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MORGAN STANLEY RESEARCH
NORTH AMERICA
Morgan Stanley & Co. Incorporated Mark Liinamaa
Mark.Liinamaa@morganstanley.com
+1 212 761 3537
Evan L Kurtz, CFA
Evan.Kurtz@morganstanley.com
+1 212 761 7583
December 12, 2010
Industry View Steel
In-Line
Stocks Move on Steel Price
Recent Reports
Surge; We See More to Go Title Date
Steel Dynamics: No Credit for New Assets Nov 22, 2010
Mark Liinamaa / Evan L Kurtz, CFA
A steel price surge has moved steel stocks; we see
Steel: Weak Reporting Season Behind Us, Oct 27, 2010
further upside: In the past two weeks, US steel Steel Worth a Look
producers have announced an unprecedented three Mark Liinamaa / Evan L Kurtz, CFA
rounds of price hikes. Prices for new orders of hot-rolled
coil have gone from $560/t to $680/t, and the market
value of our steel coverage universe has climbed 15%
since the beginning of November. We see conditions
continuing to improve on rising demand, low inventories
and strength in raw material prices, which could
ultimately propel steel stocks closer to our mid-cycle
valuations, which point to another 23% upside for the
group. Our top picks are X and STLD.
Demand growth could surprise in 2011: We believe
consensus is expecting mid-single digit growth in
demand. We see a path to 13% demand growth,
primarily driven by our forecast for a 30% increase in
apparent demand for construction steel. While we only
predict a 5% rebound in underlying demand for
construction steel, we believe the inflection to growth will
end a three-year destocking cycle and cause an
outsized jump in apparent demand at the mill buying
level. In addition, we see 8% growth in steel demand for
autos, based on 13mn light vehicle builds.
New capacity is not helpful, but manageable: While
market concerns are valid that tonnage from
ThyssenKrupp’s Alabama project is hitting the market at
a cyclical trough, our updated supply demand-model
(inside) points to a 6 percentage point increase in
operating rates in 2011 and a rise to a near normal 82%
operating rate in 2012 despite new capacity. Similarly,
we believe new OCTG capacity will be easily absorbed
by an undersupplied market. Morgan Stanley does and seeks to do business with
companies covered in Morgan Stanley Research. As
Steel price momentum a catalyst: We expect scrap a result, investors should be aware that the firm may
prices, a key lead indicator for steel prices, to continue to have a conflict of interest that could affect the
climb, serving as a catalyst to move the stocks closer to objectivity of Morgan Stanley Research. Investors
should consider Morgan Stanley Research as only a
mid-cycle valuations. single factor in making their investment decision.
For analyst certification and other important
disclosures, refer to the Disclosure Section,
located at the end of this report.
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
Investment Case
We continue to like the steel stocks for three key reasons: growth from autos, based on our auto team’s assumption that
US light vehicle production will grow to 13mn units from 12mn
1. We think consensus is underestimating potential demand in 2010.
growth in 2011. We predict a three-year trend in
construction steel inventory destocking will reverse, Apparent construction steel demand could grow by 30%
possibly driving overall apparent steel demand 13% higher While we are only expecting underlying growth of 5% for
next year. construction steel products (based on the Architectural Billings
Index data, a key leading indicator), we believe apparent
2. Investors fear the impact of new capacity additions. While
demand at the mill level could grow as much as 30%. We
the ThyssenKrupp capacity ramp is not helpful, we expect
examined the structural steel market, which is a good proxy for
it to be manageable. In addition, we do not expect OCTG
all construction related steel, since the product is almost
capacity additions to weaken pricing power. We expect
exclusively used in building. By our estimates, mill purchases
the new capacity to offset imports, in this undersupplied
of structural steel have lagged real demand as inventory levels
market. In fact, we expect a rising global rig count and
have collapsed throughout the supply chain over the past three
higher steel prices to push OCTG prices higher in 2011.
years. With our view that growth will inflect next year, we
3. Current price momentum will likely continue serving as a believe that destocking could finally reverse, boosting mill
catalyst for shares to reach our mid-cycle valuations. orders significantly, similar to what we saw with flat-rolled steel
Rising raw material prices, supply constraints, low and autos at the end of 2009 / beginning of 2010.
