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Steel Stocks Suffering

January 30, 1998

PITTSBURGH (AP) _ With efficient minimills about to boost U.S. steelmaking capacity and worries that cheap steel could flow in from distressed Asian countries, steel stocks aren’t exactly the life of the party these days.

``Neutral to negative″ was the position of Edward Okine of Forum Capital Markets in Old Greenwich, Conn. Michael Gambardella of J.P. Morgan Securities Inc. in New York said he was ``cautious.″

Others are a bit more optimistic on steel stocks. Citing strong demand and cost-cutting efforts, Leo Larkin of S&P Equity Group in New York says steel stocks should at least track the overall stock market over the next six months.

Foreign competition has continued to keep American steel companies struggling over the last several years, forcing them to miss out on a major bull market on Wall Street.

The share price for Pittsburgh-based U.S. Steel, the nation’s largest steelmaker, went down 13 percent during the past two years, Okine said. Bethlehem Steel, the second largest, was down 44 percent in the same period.

Even minimills, which are designed to make steel more cheaply, declined in share price. Nucor Corp. of Charlotte, N.C., seen as the bellwether of the minimills, was down 20 percent since the start of 1996.

Gains made during a steel-stock rally in September were largely lost by year’s end, analysts said. Now, the U.S. economy is slowing again and is not likely to create large, new demands for steel.

Analysts are able to report one big success story: NS Group Inc., a minimill in Newport, Ky., whose stock rose 283 percent last year. Its main product is steel pipe, certain types of which are in demand as casing for oil wells.

``That one did extra well because of increased drilling activity,″ said Charles Bradford, an independent metal-stock analyst.

This year, established American steelmakers are steeling themselves for an onslaught of mill capacity. Almost 18 million tons of minimill capacity is about to come on line, Okine said. ``That could put pressure on steel in the second half of the year,″ he said.

Since the crisis in Asian markets unfolded this month, financial analysts of every stock sector have tried to factor Asia into their research, and steel-sector analysts were no exception.

One widely believed scenario suggested that Asian steelmakers will dump cheap steel in America, forcing American steelmakers to cut prices just to avoid losing too much money. Some analysts, however, aren’t particularly fearful of that.

Most Asian steelmakers import raw materials _ usually American scrap steel _ and have to pay with U.S. dollars, Bradford pointed out.

``A lot of these companies cannot get U.S. dollars because of currency issues and they cannot get letters of credit″ due to Asia’s economic bust, Bradford said.

That outcome could actually be a bright spot on the American steel scene, Bradford said. If Asian mills buy less American scrap steel, scrap should become cheaper in America.

Still, steel companies’ profits probably will be low this year, partly because the companies have signed contracts to supply product at old prices that probably will be undercut, he said.

Steel’s problems may be a plus for some investors, Bradford said.

``I may be telling you bad things about the industry,″ he said, ``but that may give me a buying opportunity.″

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