The market for steel may improve in the coming quarter, however steel stocks may remain volatile as the U.S. market continues to struggle under the weight of the credit crisis, a noted steel analyst believes.

The steel markets are poised for a recovery after their weakness during the past quarters of 2007, according to Charles Bradford, president of New York-based Bradford Research.

"Steel users built up excess inventories last year when steel prices were strong, but have been liquidating since last November and thus buying less steel from the mills," Bradford said in a report on the steel industry released Tuesday. "We expect this to reverse quite soon as current inventory levels are low enough for customers to need to increase their buying. With steel scrap prices also picking up, we expect the fundamental steel environment to improve."

Steel markets outside the United States remain strong, as flat-rolled prices are higher in those markets, particularly in China, he said.

On Monday, the American Iron and Steel Institute reported that during June, U.S. steel mills shipped 8,920,000 net tons, an 8.4 percent decrease from the 9,739,000 net tons shipped in June 2006, and a 1.9 percent decrease from the 9,087,000 net tons shipped in May of this year.

From June 2005 to June 2006, shipments to service centers and distributors were down 11 percent; automotive shipments dropped 2.8 percent, contractors and contractor product shipments for commercial, road and bridge construction fell 3.1 percent, and oil and gas shipments were 9.6 percent lower, according to the institute.

The data doesn't reflect problems in residential construction because single-family homes, "don't contain a lot of steel," Bradford said. However, the steel industry may see the affect of the decline in new-home construction in 2008.

"When residential construction gets hit, a year later the commercial sector gets hit," he said. "You don't build new shopping and commercial centers where there are no new homes."

Steel company stocks have fallen from record mid-July highs as financial markets have responded to problems in the housing market.

"Steel equities have been volatile in recent weeks, reflecting fear of an economic slowdown and the reduction of any takeover premiums since the financial markets don't appear to be as favorable as a few months ago, as far as financing "deals," Bradford said.

Shares of Arcelor-Mittal closed at $56.52 Monday, down $10.37 from a July 12 high of $67.89. U.S. Steel shares dropped by almost a third to $84.33 at the close Monday, from a June 8 high of $125.05 that was fueled by unsubstantiated buyout rumors.