inventories and rising demand should continue to drive
steel prices upwards. Exhibit 2
We Expect a Strong Bounce in Apparent Demand in
While stock prices have already started to improve, we think 2011, Led by Construction
there are still a substantial number of investors on the sidelines 2010 2011 Weighted
who would buy into the steel space if macro concerns remain in End-markets Split* Growth Growth
check and steel prices rise. We see 23% upside to our Construction 30% 30% 9.0%
mid-cycle valuations, and think X and STLD are the best Autos (Incl. Trucks) 19% 8% 1.5%
Rails 2% 5% 0.1%
positioned in the current cost-push pricing environment. Machinery & Industrial 9% 10% 0.9%
Electrical & Appl. 5% 5% 0.3%
Exhibit 1 Oil & Gas 4% 5% 0.2%
We Still See Upside to our Mid-Cycle Valuations Containers and Packaging 5% 3% 0.1%
Current Normal Average Normalized Other 27% 3% 0.8%
Capacity Op. Rate Ships Mid-Cycle Steel Total 2011 Growth 13%
Company (ktons) Op. Rate (ktons) EBITDA/t EBITDA * YTD through September
US Steel 34,200 86% 29,260 $83 $2,443 Source: AISI, Morgan Stanley Research
AK Steel 6,300 97% 6,111 $75 $458
Nucor 26,210 86% 22,541 $120 $2,705
Exhibit 3
Steel Dynamics 7,425 90% 6,683 $150 $1,000
We Expect Construction Steel Destocking To End in
Average Non-Steel Normalized Upside to 2011; Triggering a 30% Jump in Apparent Demand
Company EV/EBITDA Acq. &. Proj.** Price Normal 2007 2008 2009 2010e 2011e
US Steel 4.8x ($269) $62 15% Starts ($ millions)
Nonresidential 232,068 242,614 156,006 142,610 149,741
AK Steel 4.5x $266 $17 19%
Nonbuilding 133,887 150,216 129,087 133,834 140,526
Nucor 5.7x $3,783 $55 31% Multifamily Housing 62,668 39,650 15,231 16,451 17,274
Steel Dynamics 5.4x $1,470 $21 28% Total Steel Intensive Constutction 428,623 432,480 300,324 292,895 307,540
Average 23% Y/Y Change 6% 1% -31% -2% 5%
Source: Company data, Morgan Stanley Research Steel Demand (Short Tons)
Real Structural Steel Demand 6,658 6,718 4,665 4,550 4,777
Apparent Structural Demand 7,658 6,122 3,530 3,937 5,077
Apparent steel demand could rise as much as 13% in 2011 Y/Y Change -7% -20% -42% 12% 29%
We believe consensus expectations are for modest single digit Structural Operating Rates
US Capacity (tons) 9,000 9,300 9,600 9,700 9,700
demand growth next year. We think a 30% boost in Apparent Structural Demand 7,658 6,122 3,530 3,937 5,077
construction steel demand, the largest steel end market, will Net Imports (241) (536) (197) (352) (300)
Domestic Shipments 7,899 6,658 3,727 4,289 5,377
drive 9% overall steel apparent demand growth, the bulk of our Operating Rates 88% 72% 39% 44% 55%
a 13% forecast. In addition, we expect a 1.5% contribution to Source: Company data, Morgan Stanley Research
2
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
Exhibit 4 We believe recent import surges have simply been a result of a
Architectural Billings Data is Pointing to 2011 lack of domestic availability, and the new ThyssenKrupp plant
Growth and an Uptick in Steel Operating Rates will fill a void in the local market.
75 100%
AIA Billing Index (Commercial/Industrial)
70 90% OCTG Concerns Overblown
65 80%
We are forecasting 8% and 10% OCTG capacity growth in
Steel Capacity Utilization
60 70%
2011 and 2012, respectively. Some investors have expressed
55 60%
50 50%
concerns that these new projects could cut into profitability at
45 40% X’s tubular business, which accounts for a third of normalized
40 30% EBITDA. We think these concerns are overblown. The US
35 Steel Capacity Utilization 20% market is undersupplied, and has historically relied heavily on
30 AIA Commercial/Industrial Billings 10%
imports to meet demand 40% - 50% of demand. We expect US
25 0%
OCTG producers to continue to run full out, and we expect
Dec-95
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prices to rise on higher global rig counts and HRC pricing, the
two most statistically significant drivers of US OCTG prices.
