One of the saddest things I have ever had to do was drive through an old steel town in Ohio around 1990. I was dating a woman from the area and we had gone home to visit her family.
If you’ve never been to northern Ohio you really should see it. Little towns, neat as pins, rows of houses where good families were raised, where good, solid people dutifully left their homes early every morning to provide and where one of the worst economic crashes in our history, the collapse of steel in the U.S. ravaged these same lovely towns.

The whole area is filled with ghost town like steel mills where the backbone of this country was forged by people who watched their entire world melt in front of their eyes as the steel industry slowly disappeared. The hardest part was that no one really could understand why it was going away. It was something about international pressures.

Having grown up in the aftermath of the collapse of the anthracite coal industry, I know how it feels to watch your world collapse around you. There are tougher things in this life, and I don’t want to know them.

The good news is that this may be changing. The author of a new book called, “Why Your World is about to Get a Lot Smaller; Oil and the End of Globalization,” believes that the cost of shipping steel from China and Japan may be the resurrection of the U.S. steel industry. His position is that the cost of shipping steel will make steel made here a viable cost effective alternative to Chinese and Japanese steel.

Steel collapsed in this country because Japan, and then China were allowed to dump steel here at low prices and our plants couldn’t compete. Our cost of production just got too high to compete with cheaper steel.

Anyone who has followed oil and its price fluctuations for the last 35 years knows that oil will eventually go back to the triple digit area. You’re living in a dream world if you don’t; production is peaking, demand will be crazy again when the world economy recovers, over the next ten years alternative energy sources at best will pick up about 1% of our demand. $100 priced oil is inevitable.

The cost of shipping steel may turn the steel tide in our favor.  At the same time the cost to produce steel in China and Japan is slowly inching up. This isn’t 1970 there or here.

Could OPEC be the reason steel production returns to the U.S.? Strange world!

Adding to the recovery hopes of steel is that recently the major iron ore mining companies, who supply the whole steel industry worldwide, have agreed to cut their prices by 33%. China of course wants a 40% cut. You gotta love the Chinese.

Demand for steel, as in all industries, is down right now, so it’s a buying opportunity. Stock prices on almost all steel manufacturers are down, a lot. Remember, cheer when things are bad. Buy when it looks like there will be no tomorrow.

Steel companies, with this cut in iron ore prices, can now lower their prices and still make money. Most have said they will cut production before lowering prices. Another buy indicator; we know steel prices will climb if there is a cut back in supply.

So, on a fundamental level we have an expected drop in production costs, a promised cut back in production, increasing demand as the world economies recover and a product the world has to have. Sounds like a win, win to me.

Let’s buy U.S. Steel, symbol X.

U.S Steel has its own iron ore mines, so the price cut is just icing on their cake.

The price of the stock, and their earnings, are way down, way down! The stock is about $36 to $37, down from $196 in the last 52 weeks. Even if we only get a 50% recovery that’s a stock price of around $98.

Earnings, as I said, are way down with the international drop in demand during this slow down. X is expected to lose -$8.59 in 2009, down from earning $7.04 in the just the quarter ending September 2008. I mean, way down!

Whether you believe the rust belt will rise again or not, steel will see a huge increase in demand and U.S. Steel will be there to sell it.

Buy when everyone else is scared.

Speaking of buying, let’s keep our buying discipline in place. Buy in ¼ to ½ positions on this recommendation. Buy on the dips and keep your positions balanced.

Don’t go crazy for any one stock. This recovery will take time. Give the market a chance to do its usual bouncing around and you’ll come out a winner. Try to guess what this market will do and you’ll lose. It’s as simple as that.

Good luck!
Steve