http://www.marketwatch.com/story/iron-ore-surcharges-seen-boosting-steel-makers-2010-04-06?siteid=yhoof

U.S. steel producers seen benefiting from higher prices

SAN FRANCISCO (MarketWatch) -- U.S. Steel Corp. and AK Steel Holding Corp. both saw their shares buck market declines Tuesday after J.P. Morgan Securities said it expects the sector to benefit from rising iron ore prices.

U.S. Steel /quotes/comstock/13*!x /quotes/nls/x (X 70.71 , +1.75 , +2.54% ) was up almost 2% while AK Steel /quotes/comstock/13*!aks /quotes/nls/aks (AKS 25.04 , +0.84 , +3.47% ) added 2.7%.

Shares of both steel makers have gained more than 25% since the start of the year, adding to a prolonged rally that began last year as demand continues to recover from a severe slump in manufacturing and construction markets.

Last week, several iron ore producers said they would price their sales on quarterly or short-term contracts rather than annually, a move that will lead to a spike in iron ore prices.

To protect their margins, J.P. Morgan analyst Michael Gambardella said he expects steel makers to soon adopt an "iron ore surcharge" on contracts.

"Ultimately, we think this will be a positive for the industry as it will allow producers to more rapidly and fully pass through rising iron costs to their steel selling prices," he said in a note to clients.

Gambardella sees steel makers in the U.S., the only next exporters of all three primary raw material input costs, benefiting more than the Chinese competition because they will be shielded from some of the increased costs.

Specifically, he points to U.S. Steel as the prime beneficiary.

He also said he believes the market is underestimating the leverage that Cliffs Natural Resources /quotes/comstock/13*!clf /quotes/nls/clf (CLF 75.15 , +0.30 , +0.40% ) has to rising iron ore prices and that if things break the company's way, the stock could reach $105 .

At last check, shares of Cliffs, which makers iron ore pellets, were up almost 1% at $75.49 and have jumped 280% in the past year.