Source: Company data, Morgan Stanley Research
Overcapacity a concern, but not a show-stopper Exhibit 5
This year ThyssenKrupp began selling flat-rolled steel from Global Rig Counts and HRC Pricing Are the Key
their newly commissioned 4.7mn tpy rolling mill in Alabama. Driver OCTG Prices
The mill ultimately has plans to sell high-value sheet products, Tubular Price WW Rig Counts
Modeled Price (Backtested) HRC Price
but is currently producing only commodity grade hot-rolled and 4,000 1,200
cold-rolled coils. It could take 12 to 18 months before the plant 1,100
3,500
is qualified and selling into their target markets. In the 1,000
Rig Counts, Tubular Price ($/t)
3,000
meantime, they are in head-to-head with Southern commodity 900
800
flat-rolled producers such as Nucor and US Steel’s Fairfield
HRC ($/t)
2,500
700
plant. Eventually they will compete more with some of the 2,000
600
higher-value product producers in the Midwest.
1,500 500
That said, we believe a significant amount of ThyssenKrupp’s 400
1,000
production will displace imports. Statistical analysis shows that R-Squared: 0.77
300
in recent history, the key variable affecting import levels in the 500 200
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Jan-12
US is demand. We suspect that most buyers generally would
chose US products over imports since they value shorter
Source: Baker Hughes, Pipe Logix, Morgan Stanley Research
delivery times and quality certainty over pure price
considerations, particularly for high-value flat-rolled products.
Exhibit 6
We Expect US Crude Steel Supply to Trail Demand Through 2015
Country Company Location 2010 2011e 2012e 2013e 2014e 2015e Comments:
Slab cap. expansion
USA Comercial Metals Phoenix, AZ 280
USA AK Steel Butler, PA 100 400 500k short tons to come on 9/1/11
USA Steel Development Co. Amory, MS 150 150 300k short tons
USA Severstal Columbus, OH 500 1,400 Phase two adds 1.9m tons
USA Essar Minnesota Steel Nashwauk, MN 500 1,000 2013 DRI (2.5mn tonnes); 2014 steel slab casting
Total 280 100 1,050 1,550 500 1,000
Billet/bloom cap. Expansion
USA Steel Dynamics Columbia City, IN 900
USA V&M Star Youngstown, OH 30 350 60 110 550k short tons of OCTG
Total 900 30 350 60 110 0
Other Assumed Growth 0 250 250 250 250 250 Assumed capacity creep
US Capacity Change 1,180 380 1,650 1,860 860 1,250
US Installed Base 126,166 126,546 128,196 130,056 130,916 132,166
Growth 1.2% 0.3% 1.3% 1.5% 0.7% 1.0%
Source: Company data, CRU, Morgan Stanley Research
3
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
Exhibit 7
OCTG Capacity Growth Will Likely Displace Imports, Allowing Existing Player to Continue to Run Full
Completion Real
Company Location Date 2009 2010 2011 2012 2013 2014 Total Tons Capacity
Northwest Pipe Bossier City, LA 2010 60 36 Tube-forming Capac #VALUE!
