Business journalists have pointed out the irony that Pittsburgh, once known as the steel capital of the world, no longer actually contains any major steel mills within the city limits. To them, it’s a telling symbol of the dwindling global role of the U.S. steel industry. Today China, not the U.S., is the world’s leading producer of steel; China accounted for about 38% of the world’s steel made in 2009, compared with 7% for the U.S., according to Barclays Capital.

But one thing hasn’t changed. When the U.S. steel industry was riding high a half century ago, it was often said, "As steel goes, so goes the nation." We think that’s still true. If the demand for steel rises from its current weak levels, it would likely portend better days ahead for the U.S. economy as a whole. The steel industry historically has been among the first to benefit from a reviving economy. The industry remains a good economic barometer because steel has so many applications -- in homes, office buildings, cars, highways, and appliances, for instance.

Although the U.S. steel industry is smaller today than in its heyday in the 1950s and 1960s, downsizing has enabled it to survive and be in a position to capitalize on an economy that we think should gradually perk up over the next 18 months. Also, through the years a shot of technological innovation -- mini-mills -- has been injected like a flu vaccine into a vulnerable, technology-challenged industry, helping enhance its competitive condition. Mini-mills are relatively small, highly automated, nimble factories that first surfaced in the late 1960s as a more economical means of making steel, an alternative to the conventional large integrated mills that had held sway since the days of Gilded Age steel barons like Andrew Carnegie and Henry Clay Frick.

One significant economy offered by mini-mills is that they eliminate a traditional initial production step, the making of pig iron. Instead mini-mills’ electric-arc furnaces make steel from existing scrap metal, pig iron, and iron compounds as part of a streamlined, flexible production process. (Today the integrated mills produce about two-thirds of all steel; the mini-mills, the remainder. And Nucor, a mini-mill company, is the largest U.S. steelmaker.)

The mini-mills hold a cost/sales advantage over the integrated mills at this point in the economic cycle, when lower utilization rates prevail. For instance, consider the three mini-mill companies that we think have above-average prospects over the next two years: Commercial Metals (market capitalization: about $2 billion, headquarters: Irving, Texas), Nucor (market capitalization: about $14 billion, headquarters: Charlotte, North Carolina), and Steel Dynamics (about $3 billion, Fort Wayne, Indiana). In our estimation, they can break even running at about 60% of their capacity. In contrast, the break-even point is considerably higher, about 75%, for the two integrated companies that in our judgment have similarly attractive near-term outlooks, ArcelorMittal (about $51 billion, Luxembourg) and United States Steel (about $5 billion, Pittsburgh). Even so, relentless cost-cutting over the years has permitted both the integrated mills and the mini-mills to lower their break-even points.

Due partly to the reduction in fixed costs, the additional revenue gained from rising prices and the increased demand for steel that we expect to materialize over the next 18 months should go largely to the bottom lines of the integrated mills and, to a lesser extent, the mini-mills. We think ArcelorMittal, United States Steel, Commercial Metals, Nucor, and Steel Dynamics all could return to profitability in 2010 after reporting losses this year.

Beyond that, the long-term fundamentals of the industry look favorable to us, owing in no small part to the developing countries that are expanding their industrial and urban infrastructure vigorously. "There are no commodities or raw materials more leveraged to growth in emerging economies than steel and iron ore," Barclays Capital notes. Commercial Metals estimates that the BRIC nations -- Brazil, Russia, India, and China -- will spend more than $4 trillion on infrastructure in the next decade and in the process create sustained demand for steel.

At present, the U.S. steel industry is operating at about 50% of capacity, compared with 73% for the global steel industry, estimates Macquarie Research. But U.S. capacity utilization may increase sharply over the next year and a half, to 60% in the third quarter, 70% in the fourth quarter, and 80% in 2010, Barron’s calculates.

In addition, we detect these signs, among others, that the near-term fundamentals of the domestic steel industry appear to be improving:

*  Steel prices are beginning to rise. This year U.S. producers have hiked prices of flat steel by as much as $50 a ton, a reflection of both increasing demand for steel from developing countries and a drawdown of inventories here and in Europe. We think prices in all types of steel are likely to rise going forward. For instance, hot-rolled coil steel, currently trading at about $480 a ton, has risen from its recent low of $382 in June and could rise to $550-$600 or more in 2010 -- its average in 2006-2007. Although the relatively weak dollar is on balance bad for the profits of U.S. multinational companies, it’s been a competitive boon to the price of steel made in the U.S.; domestic steel prices are now among the lowest in the world. If that trend continues, steel imports to the U.S. should decline and domestic steel exports should expand. And as supply tightens, the benchmark price of steel in the U.S. may increase 22% from 2009 to 2010, according to Deutsche Bank Securities.

