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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: nspolar who wrote (9899)	3/25/2002 8:28:45 AM
From: Frank Pembleton	Respond to of 36161

Stelco Steel and Leverage I bought Stelco for leverage in a recovery of steel prices Jeffrey Rubin Many pundits have been quick to deny that we actually had a recession, particularly those who never saw it coming. I won't waste precious column space debating semantics. However, one would be well advised to treat one's investment portfolio as if we were not only coming out of a recession, but a particularly severe one for the manufacturing sector. The fact that manufacturing no longer has the economic weight to produce the big swings in gross domestic product that it once did hardly mitigates what has happened to the sector itself. Prior to January, it contracted by almost 8 per cent over the course of an 18-month slide. That's a longer and deeper decline than in the 1990-91 recession and almost as large as the declines racked up in the 1980 and 1982 recessions. The fact that manufacturing industries are coming out of one of their larger cyclical craters during the past 40 years strongly suggests to me that I should be invested in the sector. Particularly, now that the sector has turned. Show me a recovery that didn't have industrial production outpace virtually every other sector of the economy. And when I say industrials I'm not talking Nortel, whose weighting still dominates how the Toronto Stock Exchange defines the sector, but rather the Stelcos of the world. In fact, I am talking Stelco Inc. (STE.A-TSE) -- last month I bought the stock. It's the first actual stock I've owned in my trading portfolio since I started writing this column more than two years ago. As readers will know, I make no pretense to being a stock picker. I didn't, however, choose Stelco as any analyst would. I don't know if Stelco is a fundamentally better firm that Ipsco, Dofasco or Co-Steel and quite frankly I don't care. All I know is that more of its production is sold in the spot market than virtually any other Canadian steel producer, rendering its share price much more leveraged to a change in steel prices. Since there isn't any exchange-traded fund that gives me a pure play on Canadian steel stocks anyway, I might as well pick a steel stock that gives me the greatest leverage on a manufacturing rebound. Think of it as buying a strip instead of a bond if you're playing an interest rate rally. I bought Stelco as a leveraged play on a recovery in steel prices, which in turn is a leveraged play on a rebound in industrial production. In short, I bought a lot of leverage. There is a time to have leverage and a time not to have leverage. An 8-per-cent decline in manufacturing output leveraged a 40-per-cent decline in hot rolled steel prices, which in turn leveraged an almost 90-per-cent decline in Stelco's share price. Obviously, the last year-and-a-half was not a good time to have leverage in the steel industry. But remember, leverage is always a two-way street. By the same token, as little as a 5-per-cent rebound in manufacturing production this year should lever as much as a 25-per-cent increase in North American steel prices, particularly now that the United States has moved to impose as much as a 30-per-cent duty on foreign steel imports (Canada and Mexico are exempt). Mexico has already paralleled the U.S. trade action and Canada is likely to follow suit. Not only do Stelco and other Canadian steel producers win from their exemptions from U.S. sanctions, but they also share in the price gains that trade restrictions, and firming domestic demand, will create in the steel market. Stelco is the kind of firm whose obituary is always written at this stage of the cycle. I must confess I bought the stock in 1993 at the same price I bought it recently ($4.50). The cyclical positioning was very similar, if not identical, to today's economic environment. We were coming out of a recession and Stelco had been pretty well written off. I sold within a year of buying after it had almost doubled to $8. That said, it took the stock almost four years to go any higher and for much of that time it traded a good deal lower. So much for long-term returns from the steel industry. Fortunately, I wasn't a long-term investor in the industry then and I don't intend to be now. However, I am willing to commit my money this year to a recovery in North American manufacturing. And if I'm right, you'll be hard pressed to find a bigger beneficiary from that rebound than Stelco. Jeffrey Rubin is chief economist and managing director of CIBC World Markets.