Are steel firms a buy?

They fit my preferred equity allocation as dollar-exposed industrials with both lower input costs, rising export prices and exposure to any boost in housing construction (in the US). Goldman Sachs think so:

Lower coal and iron ore price forecasts and mark-to-market adjustments lead to earnings revisions across the sector We have factored in the recent downgrades to our GS Global ECS team’s iron ore and coking coal price forecasts (see “Mining commodities: The focus shifts to the supply side”, published July 24). In addition, we have made some mark-to-market adjustments and small changes to our steel price and other assumptions. Our EPS estimates and target price revisions are highlighted in the tables below, as are the revised assumptions underpinning our estimates.

SGM (Buy) remains our preferred pick; Neutral on ARI and BSL SGM (Buy, A$9.00) remains our preferred pick in the sector. We expect an eventual broad-based recovery in the US and cost outs to drive an improvement in SGM’s earnings. In our view, the current share price implies 1) a long-term margin below the historical median for SGM’s scrap operations, 2) no improvement from the depressed average earnings of the last 4 years and 3) less than c.40% of the benefit from the A$100mn cost out program. We remain Neutral on ARI (A$1.00) and BSL (A$5.37).

Those iron ore forecasts are very bullish still (and actually out of step with the GS’s new forecasts some $10 lower). I’m still be cautious on local producers. The dwelling construction upturn is real but is still very low.