*  Customers are replenishing inventories, which are at historically low levels. Unlike in the past, the U.S. steel industry has generally shown financial discipline and shut down mills rather than keep them running unprofitably for the sake of generating cash flow. Previously the inevitable consequences of keeping mills habitually churning out steel when demand was anemic were bloated inventories and minimal pricing power when demand became more robust. But supply in this recession hasn’t been allowed to become imprudently inflated: inventories at North American service centers, for example, decreased for the tenth consecutive month in June, according to Deutsche Bank Securities. In fact, inventories have been cut in half since August 2008, and restocking them may generate demand for nearly 15 million tons of steel over the next 18-24 months, Deutsche Bank estimates.

*  Steelmakers are restarting idle operations in anticipation of a stronger second half of the year. United States Steel in July recalled about 800 workers to its sheet-steel mill in Granite City, Illinois, and in August is resuming production at its Keewatin, Minnesota, mill that produces iron-ore pellets. And ArcelorMittal is reactivating blast furnaces at mills in France, Belgium, and Spain.

*  Demand for steel is likely to be abetted by the popular $3-billion cash-for-clunkers program, formally known as the Car Allowance Rebate System, in which consumers are trading in their cars for new, more fuel-efficient models. That should especially benefit ArcelorMittal and United States Steel, prime sellers to the automotive companies, which buy about 15% of their steel. We project that demand from the automotive industry may soar by as much as 50% over the next 12 months.

*  The federal government’s economic-stimulus package has earmarked about $108 billion to date for highway, bridge, and other infrastructure projects that require huge quantities of steel. Those expenditures should help Commercial Metals, Nucor, and Steel Dynamics in particular; their steel is used mainly in infrastructure.

*  Steel executives are reporting a modest pickup in demand. At the annual World Steel Dynamics conference in New York City in June, top managers from the large steel companies almost uniformly observed that their book of orders was increasing. (There was one notable dissenter: Daniel DiMicco, chief executive officer of Nucor, who speculated that the industry was in for "a prolonged and slow recovery." He characterized the recent price increases as a blip attributable to falling inventories and said that until a stronger economy stimulates demand significantly, the industry is headed for "weak returns at best and a shakeout at worst.")

For our part, we respectfully differ with Mr. DiMicco and believe the economy is likely to strengthen over the next 18 months, and with it the fortunes of the steel industry. We see mounting evidence that the global economic recession ended in the second quarter. And we concur with ISI, the economic-research firm, that the U.S. economy may be stronger than expected; ISI forecasts that the gross domestic product would expand 4.5% next year.

If the recession has indeed already ended (it’s typically apparent only in retrospect), we think that not just the U.S. steel industry but its key suppliers should be early beneficiaries of the better economic times ahead. Our short list of suppliers that in our view could do well includes the following:

*  BHP Billiton (market capitalization: about $172 billion, headquarters: Melbourne, Australia), the world’s largest diversified mining company and third-largest iron-ore producer;

*  Cliffs Natural Resources (market capitalization: about $3 billion, headquarters: Cleveland), the largest North American producer of iron-ore pellets and a major supplier of metallurgical coal;

*  Rio Tinto (about $52 billion, London), the world’s second-largest iron-ore producer;

*  Teck Resources (about $14 billion, Vancouver, Canada), the world’s second-largest producer of zinc and exported coking coal; and

*  Thompson Creek Metals (about $1.8 billion, Denver), a major producer of molybdenum, an element now in short supply that improves the strength, corrosion resistance, and weldable properties of steel alloys.

Like the old gray mare in the folk song, the U.S. steel industry ain’t what it used to be. But we think the best U.S. steel companies -- and their best foreign-based peers -- are still healthy enough financially and operationally to be among the first enterprises to profit from a rising economic cycle. In our judgment, healthy integrated producers like ArcelorMittal and United States Steel and healthy mini-mill producers like Commercial Metals, Nucor, and Steel Dynamics are likely to secure stronger competitive positions and greater earnings in the next two years.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $15 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of June 30, 2009.

As of July 31, 2009, Turner held in client accounts 22,030 shares of ArcelorMittal, 1.4 million shares of United States Steel, 724,157 shares of Commercial Metals, 1.3 million shares of Nucor, 149,900 shares of Steel Dynamics, 269,910 shares of BHP Billiton, 325,590 shares of Cliffs Natural Resources, 1,530 shares of Rio Tinto, 701,718 shares of Teck Resources, and 1.5 million shares of Thompson Creek Metals.