Boomerang Liberty, TX 2010 50 200 38 360 288
Lakeside Steel Thomsaville, AL 10/31/2011 25 100 24 120 96
V&M Star Youngstown, OH 2011 25 280 50 85 550 440
Tianjin Pipe Group Gergory, TX 2013 50 550 440
Incremental Capacity 110 286 418 74 135
Total Capacity 3,621 3,731 4,017 4,435 4,509 4,644
Capacity Growth 3% 8% 10% 2% 3%
Shipments Imports Exports
Apparent Net Imports / Shipments /
Mill Y/Y Change Mill Y/Y Change Mill Y/Y Change Capacity
Demand App. Demand Capcity
Products Products Products
2006 2,874 4.2% 1,875 24.2% 440 4,309 10.4% 33.3% 3,621 79.4%
2007 2,715 -5.5% 1,944 3.7% 331 4,328 0.4% 37.3% 3,621 75.0%
2008 3,129 15.2% 3,974 104.4% 462 6,640 53.4% 52.9% 3,621 86.4%
2009 1,237 -60.5% 1,602 -59.7% 301 2,538 -61.8% 51.3% 3,621 34.2%
2010 2,796 126.0% 2,439 52.2% 408 4,826 90.2% 42.1% 3,731 74.9%
2011 3,276 17.2% 2,100 -13.9% 400 4,976 3.1% 34.2% 4,017 81.5%
2012 3,427 4.6% 1,800 -14.3% 400 4,827 -3.0% 29.0% 4,435 77.3%
2013 3,468 1.2% 2,000 11.1% 400 5,068 5.0% 31.6% 4,509 76.9%
2014 3,722 7.3% 2,000 0.0% 400 5,322 5.0% 30.1% 4,644 80.1%
Source: OCTG Situation Report, SBB, Morgan Stanley Research
Cost-push issues to push near-term steel prices higher, Exhibit 8
potentially a catalyst for stocks We Expect HRC Prices to Average $665/t in 2011
We are hearing reports that mills have been caught off-guard HRC Actual Base Case Forecast
$1,100
by the recent uptick in steel orders rates, which has forced
$1,000
many of them into the market due to excessively low mill
$900
inventories. This uptick in mill demand is coinciding with
HRC ($/Short Ton)
$800
weather related supply constraints and steady demand for
$700
exported material. December scrap prices rose $45/t, more
$600
than double initial expectations. We expect another large hike
$500
in January as producers scramble to secure material. In
$400
addition, iron ore and coking coal prices are set to rise in 1Q10.
$300
In 3Q, 50% of listed Chinese steel producers lost money,
$200
indicating current price levels are unsustainable.
May-03
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Sep-12
The cost-push theme is a key reason we favor shares of X and Source: CRU, Morgan Stanley Research
STLD. Both companies stand to benefit as a result of raw
material ownership. In the case of US Steel, roughly 100% of
the company’s domestic iron ore needs can be met by
internally mined production. Similarly, Steel Dynamics owns
7m tons of scrap processing capability, while not a perfect
hedge, it is a significant offset to rising scrap costs. These
companies, relative to peers, should see more margin dollars
fall to the bottom line as costs push steel prices higher.
4
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
Exhibit 9
We Expect Operating Rates to Rise to 6 Percentage Points in 2011, Despite TK and Other Capacity Startups
Shipments Imports* Exports Apparent Demand Production Capacity US Op.
Year (000 tons) % Change INDEX (000 tons) % Change (000 tons) % Change (000 tons) % Change (000 tons) % Change (000 tons) % Change Rate
1985 72,433 -0.9% 0.86 21,745 -11.5% 932 -4.9% 93,246 -3.5% 87,290 -4.3% 133,597 -1.0% 65.3%
1986 69,688 -3.8% 0.83 18,507 -14.9% 929 -0.3% 87,265 -6.4% 80,406 -7.9% 127,906 -4.3% 62.9%
1987 76,686 10.0% 0.92 17,929 -3.1% 1,127 21.2% 93,488 7.1% 88,389 9.9% 112,163 -12.3% 78.8%
