BlueMountain's Feldstein bearish on steelmakers in U.S., abroad

NEW YORK Wed Feb 13, 2013 5:07pm EST

NEW YORK Feb 13 (Reuters) - American steel manufacturer United States Steel Corp will suffer as China's appetite for iron ore slows, hedge fund manager Andrew Feldstein said on Wednesday at an investor conference in New York.

Feldstein, who runs $12.5 billion hedge fund BlueMountain Capital Management, said China's slowing demand for steel, and therefore iron ore, would negatively impact a number of steel and iron ore producers around the world, making them attractive "short" targets.

When a hedge fund manager is short on a stock, he believes it will fall in value.

"The U.S. steel market is not immune to volatility in the Asian steel markets," Feldstein said.

Feldstein, speaking at the Harbor Conference in midtown Manhattan, said United States Steel Corp would be negatively affected as Chinese demand for the commodity declines. He also said the company's high pension costs were a cause for concern.

He recommended shorting the company by being long its equity and short its credit by a ratio of one to six.

Feldstein is not the first large investor to call attention to the challenges United States Steel faces. Hedge fund manager David Einhorn, who runs Greenlight Capital, sounded similar alarm bells at an investment conference last year.

Like Feldstein, Einhorn said the manufacturer's pension liability and slowing Chinese steel demand would negatively impact earnings at the company, which at the time had lost money in nine of the previous 13 quarters.

Feldstein did not restrict his bearishness on the steel industry to the United States. He also singled out Japanese steel producer JFE and Australian-based Fortescue Metals Group as companies on his target list.

He promoted shorting JFE, Japan's second-largest steel producer, via credit default swaps. Feldstein said the steel exporter was at risk from increased exports of the commodity out of neighboring China.

He recommended shorting Fortescue Metals with a combination of equity and put options.

"Iron ore is very abundant - it's basically dirt in the ground," Feldstein said. As new iron ore producers increase supply, thus pushing down prices, Fortescue's business will suffer, he said.

It was at the Harbor Conference a year ago that Saba Capital Management founder Boaz Weinstein presented a trade idea based on a dislocation between two components of a credit derivatives market. The deviation was being caused by a large buyer who appeared willing to pay elevated prices for positions in the index.

That buyer ended up being JPMorgan Chase's Chief Investment Office and the bet, the now-infamous "whale" trade.

A flurry of public criticism of JPMorgan ensued, eventually forcing the bank quickly to unwind the CIO's position. Feldstein's BlueMountain Capital helped with the unwind.

Feldstein also recommended a more simple short bet against debt that has been scooped up by some of the nation's biggest mutual funds.

He reasoned that mutual funds' large holdings of unsecured debt, mostly corporate bonds, presented a good short opportunity. If the economy were to strengthen and interest rates were to rise, the funds would have to sell their low-yielding bonds very quickly to keep their returns in line with benchmarks, pushing bond prices lower.

"The best shorts out there right now are bonds being bought by mutual funds," Feldstein said.

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