Moody's Investors Service said the outlook for the U.S. steel industry remains stable, with strong demand and pricing.
"Strong overall global demand has supported pricing in every region throughout 2007, with China again providing tremendous support for global steel consumption," analyst Carol Cowan wrote in a note to investors. "Demand in the U.S. has also remained solid, despite weakness in the appliance and automotive markets, largely driven by high levels of commercial construction activity."
Cowan said the housing market is not a significant driver for steel consumption, but ongoing weakness in that sector could undercut demand across some end markets.
"Further deterioration in the overall U.S. economic environment could cause slowing demand during the course of 2008. In particular, Moody's anticipates weakness in steel destined for the appliance, automotive and residential construction markets," Cowan said.
Cowan noted Moody's upgraded more steel companies worldwide in 2007 than in previous years - 16 through the end of November compared with four in 2006.
"The highest number of upgrades occurred in the U.S., with seven upgrades affecting six companies," the analyst wrote. "Much of the driving force behind the upgrades has been the material improvement in margin performance, debt protection metrics and credit profiles, a result of the very strong underlying conditions in the steel industry over the last four years."
Moody's expects global consolidation will benefit the industry in the long run.
But Cowan thinks steel companies will show production discipline and financial health through a stretch of weak demand and pricing before they see sustained positive ratings momentum.
"Companies that we expect to perform relatively well in 2008, based on our outlook for their products and end markets include producers of long products such as Nucor (nyse: NUE - news - people ), Gerdau Ameristeel, and Commercial Metals (nyse: CMC - news - people ), as well as specialty steel manufacturers such as Carpenter Technology (nyse: CRS - news - people ) and Allegheny Technologies (nyse: ATI - news - people )," Cowan wrote.
In afternoon trading, Nucor shares rose 64 cents to $61.27, Gerdau Ameristeel added 7 cents to $14.73, and Commercial Metals gained 67 cents, or 2.3 percent, to $30.47. Carpenter Technology Corp. fell 91 cents to $77.34, and Allegheny Technologies rose $1.72, or 2 percent, to $90.02.
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