March 19 (Bloomberg) -- Steel is beginning to collect rust in the stock market.

U.S. steel inventories are near a record high, and a glut in China, which makes 30 percent of the world's metal, may cause prices to fall by the second half, according to UBS AG, Europe's largest bank, which cut its forecasts last month. Zurich-based Credit Suisse Group says the risks of a drop are mounting.

``There are signs we are approaching a peak,'' said Michael Shillaker, a Credit Suisse analyst who has ``underperform'' ratings on shares of ThyssenKrupp AG, the biggest steelmaker in Germany, and Spain's Acerinox SA. ``The cycle has overheated,'' Shillaker said in an interview from London.

The Bloomberg World Iron and Steel Index has gained 55 percent since June 2006 as demand for bridges and skyscrapers in China, the fastest-growing major economy, buoyed metals prices. The last similar rally, a 63 percent jump in the 10 months ended March 2005, led to a 20 percent decline in the index during the next four months.

Shares of the world's 62 largest steelmakers are trading at 11 times estimated earnings, 32 percent more than the average during the past two years. Steel stocks have advanced a record 590 percent in the past four years. European hot-rolled coil steel prices have jumped to $520 a metric ton, the same level reached before they entered a seven-month tailspin.

``We're definitely bearish on the outlook for steel stocks,'' said Atul Lele, who helps manage $350 million at White Funds Management in Sydney. He cited ``the rise in U.S. steel stockpiles, as well as rising inventories globally, in the face of falling or peaking global steel demand.''

Rising Inventories

A slowdown may erode profit growth for producers such as Arcelor Mittal, the world's biggest, and reduce the value of the $650 billion invested in the most widely held steel companies. Cheaper and more abundant supply may reduce costs for General Motors Corp. and the industrial buyers who spend $500 billion on the metal each year.

U.S. steel stockpiles rose to an all-time high of 16.8 million tons in October and were more than 24 percent above their levels of a year earlier in January, according to Credit Suisse. China's steel-product exports more than doubled in the first two months of 2007 to 8.75 million tons, China's Customs Office said on its Web site last week.

It was the surge in Chinese exports that prompted Peter Hickson, the global strategist for basic-materials industries at UBS, to alter his outlook last month, lowering his steel-price forecasts for the third and fourth quarters of this year by 2 percent.

``Steel inventories are starting to rise,'' Hickson said in an interview. ``A couple more months of this may start to spook sentiment and growing confidence in prices.''

Mittal, Nippon Steel

Hickson recommended South Korean steelmaker Posco six years ago, when the stock cost one-fourth of what it does today and the industry was in a funk. U.S. steelmaker LTV Corp. was bankrupt and Bethlehem Steel Corp. was heading toward court protection.

Shares of Mittal Steel Co. have gained 18 percent this year and those of Arcelor have climbed 16 percent. Together, the companies account for 10 percent of the world's steel. Mittal's stock dropped 1.2 percent in Amsterdam today. Shares of Arcelor declined 0.5 percent in Paris.

Nippon Steel Inc., the world's second-biggest producer, reached a 17-year high after the company raised its full-year profit forecast this month. The stock declined 0.1 percent today in Tokyo.

The price-earnings ratio for South Korea's Posco has advanced to more than double its average during the past two years after Warren Buffett disclosed he held a stake in the world's third-largest steelmaker.

Record Mergers

Takeover speculation and prospects for falling raw-material costs helped create the boom. Steel companies unveiled 347 mergers and acquisitions valued at $95 billion in 2006, according to data compiled by Bloomberg. Some 270 transactions totaling $33 billion were done in 2005.

Mittal's $38.3 billion purchase of Arcelor last year was a record for the industry. Tata Steel Ltd. of India agreed to buy the U.K.'s Corus Group Plc for $12 billion in January. Nippon Steel said March 8 it bought a 5 percent stake in Posco, part of plans by the two companies to buy shares in each other to ward off unsolicited takeovers.

`Don't Be Greedy'

``The trick in this business is not to be greedy,'' said Charles Bradford, a New York-based analyst at Soleil Securities Corp. who has covered the steel and mining industries for more than 30 years. ``What we are seeing now is takeover floods, not the fundamentals.''

To be sure, Buffett and Mark Mobius, the biggest investor in emerging markets, are betting the rally is just getting started. Buffett's Berkshire Hathaway Inc. paid $572 million for a 4 percent stake in Posco, which was valued at $1.16 billion at the end of last year. The shareholding is now worth $1.42 billion.

Mobius, who manages $30 billion of emerging market stocks for Templeton, added to his steel holdings in the fourth quarter, according to the company's latest U.S. Securities and Exchange Commission filing.

The FranklinTempleton BRIC Fund, managed by Mobius with $1.21 billion of assets, raised its investments in materials industries by 0.3 percent in the fourth quarter. They included $12 million of India Steel Authority stock and $20 million of shares of Russia's Evraz Group.

Falling Demand

Some analysts, including Leo Larkin of Standard & Poor's in New York, say the slowing U.S. economy and falling demand from automakers will hurt earnings and lower steel prices this year. GM last year lost $2 billion and reduced spending on automotive operations by $6.8 billion.

``The risks are skewed more to the downside,'' said Shillaker of Credit Suisse, who has been bearish on some steel stocks since September and published a report March 14 entitled ``Don't Get Too Excited; risks remain.'' ``I'm not saying the signs are turning the other way. We're just turning more selective, more bullish on certain stocks where earnings could remain strong,'' such as Germany's Salzgitter AG and France's Vallourec SA, he said.

To contact the reporters on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net; Meeyoung Song in Seoul at msong2@bloomberg.net.

Last Updated: March 19, 2007 12:45 EDT