The slumping US economy is trickling into global financial systems, slowing growth worldwide. However, global demand for steel is still on a tear. And so are stocks of steel companies, particularly those with clear control over costs.

Asia’s breakneck demand growth is still the primary factor driving steel. As the pie chart “Steel Consumption” shows, Asia now accounts for more than half of global steel use. China alone accounts for a full 38 percent.

Source: Various

For the continent’s emerging economies, the hard stuff is essential for everything from constructing bridges, roads and buildings to power plants. China’s preparations for the summer Olympics have required massive amounts of steel. But long-run demand is even more impressive, and it’s sure to continue as rural Chinese migrate to burgeoning cities and the construction of new cities picks up. And the country’s recent devastating earthquakes make those needs more critical than ever.

The craving for new energy supplies–particularly light crude oil–is another emerging demand source. Exploiting Brazil’s potentially huge Tupi find off its coast will require going several miles under the ocean floor, a good part of which is a salt field with incredible pressures that require extraordinarily robust steel.

The further and deeper the world’s mining and drilling companies are forced to go to meet surging demand for vital resources of all stripes, the more steel they’ll use. And moving their output will require even more railroads, pipelines, processing facilities, ports and tankers, all of which use large quantities of steel.

Of course, steel is also a driver for bull markets in the inputs needed for its manufacture. We’ve featured these in previous issues, particularly iron ore and metallurgical coal. Below, we highlight another increasingly essential input–molybdenum–which is used to make a particularly tough variety of steel.

At this point, almost every steel company is prospering, particularly those with close proximity to emerging Asia. Robust demand means costs can largely be passed onto customers, and producers are able to sell everything they pump out. However, those best able to control the cost of these inputs are increasingly outperforming those who can’t.

The VRI Portfolio currently features two steel recommendations: Russia’s Mechel (NYSE: MTL) and South Korea’s Posco (NYSE: PKX).

Posco’s close proximity to Asia’s most vibrant steel markets–mainly China–has been a huge advantage in recent years. This year the company has been increasingly challenged by sharply higher prices for iron ore, metallurgical coal and even electricity–the cost of which has been driven higher by rising prices for natural gas, oil and ordinary coal despite regulation that strives to hold down rates.

We still favor the world’s fourth-largest producer, which remains one of the lowest-cost operators in the world despite rising input costs. Management has been investing heavily in new processes that reduce waste, are more favorable to the environment and create fewer capital costs. It’s also targeted expansion in emerging countries such as Vietnam, where demand is only now starting to take off.

Finally, despite coming well off lows reached earlier this year, the stock is cheap at 1.3 times annual sales and less than 12 times trailing earnings. It also has considerably less debt than rivals and one of the best client lists in the world. Buy Posco at current prices.

In contrast, Russia’s Mechel has historically been a higher-cost producer but is in the best position in the industry to control future expenses. It’s 100 percent self-sufficient in met coal, 80 percent in iron ore and 50 percent in electricity.

The company is also ideally located in another area of the world where steel demand is surging: Central and Eastern Europe. Growth in the Commonwealth of Independent States–of which Russia remains the leading country–is surging with the rapid re-development of the energy sector and as formerly stagnant economies come up to first-world standards. And Mechel’s connections run deep in government circles as well, an essential element for success in Russia and its surrounding historically authoritarian and centralized nations.

Splitting 3-for-1 on May 16, Mechel has been one of the VRI Portfolio’s biggest winners, more than doubling since our initial recommendation in October 2007. We believe it has a long way to run, though the shares are also likely to remain quite volatile. Buy Mechel at current prices if you haven’t already.

We also track four additional steel companies in our “How They Rate” coverage universe: ArcelorMittal (NYSE: MT), Gerdau (NYSE: GGB), Nucor (NYSE: NUE) and US Steel (NYSE: X). Coverage universe companies are also rated buy/sell/hold, and are VRI A-listers for future portfolio additions.

Like Mechel, Arcelor is an integrated steel producer focused on controlling its costs by taking control of supplies of vital inputs. This year’s purchase of a 14.9 percent stake in Australia’s Macarthur Coal is a case in point. It also has a heavy presence in countries with a history of resource nationalism and occasional hostility to business that run afoul of authorities, such as Kazakhstan and Ukraine. That risk is offset by its truly global scope.

Arcelor shares have moved but still look reasonable at less than 10 times projected 2008 earnings. Buy ArcelorMittal on dips to 95 or lower.

US Steel is largely a comeback bet on the former giant. Still traded under the symbol “X” on the New York Stock Exchange, the company is enjoying a renaissance because of growing exports, despite the rising weakness in the industry that used to be its major customer, US automobile manufacturers. The stock sells cheaply at 10 times forward earnings and barely one times sales. Buy US Steel up to 170.

As for Gerdau and Nucor, we’re bullish over the long term. Gerdau’s Brazilian roots give it the inside track for the massive infrastructure build in that fast-growing country, including energy development. Gerdau has gone over our buy price for now; buy it on dips to 50 or lower.

Nucor remains highly competitive globally as a mini-mill. This process uses scrap steel and is better insulated against spikes in raw material costs. Also, located in the Carolinas, Nucor enjoys access to relatively cheap electricity. Buy Nucor up to 80.

Note that the steel industry depends on economic growth. The key market to watch is China. Should Chinese growth take a dive, we’ll close out most positions in steel stocks. Meanwhile, we’re prepared to absorb the normal volatility along the way to what should be explosive, long-term profits in our favorite plays.

Source: Various

China Molybdenum (Hong Kong: 3993, OTC: CMCLF) has one of the largest molybdenum mines in China with a mine life of about 40 years, and the company is responsible for 7 percent of global output.

Molybdenum (from the Greek word “molybdos,” which means lead-like) is a silvery white, flexible metal with an exceptionally high melting point (2,625 degrees Celsius). It’s used principally as an alloying agent in steel, cast iron and super alloys to enhance hardness, strength, toughness and resistance to wear and corrosion.

It’s employed in the production of steel, molybdenum’s most significant end-use. It’s also used in the oil and gas industry for removing sulfur. In finished products, it’s used in construction, machinery, automobiles, aircrafts, ship building, oil pipes, drilling platforms, lubricants and catalysts.

Source: International Molybdenum Association

One of the interesting growth characteristics of the company is that it’s expected to be involved in the industry merger and acquisition (M&A) action. (See VRI, 12 June 2008, In Size, Sureness). China continues to engineer consolidation across the board in the resource industry, pushing the smaller, inefficient players out of the way. The M&A program will allow China Molybdenum to mitigate some of the risks that it now faces as production comes out of one mine, where any problems can lead to higher costs.

The company has also been diversifying into gold and has acquired three operating mines this year at USD240 per ounce, a good price given the metal’s strength and long-term positive fundamentals. Although we view this as a good opportunity longer term, we have to see evidence that management will adapt to the different requirements of the gold mining business.

Demand for molybdenum in China will remain strong and should get a boost as the country increases its gas pipeline network by 50,000 kilometers, a project that’s expected to require at least 25,000 tons of molybdenum per year for the next decade.

China Molybdenum is one of the lower-cost producers in the world. And, although costs should increase going forward because of higher electricity prices, the company will remain a robust, inexpensive producer. Given our expectation that molybdenum prices will remain at high levels, its low-cost production capabilities will become one of the company’s great assets.

China Molybdenum is a leveraged play so it’s more volatile. The shares are down 7 percent since first recommend here, and it represents good value at these levels. See VRI, 14 February 2008, Another Undiscovered Metal. Buy China Molybdenum at current levels, preferably in Hong Kong markets.