The U.S. manufacturing industries seem to be bracing for a significant slowdown or recession by the looks of their steel inventories:

“End-users have no excess inventories and service center inventories were cut to only 2.6 months supply at the start of November.” ~Purchasing.com, Analysts see sheet steel prices inflating 13% in 2008 11/20/07

I agree with their cautious and defensive stance. I believe we’re headed for a not pretty recession if the Fed doesn’t get the interest rate down near the rate of 2-yr treasuries, which is trading around 3% at the moment, by February. Therefore, I would LIKE to see at least a 75bp cut when the Fed meets on Dec. 11th. Anything less I would take as a sell signal just as I felt anything less than a 50bp cut on Oct. 31st was a sell.

Ok back to steel. However, if whatever the Fed does between now and February does stabilize the economy, keeping it swimming above a recession, the steel stocks might be a good place to run to. With steel inventories as low as they’ve been in a long while, any pickup in manufacturing activity or just increase of stockpiles could fuel a nice snapback rally for steel:

“Now, the principal at Bradford Research in New York sees a further substantial 13% price increase in sheet prices during the first half of 2008—a $30/ton increases during the first quarter and another $40 in the second quarter. All this pricing activity would bring hot-rolled sheet in coil to $610/ton, compared with $520 in October.

The outlook for flat-rolled steel in the U.S. “isn’t particularly strong from a real consumption standpoint,” writes analyst Charles Bradford, “with the automobile and appliance businesses remaining quite soft.” On the other hand, he adds that buyers at OEM companies and service centers have bare shelves and will have to increase purchasing sometime soon. Bradford says this will prop up mill efforts for higher prices. Atop that, he says anticipated cost inflation for such raw materials as iron ore and scrap will pressure the mills to boost prices.” ~Purchasing.com, Analysts see sheet steel prices inflating 13% in 2008 11/20/07

Just wanted to get this on your trading radar as it is on mine. I still believe we’re going down and the parachute’s not opening so I’m not dipping my toe into the steel stocks yet. However, U.S. steel (X) might be the first place I’d look as it was right up there in the takeover rumormill earlier in the year. Now that the weak dollar’s putting American companies on sale, U.S. steel seems like a delicious acquisition for foreign companies or funds. Still, I want to see what Uncle Ben is made of on Dec. 11th before I make any longer term trades. Also, note the steel forecasts in these articles focus on sheet steel. Each steel company has a different business portfolio of the types of steel they sell. Make sure you know what kind your company makes the most from. Be careful out there.

Full article: Analyst sees sheet steel prices inflating 13% in 2008
Full article: Sheet steel prices are crawling forward
Full article: Steel scrap prices to rise in the first quarter
Full article: October steel imports rise 13% from September
**Disclosure: no positions in the stocks mentioned.**

This entry was posted on Wednesday, November 28th, 2007 at 3:54 am and is filed under Engineering, Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.