1988 83,494 8.9% 1.00 17,946 0.1% 2,070 83.7% 99,370 6.3% 99,287 12.3% 111,690 -0.4% 88.9%
1989 84,259 0.9% 1.01 15,028 -16.3% 4,576 121.1% 94,711 -4.7% 97,434 -1.9% 115,919 3.8% 84.1%
1990 84,736 0.6% 1.01 14,710 -2.1% 4,555 -0.5% 94,891 0.2% 97,763 0.3% 116,722 0.7% 83.8%
1991 78,868 -6.9% 0.94 13,505 -8.2% 6,346 39.3% 86,028 -9.3% 87,447 -10.6% 117,632 0.8% 74.3%
1992 82,354 4.4% 0.98 13,795 2.1% 4,288 -32.4% 91,862 6.8% 91,604 4.8% 112,779 -4.1% 81.2%
1993 89,022 8.1% 1.06 13,971 1.3% 3,968 -7.4% 99,024 7.8% 95,906 4.7% 109,920 -2.5% 87.3%
1994 95,347 7.1% 1.14 20,770 48.7% 3,826 -3.6% 112,292 13.4% 97,941 2.1% 108,216 -1.5% 90.5%
1995 96,859 1.6% 1.16 17,773 -14.4% 7,080 85.1% 107,551 -4.2% 103,176 5.3% 112,470 3.9% 91.7%
1996 100,530 3.8% 1.20 19,888 11.9% 5,031 -28.9% 115,388 7.3% 105,309 2.1% 115,801 3.0% 90.9%
1997 105,538 5.0% 1.26 22,321 12.2% 6,036 20.0% 121,824 5.6% 108,561 3.1% 121,422 4.9% 89.4%
1998 102,143 -3.2% 1.22 31,664 41.9% 5,520 -8.5% 128,287 5.3% 108,752 0.2% 125,282 3.2% 86.8%
1999 105,103 2.9% 1.25 24,504 -22.6% 5,426 -1.7% 124,181 -3.2% 107,395 -1.2% 128,157 2.3% 83.8%
2000 109,050 3.8% 1.30 26,512 8.2% 6,529 20.3% 129,032 3.9% 112,242 4.5% 129,941 1.4% 86.4%
2001 98,940 -9.3% 1.18 21,711 -18.1% 6,144 -5.9% 114,507 -11.3% 99,321 -11.5% 125,450 -3.5% 79.2%
2002 100,000 1.1% 1.19 21,527 -0.8% 6,009 -2.2% 115,519 0.9% 100,958 1.6% 113,774 -9.3% 88.7%
2003 105,628 5.6% 1.26 16,196 -24.8% 8,220 36.8% 113,605 -1.7% 103,261 2.3% 121,265 6.6% 85.2%
2004 110,952 5.0% 1.32 28,389 75.3% 7,893 -4.0% 131,448 15.7% 109,879 6.4% 116,193 -4.2% 94.6%
2005 103,224 -7.0% 1.23 24,928 -12.2% 9,492 20.3% 118,660 -9.7% 104,606 -4.8% 119,506 2.9% 87.5%
2006 108,609 5.2% 1.30 35,953 44.2% 9,728 2.5% 134,834 13.6% 108,234 3.5% 123,515 3.4% 87.6%
2007 106,112 -2.3% 1.27 26,587 -26.1% 11,082 13.9% 121,617 -9.8% 108,228 0.0% 124,445 0.8% 87.0%
2008 97,957 -7.7% 1.17 25,956 -2.4% 13,477 21.6% 110,436 -9.2% 100,697 -7.0% 124,402 0.0% 80.9%
2009 60,352 -38.4% 0.72 14,180 -45.4% 9,281 -31.1% 65,251 -40.9% 64,149 -36.3% 124,677 0.2% 51.5%
2010E 85,131 41.1% 1.02 18,375 29.6% 12,196 31.4% 91,311 39.9% 88,241 37.6% 126,166 1.2% 69.9%
2011E 93,972 10.4% 1.12 22,637 23.2% 13,416 10.0% 103,194 13.0% 96,146 11.8% 126,546 0.3% 76.0%
2012E 102,927 9.5% 1.23 23,343 3.1% 14,086 5.0% 112,184 8.7% 104,549 10.8% 128,196 1.3% 81.6%
2013E 107,573 4.5% 1.28 25,872 10.8% 14,791 5.0% 118,655 5.8% 109,907 5.1% 130,056 1.5% 84.5%
2014E 109,961 2.2% 1.31 26,810 3.6% 14,791 0.0% 121,980 2.8% 112,677 2.5% 130,916 0.7% 86.1%
2015E 113,360 3.1% 1.35 28,145 5.0% 14,791 0.0% 126,714 3.9% 116,632 3.5% 132,166 1.0% 88.2%
Source: AISI, CRU, Morgan Stanley Research
5
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
Risk-Reward Snapshot: US Steel (X, $54, Overweight, Price Target $62)
Risk-reward skewed to the upside Why Overweight?
$100 • We believe US Steel’s vertically
90 integrated Flat-rolled segment will
$86 (+60%)
generate operating margins above
80
expectations as higher industry raw
70 material costs push up pricing.
60 $ 53.61
$62 (+16%)
• With Chinese tubular blocked from
50
US markets and rising shale activity,
we see $4.7b of value in X tubular
40
segment, also not believed to be in
30
$28 (-48%) shares.
