about 110 million tons are produced domestically, says Bob Richard at Longbow Research.

That means the shortfall must be imported from other countries. The trouble, though, is that the rest of the world needs steel, too. Governments and companies in China, India and Russia are on a building spree putting up bridges, airports and skyscrapers. So mills in their nations are not exporting to the USA as they once did. China, for instance, has a plan to build 97 airports by 2020, says Chip Hanlon, president of Delta Global Advisors.

"Global growth is starting to overrun us," says Olympic Steel's Siegal.

And the result is declining worldwide inventory, says Sam Halpert, senior analyst at Van Eck. "We've had a big destocking," he says.

Streamlined industry.

A string of bankruptcy reorganizations of the USA's most storied steelmakers leading up to 2000 allowed the industry to mend itself, Halpert says.

Some of the biggest changes occurred in 2002, when financier Wilbur Ross began forming International Steel Group. Amid a steel depression, ISG gradually bought some of the nation's top steel mills, starting with LTV and then Bethlehem Steel, Weirton Steel and Georgetown Steel.

Labor contracts were amended. Costs were driven down. And mills were modernized. Now, across the nation's steel industry, 160,000 employees produce 110 million tons of steel a year, says the American Iron and Steel Institute. In 1970, it took 500,000 workers to make 91 million tons. "The industry is better," Halpert says. Such efficiencies have made producing steel more profitable, he says.

Down-and-out dollar.

The weakness of the U.S. dollar compared with other currencies is causing titanic changes in the steel market, KeyBanc's Parr says.

Steel exported from the USA, thanks to the dollar, is competitive even in nations with lower-cost steel production, he says. Meanwhile, the weak dollar is making U.S. steel companies irresistible buyout targets for foreign steel companies.

European, Brazilian and Russian companies have been gradually buying the USA's steel companies. In 2005, for instance, Netherlands-based ArcelorMittal bought ISG and is now the largest steel company in the world. Russian steelmaker Evraz bought Oregon Steel Mills in 2006. More than half the nation's steel mills are owned by foreign companies, Parr says, up from 5% a decade ago.

This worldwide consolidation has put the steel industry into fewer hands, and now producers, not customers, are calling the shots when it comes to the price of steel, Parr says.

"It is a sellers' market right now," Richard says.

Can the boom continue? Commodity-based stocks often "get ahead of themselves," so Hanlon says investors shouldn't be surprised if steel stocks pause temporarily.

Executives, though, say the industry has changed so much in such a short time that the price of steel isn't coming down anytime soon. Siegal says now that many mills are owned by foreign companies, they'll just as soon export to their home countries as sell in the USA. That may cause prices to stay high, go higher or even create "spot outages," he says.

Don't expect additional supplies of steel to ease the situation, Parr says. There are a few new steel mills coming online, but there's still nowhere near the capacity to meet the current level of demand, Parr says. "We're five years into this," he says. "Basic materials cycles last decades."

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