PITTSBURGH (AP) — Shares of U.S. steel companies rose Wednesday as an analyst said distributors of the metal were poised to benefit from an eventual uptick in demand.
Steel production and prices have plunged in recent months as the global economic downturn has battered demand from key customers in the automotive, construction and industrial equipment industries. Distributors, also known as service centers, buy about a third of the steel produced by U.S. mills. They stockpile the metal and customize it for manufacturers.
In a note to investors, Jefferies & Co. analyst Yvonne Varano wrote that steel service centers should benefit as inventories decline and the broader economy improves, triggering new orders for the metal.
Shares of steel distributors typically move six to nine months before improving macro economic data emerges, she wrote. Steel distributors include companies like Reliance Steel & Aluminum.
“We would recommend investors have exposure to the metal service center industry in anticipation of demand improvement as inventory destocking abates and the broader economy begins to recover,” Varano wrote. “We expect to see a leveling off of (steel) prices in the coming months as demand firms and service centers are not so anxious to purge higher priced inventory.”
Meanwhile, Rio Tinto Ltd., the world’s third-largest miner, said Tuesday it had agreed with Japan’s Nippon Steel Corp. — the world’s second-largest steel company — to cut its prices for iron ore, a key steel ingredient, by more than a third for this year, foreshadowing a wider industry slump in prices.
Some domestic steel producers that operate traditional blast furnaces, such as United States Steel Corp., have their own iron ore mines, while others such as AK Steel Holding Corp. rely on outside suppliers for iron ore. Nucor Corp. makes steel by melting scrap in electric furnaces.
Shares of U.S. Steel climbed $2.30, or 7.5 percent, to $33.03 in early afternoon trading. AK Steel rose $1.01, or 7.5 percent, to $14.43. Nucor shares increased $2.34, or 5.7 percent, to $43.49.