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By Ian Chua

Written by: Staff

HONG KONG, Mar 3 (Reuters) After a steep fall late last year, Asian steel stocks are making a comeback, helped by signs that prices have bottomed and demand is picking up.

Analysts say lower-cost producers in particular will benefit, although they warn swollen output capacity and high iron ore prices should make investors cautious.

''Our view is that the steel price has bottomed for now and what you're seeing at the moment is very strong demand for steel,'' said Tim Rocks, equity strategist at Macquarie Securities.

Within the past week, steel firms such as China's Baoshan Iron and Steel Co. Ltd., Taiwan's China Steel Corp. and India's Tata Steel Ltd. lifted steel prices following cuts last year due mainly to excess supply from China.

Citigroup analyst Abhay Laijawala, who reiterated a ''buy'' recommendation for Tata Steel this week, said the steel price hikes underscore optimism about improving global prices.

''For the low-cost producers, they are very profitable now, at (steel) prices that are probably not going to fall,'' Rocks said, pointing to Baosteel, Angang New Steel Co. Ltd. and South Korea's POSCO as low-cost manufacturers.

A bright long-term growth picture and recent downward earnings revision by analysts make steel stocks attractively valued, said Garry Evans, pan-Asian equity strategist at HSBC.

POSCO, for example, trades at about 7 times forward earnings, against nearly 10 for the KOSPI index. Its shares have rallied 14 per cent so far this year, strongly outperforming a 3 per cent drop in the KOSPI. They rose 8 per cent in 2005.

Australia's Bluescope Steel, which said last week Asian steel prices appeared to have bottomed, climbed off a 1-1/2 year low plumbed on Feb. 16. after two profit warnings.

Credit Suisse recently upgraded Bluescope to ''outperform'' and said an uptick in freight rates also suggested the end of the global steel de-stocking may be in sight.

SELECTIVE But lingering concerns about oversupply from China and worries that the rise in steel prices is just a rebound after last year's fall are expected to keep investors cautious.

Analysts said the market's focus now is on negotiations for next year's prices for iron ore.

Investors are bracing for a rise of 10 to 20 per cent.

Also, ample production capacity will keep a lid on steel prices, said Ayaz Ebrahim, chief investment officer, Asia-Pacific (ex-Japan) at HSBC Halbis Partners.

''We don't think steel prices are going to get out of control so we wouldn't necessarily pile into many more steel companies at this point in time,'' Ebrahim told Reuters.

''Selectively there still is opportunity, but I certainly wouldn't go out there and buy the whole sector.'' REUTERS SD KN1345

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