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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




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                                                                                                                                                                                                                                              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
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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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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




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                                                                                     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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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.




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                                                                            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
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                                                                                                       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




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Steel




                                  8
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                                                                               Steel




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in Morgan Stanley Research: AK Steel Holding Corp., US Steel Corporation.
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                         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
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Stanley received investment banking compensation in the last 12 months.
Analyst Stock Ratings




                                                                                                                                                     9
                                                                                              MORGAN            STANLEY           RESEARCH

                                                                                              December 12, 2010
                                                                                              Steel




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                                                                                                                                                                              10
                                                                                             MORGAN           STANLEY            RESEARCH

                                                                                             December 12, 2010
                                                                                             Steel




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                                                                                                                                                                            11
                                                                                       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.




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