Monday, April 25, 2011

POSCO (PKX) (USAP) (ZEUS) (GGB) Pressured on Low Growth Outlook

The steel industry, even with some strong recent quarters, looks weak, as over the next five years it is expected to grow at a pace of about 5 percent or less annually, putting downward pressure on steel producers like Gerdau S.A. (NYSE:GGB), Olympic Steel Inc. (Nasdaq:ZEUS), Universal Stainless & Alloy (Nasdaq:USAP) and POSCO (NYSE:PKX), even with a couple of decent quarterly results coming from their peers, like Steel Dynamics (NASDAQ:STLD). And that's the more positive outlook by the majority of analysts. Many don't think growth will happen even at that rate.

A majority of steel companies are being pressured to raise prices on their products in order to protect margins and earnings as the price of inputs and commodities jump.

That's not to say steel demand is falling, because it's not. But the slowly rising demand doesn't guarantee rising profits, as the industry is experiencing at this time. A number of weak economies around the world could also cut into demand if steel prices and products rise to prohibitive levels.

There's no way to spin the outlook for the steel industry in a positive manner. The industry will struggle for years, even in the midst of better demand, as it attempts to work out the balance between steel demand, rising inputs, and ability for companies and countries to afford price increases from the producers.

POSCO closed Thursday at $111.13, falling $2.10, or 1.85 percent. Universal Stainless & Alloy ended the session at $32.79, gaining $0.64, or 1.99 percent. Olympic Steel Inc. closed at $30.86, up $0.15, or 0.49 percent. Gerdau S.A. closed at $12.13, down $0.01, or 0.08 percent.

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