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Steel Shares Slip on Softer Outlook

UBS Investment Research on Sept. 25 slashed its rating recommendations on steel stocks, including Ryerson (RYI), United States Steel (X) and Nucor (NUE), warning about the outlook for the commodity's prices during the coming months. The stocks shed value after the news.

UBS is "increasingly convinced" that steel prices will be flat to lower in the next nine months. "Steel supply overhang now seems unavoidable," analyst Timna Tanners said in a research note released on Sept. 25. Tanners noted continuing production overcapacity in China and the likelihood of slowing global demand next year.

UBS moved the Pittsburgh, PA-based heavyweight U.S. Steel to "Reduce2" from "Neutral2;" the 12 month target on the stock price sank by $11 per share to $57 per share. U.S. Steel has a lot of fixed costs and exposure to the sheet metal market, UBS explained. U.S. Steel's price dropped 1.4% to $54.96 per share on the New York Stock Exchange in afternoon trading Monday.

UBS prefers Nucor because it has a more variable cost structure and exposure to construction, which should help the Charlotte (N.C.) steel mill defend against a deteriorating market. Nucor's rating fell to "Neutral2" from "Buy2," reflecting a $15 decline in target price to $51 per share. Nucor was trading 0.6% lower to $46.67 per share on the NYSE after the news.

Ryerson shed 2.4% of its value on Monday to trade at $20.90 per share on the New York Stock Exchange. UBS moved its rating on that stock to "Neutral2" from "Buy2," but kept its target price at $25 per share. UBS said that this ratings downgrade resulted merely from the Chicago materials distributor's rise in value during recent months. (Ryerson's stock has gained from a 52 week low of $18.15 per share on Oct. 19, 2005, according to the NYSE.)

UBS' top picks remain the Fort Wayne (Ind.) mill operator Steel Dynamics (STLD), Los Angeles metals processor Reliance Steel & Aluminum (RS), and Portland's steel producer Oregon Steel Mills (OS), in that order of preference. Steel Dynamics has growth prospects and acquisition target potential, UBS says. Meanwhile Reliance Steel's exposure to aerospace and non-residential markets should shield it during the next nine months.

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