Ahead of the Bell: Steel and Metals

Second-quarter earnings in the steel and metals sector may improve as the industry benefits from better access to capital, higher prices for scrap metals and a possible recovery in China's markets, an analyst said Tuesday.

KeyBanc Capital Markets analyst Mark L. Parr said he favors Steel Dynamics Inc., Nucor Corp. and AK Steel Holding Corp. and recommended shares of Reliance Steel & Aluminum Co.

Parr also said GrafTech International Ltd. benefits from pricing power and a strong operating model.

Better access to credit should release pent-up demand, particularly in project-oriented industries such as commercial construction and infrastructure.

"The importance of improved credit markets is difficult to overstate, particularly in light of commentary made by virtually all of our companies that sales have been lost over the last several quarters due to difficulties encountered by customers obtaining financing for large projects, or in many cases, finding lines of credit to make ordinary purchases," Parr said.

Parr also said he sees evidence of inventory de-stocking and improvements in steel pricing and scrap metal values.

Steel prices in China have begun rising, "despite some conflicting signals," he said.

"That said, we remain cautious of other developments within the Chinese steel market that could lead to a repeat of the false start experienced earlier this year," Parr said.

Production continues to run at levels similar to last year despite weaker demand due to sharply reduced steel exports and exports of steel containing goods, he said. Some of the increased production has been absorbed by speculative buying in anticipation of government stimulus spending, Parr said.

"China's eventual stimulus impacts look dramatically more meaningful than U.S. pronouncements, but protracted delays could result in another pullback similar to the February/March time frame," Parr said.

The path to China's recovery in the next year "appears far more likely and much greater in magnitude than the outlook for the U.S. steel market," he said. As a result, delays or reversals in China are potentially more meaningful, Parr said.