Yesterday, Stelco filed documents with an Ontario court to strike down a $350-million lawsuit by Georgian Windpower, which the latter claims is the amount of damages incurred when Stelco walked away from an agreement to replace coal-fired generators with wind turbines on its Nanticoke, Ontario, site.

Stelco, which has been operating under court-supervised bankruptcy protection since 1Q04, says (i) the contract with the windpower company was illegal, or (ii) it was allowed to cancel its contract with 60 days notice. Take your pick.

I don't think Stelco is likely to lose on that matter, but the share price has dropped off the table. The stock was already "broken" and has been trading as a speculation in any event.

How a profitable company can petition itself into bankruptcy, asking a judge to rule on what may or may not happen in the future of a going concern business corporation, and stay there for 18-months of record profits, is a sad commentary on the Canadian capital market system. I will not say more about that, except that maybe the new chair of the Ontario Securities Commission might want to look deeply into the matter after he soon takes the helm of the major securities regulatory agency in Canada.

One of the reasons the Stelco share price has dropped from C$4.50 to C$1.00 over the past three months (presently C$1.13) is that the bankruptcy process has taken precedence over business operations, and the steel industry has recently taken a turn for the worse, as commodity prices weakened, and traders have been concerned about policy actions the Beijing authorities might take to slow GDP growth in China, particularly with respect to steel manufacturing.

In fact, rather than remain a net importer of steel, it could be that Chinese steel producers may turn into global exporters if the central authorities there put the hold on domestic growth plans.

All steel companies have been suffering in recent months, including Stelco, as the following charts of global producers clearly reflects. The problem for Stelco is that it is in tough in that battle at the same time the courts are seemingly in control.

At the end of the day, it is my hope that Russia's Severstal does complete its acquisition of Stelco, and that they pay a fair price for it. I still believe that Canada's largest steelmaker is worth more than C$600 million (net of debt), which would take the stock over C$5.00.

And it would be a terrific fit for Severstal, which has acquired similar operations in the Great Lakes region, and has, apparently from all accounts, an excellent management team, and an interest in protecting the unionized workers at Stelco.

As for my take on the steelmakers (GICS 15104050), I think there is still several months of working through a long-term cycle bottom required before they, as a group, hit my accumulation zone. At the appropriate time, I will announce that it makes trading sense to start writing call options on this group, and then buying the stocks, and later buying the call options.

Until then, the industry needs to pray for strength in China (i.e., economically speaking). If U.S. congressional leaders are going to be clamouring for protectionist sanctions against China, and the like, as went on yesterday, I suspect there is more pain to come for the steelmakers.

The steel companies, and the aluminum companies, also need the auto manufacturers unit sales volume to pick up. That situation is another depressant on the shares prices of the steel manufacturers.