20 • Our North American autos team
believes US sales could rise to 14
10
million vehicles in 2011 (consensus
0
is closer to 12 million). Above
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
Base Case (Dec-11) Historical Stock Performance Current Stock Price consensus auto sales could add
Source: FactSet, Morgan Stanley Research close to 2 million tons of incremental
Price Target: $62 Our $62 price target is based on the average of two methods of flat-rolled steel demand, X’s primary
mid-cycle valuation. One method applies a 4.8x multiple to product.
mid-cycle EBITDA of $2.5b, the other applies an 8.9x multiple to Key Value Drivers
mid-cycle EPS of $7.70. These multiples are in line with historical
• High fixed costs make US Steel’s
averages.
earnings highly leveraged to the steel
Bull 9.2x 20101 Strong rebound in real demand in 2011. The hot-rolled coil price
price, every $10/t move in HRC tends
Case EPS per ton averages to $825 in 2011. Operating rates average 84%.
to move shares by $1.50.
$86 of $9.30 Tubular earns $800m.
Potential Catalysts
Base 13.6x 2011 Real US demand gradually climbs, China production recovers
Case EPS in 2011. The hot-rolled coil price per ton averages $670 in 2011. • We believe news flow pertaining to
$62 of $4.55 Operating rates average 75%. Chinese steel production climbs 7% January scrap price hikes will cause
in 2011, causing global cost-push price hikes. the share to trade higher.
Bear 1.5x 2009 Double-dip recession; China production does not rebound. Risks
Case Tang. BV The hot-rolled coil price per ton falls to $585 in 2011. While X
• As a high beta name, the stock is
$28 of $19 troughed at 1.0x tangible book value in March 2009, we believe
improved liquidity will prevent a fall to similar levels in a double-dip. vulnerable to a broad market sell-off.
• Overcapacity in the US market could
Bear to Bull limit pricing.
100 • Imports may tick up as struggling
9.00 international competitors attempt to
90
5.00
80 10.00 86 dump steel.
70 price target: 62 9.00
60 15.00
62
50
10.00
40
30
20 28
10
0
Bear 2011 HRC 2011 Op. Tubular Base 2010 HRC Tubular 2010 Op. Bull
Case $585/t Rates of earns Case of $825 earns Rates of Case
70% $400m $800m 84%
Source: Morgan Stanley Research
6
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
Risk-Reward Snapshot: Steel Dynamics (STLD, $17, Overweight)
Risk-Reward View: Risks Skewed to the Upside Why Overweight?
$30 • Improvements in Steel Operations
$28 (+68%) are not well understood. We see
25 $325m of incremental mid-cycle
EBITDA from recent improvements.
20
$21.00 (+26%) We do no think investors are giving
$ 16.70 proper credit.
15
• Omnisource is worth $6; Mesabi
nugget $4. The market does not
appear to be assigning value to the
10 $10 (-40%)
company’s raw materials business after
backing out the steel business. We see
5
$6 of immediate value and $10 if
Mesabi works out as planned.
0
• We expect structural operating rates
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
Price Target (Dec-11) Historical Stock Performance Current Stock Price
to surprise to the upside in 2011. We
Source: FactSet, Morgan Stanley Research expect a small pick up in real demand
for structural beams to lead to modest
Price Target $21 Our $21 price target is based on our mid-cycle sum-of-the-parts
restocking and a 30% bump in apparent
analysis, less $4 per share to exclude Mesabi value, which is
probably too long-term for investors to pay for now. Our SOTP demand. We also, expect 150k in rail
value of $25 is 8.4x our mid-cycle EPS estimate of $3. sales to support operating rates at
STLD’s structural mill.
Bull 10.1x Robust global and US growth. The hot-rolled coil price per ton
Case 2011e EPS rises to $785 in 2011. Operating rates average 85% for the year • Valuation. We see 50% upside to our
$28 of $2.76 and structural/rail division ships 1.2m tons. sum of the part valuation of $25, which
includes $4 for Mesabi. Our $21 price
Base 13.5x Moderating global growth; US growth flat. The hot-rolled coil
target, which excludes Mesabi, implies
Case 2011e EPS price per ton averages $665 in 2011. Operating rates average
26% upside.
$21 of $1.55 78% for the year and the structural/rail division ships 1m tons.
