This rebound in combination with production discipline

Falling steel prices Falling steel prices, recent idlings by ArcelorMittal (ticker: MT) and [private company] Severstal NA, and below-consensus midquarter updates from Nucor (NUE) and Steel Dynamics (STLD) have all created concern that too much production has been brought online. We think the recent slowdown in demand has been driven more by cautious steel buyers reacting to falling scrap prices, macro concerns, and the approach of the summer seasonal shutdowns, and think it will ultimately continue to improve throughout the year.

This rebound in combination with production discipline from the steel mills and elevated global raw-material costs should continue to push steel prices and earnings higher. U.S. Steel (X) should benefit the most from an environment of elevated steel prices and raw-material costs given its integration while Nucor's and Steel Dynamics' (though more variable cost) exposure to the flat-rolled markets should support earnings. AK Steel Holding (AKS) will likely see a squeeze from higher iron-ore costs and restatement of the first quarter.

Allegheny Technologies' (ATI) and Carpenter Technology's (CRS) earnings in the second quarter should continue to benefit from improving end-market demand and rising nickel surcharges (which were up quarter over quarter in April-June and lag nickel prices by two months). However, with average nickel prices declining in May and again in June, surcharges should be down in both July and August, and we think this movement could cause buyers to delay however purchases and wait for lower prices. Haynes International (HAYN) should improve on last quarter's unexpected return to profitability as cost restructuring and increasing volumes offset pricing pressures.