Zacks Industry Outlook Highlights: U.S. Steel Corporation, POSCO, Vale, Rio Tinto and BHP Billiton - Press Releases

For Immediate Release

Chicago, IL – November 1, 2010 – Today, Zacks Equity Research discusses the Steel Industry, including U.S. Steel Corporation (X), POSCO (PKX), Vale (VALE), Rio Tinto (RTP) and BHP Billiton (BHP).

A synopsis of today's Industry Outlook is presented below. The full article can be read at http://www.zacks.com/stock/news/42457/Steel+Industry+Outlook+-+Nov.+2010..

The steel industry has long witnessed volatility in prices with a large spot market. Steel prices rose steadily for most of 2008, after which there was a downtrend. Lower prices had an adverse effect on steel producers, who recorded lower revenues and margins, and had to write down finished steel and raw material inventories.

The period witnessed major steel producers slashing production to minimize inventory accumulation. U.S. Steel Corporation (X), the fifth-largest steel producer worldwide, cut down production by almost 62% during the second quarter of 2009, while Korean steel maker POSCO (PKX) cut production by about 15%. This was the first time in its history that POSCO was forced to adopt such a measure, proof of the very adverse operating environment.

Although steel prices have been stabilizing since the latter part of 2009, it is significantly below the pre-crisis level. We believe that a sustained recovery in steel prices remains uncertain in the backdrop of sluggish economic activity.

Factors Affecting Steel Prices

Chinese Imports: The steel industry is also affected by fluctuations in steel import–export and tariffs. China is the largest steel producer globally, with the balance between its domestic production and consumption being an important factor in global steel prices. Consumers in the U.S. are importing cheaper steel from China, which is forcing domestic steel producers to sell at lower prices, and even at a loss, sometimes. To this end, the U.S. government has been imposing anti-dumping duties on Chinese steel imports.

Concerns about the sustainability of economic recovery and question marks about China's growth momentum come into play in the pricing equation. This relatively uncertain China outlook, coupled with a still tentative recovery in the developed world, is expected to weigh on prices.

Threat from substitutes: Steel has many substitutes like aluminum, which replaces it in the automotive markets. Cement, composites, glass, plastic and wood are also used as steel substitutes. This significantly influences market prices and demand for steel products.

Raw Material Trends

The key input for steel production is iron ore. Apart from this, coking coal and coke, scrap, electricity and natural gas are also used as inputs in steel production. The raw materials industry is highly concentrated with only three major players -- Vale (VALE), Rio Tinto (RTP) and BHP Billiton (BHP) – having significant pricing power. The risk lies in consolidation among raw material suppliers. For instance, the announced iron ore joint venture between mining companies BHP Billiton and Rio Tinto would further increase the pricing power of both the suppliers.

Steel makers would face higher production costs if suppliers shift to sales based on spot prices from the long-term fixed price contract system, as spot prices for most of the raw materials, especially iron ore, remained high from 2006 through 2008. In 2009, iron ore prices, which are linked with the London Metal Exchange prices, were about 28% to 33% below the benchmark prices.

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