Bear 1.0x Double dip. The hot-rolled coil price per ton averages $515 in
Case 2010e BV 2011. Operating rates average 71% for the year and the Potential Catalysts
$10 of $9.68 structural/rail division ships 635k tons. • Scrap prices may move higher on
seasonal factors as winter weather
Bear to Bull reduces collection rates.
• A continuation of recent improvements
35
in the Architectural Billings Index will
30 2.00 1.00
4.00 bolster conviction in construction
25 price target: 21 4.00 28 levered companies, such as STLD.
20 3.00
2.00 21
15 2.00
Risks
10
10 • As a high beta name, the stock is
5
vulnerable to a broad market sell-off.
0
• China tightening may discourage
Bear 2011 HRC 2011 Op. Structural Trough Base 2011 HRC Structural 2011 Op. Bull
Case $515/t Rates of ships Multiple on Case $785 ships Rates of Case investors from buying steel stocks.
71% 635k tons 2011 1.2m tons 85%
EBITDA
Source: Morgan Stanley Research
7
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
8
MORGAN STANLEY RESEARCH
December 12, 2010
Steel
Disclosure Section
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A.
As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as
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Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and
that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this
report: Mark Liinamaa.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
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Important US Regulatory Disclosures on Subject Companies
As of November 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered
in Morgan Stanley Research: AK Steel Holding Corp., US Steel Corporation.
Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of AK Steel Holding Corp., Metals
USA Holdings Corp., Steel Dynamics, US Steel Corporation.
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from AK Steel Holding Corp., Metals USA
Holdings Corp., Nucor Corporation, Steel Dynamics, US Steel Corporation.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AK Steel Holding Corp.,
Metals USA Holdings Corp., Nucor Corporation, Steel Dynamics, US Steel Corporation.
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AK
Steel Holding Corp., US Steel Corporation.
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client
relationship with, the following company: AK Steel Holding Corp., Metals USA Holdings Corp., Nucor Corporation, Steel Dynamics, US Steel
Corporation.
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past
has entered into an agreement to provide services or has a client relationship with the following company: AK Steel Holding Corp., Steel Dynamics, US
Steel Corporation.
Morgan Stanley & Co. Incorporated makes a market in the securities of AK Steel Holding Corp., Commercial Metals Company, Metals USA Holdings
Corp., Nucor Corporation, Schnitzer Steel Industries, Steel Dynamics, US Steel Corporation.
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upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment
banking revenues.
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STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below).
Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the
equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since
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Global Stock Ratings Distribution
(as of November 30, 2010)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside
our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we
cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative
weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy
recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
Coverage Universe Investment Banking Clients (IBC)
% of % of % of Rating
Stock Rating Category Count Total Count Total IBC Category
Overweight/Buy 1121 40% 417 44% 37%
Equal-weight/Hold 1175 42% 410 43% 35%
Not-Rated/Hold 119 4% 26 3% 22%
Underweight/Sell 392 14% 105 11% 27%
Total 2,807 958
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual
circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan
Stanley received investment banking compensation in the last 12 months.
Analyst Stock Ratings
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MORGAN STANLEY RESEARCH
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Steel
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe,
on a risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the
analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the
relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant
broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant
broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index;
Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.
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Other Important Disclosures
Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Commercial Metals Company, Nucor Corporation, Steel
Dynamics, US Steel Corporation.
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MORGAN STANLEY RESEARCH
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MORGAN STANLEY RESEARCH
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Industry Coverage:Steel
Company (Ticker) Rating (as of) Price* (12/10/2010)
Mark Liinamaa
AK Steel Holding Corp. (AKS.N) E (06/09/2009) $14.58
Commercial Metals Company E (11/18/2008) $16.95
(CMC.N)
Metals USA Holdings Corp. O (05/19/2010) $13.9
(MUSA.N)
Nucor Corporation (NUE.N) E (06/09/2009) $41.88
Schnitzer Steel Industries U (07/17/2009) $61.22
(SCHN.O)
Steel Dynamics (STLD.O) O (03/02/2009) $16.7
US Steel Corporation (X.N) O (06/09/2009) $53.61
Stock Ratings are subject to change. Please see latest research for each company.
* Historical prices are not split adjusted.
© 2010 Morgan Stanley
