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Steel Industry Summary - November 1, 2017

Core Content

This document provides an overview of the steel industry in Europe, the US, and China, with a focus on price trends, company valuations, and key risks. It includes price data for various steel products, such as Hot Rolled Coil (HRC), Cold Reduced Coil (CRC), Hot Dipped Galvanised Coil (HDG), Plate, and Rebar, as well as raw materials like Iron Ore and Coking Coal. It also highlights the performance of major steel companies, particularly ArcelorMittal and Voestalpine, and outlines the valuation methods and risks associated with the steel sector.

Key Price Trends

Hot Rolled Coil (HRC)

• Northern Europe: Prices fell by E1 to E541 (USD6 to USD634) last week. Prices have risen by E36 over the past three months.
• Southern Europe: Prices dropped by E5 to E511 (USD9 to USD600). Prices have increased by E38 over the past three months.
• Turkey: Prices fell by E21 to E497 (USD21 to USD304). Prices have increased by E55 over the past three months.
• USA: Prices rose by USD20 to USD669 (E571). Prices have increased by USD35 over the past three months.
• Chinese Exports: Prices fell by USD3 to USD551. Prices have increased by USD31 over the past three months.

Cold Reduced Coil (CRC)

• Northern Europe: Prices fell by E1 to E627 (USD6 to USD735). Prices have risen by E21 over the past three months.
• Southern Europe: Prices fell by E19 to E589 (USD13 to USD690). Prices have increased by E34 over the past three months.
• Turkey: Prices fell by E52 to E576 (USD5 to USD675). Prices have risen by E45 over the past three months.
• USA: Prices rose by USD27 to USD887 (E756). Prices have risen by USD113 over the past three months.
• Chinese Exports: Prices fell by USD10 to USD590. Prices have risen by USD45 over the past three months.

Hot Dipped Galvanised Coil (HDG)

• Northern Europe: Prices fell by E24 to E654 (USD24 to USD767). Prices have risen by E20 over the past three months.
• Southern Europe: Prices fell by E25 to E608 (USD25 to USD713). Prices have risen by E18 over the past three months.
• USA: Prices rose by USD27 to USD953 (E808). Prices have risen by USD142 over the past three months.
• Chinese Exports: Prices fell by USD10 to USD590. Prices have risen by USD41 over the past three months.

Plate

• Northern Europe: Prices fell by E9 to E589 (USD3 to USD691). Prices have risen by E14 over the past three months.
• Southern Europe: Prices fell by E6 to E559 (USD6 to USD656). Prices have risen by E21 over the past three months.
• USA: Prices were stable at USD759 (E648). Prices have risen by USD34 over the past three months.

Rebar

• Northern Europe: Prices rose by USD15 to USD652. Prices have risen by USD123 over the past three months.
• Southern Europe: Prices fell by USD3 to USD542. Prices have risen by USD28 over the past three months.
• USA: Prices were stable at USD617 (E527). Prices have risen by USD41 over the past three months.

Iron Ore

• Fines 62% Fe: Prices fell by USD2 to USD58. Prices have risen by USD6 over the past three months.
• Fines 58% Fe: Prices fell by USD3 to USD45. Prices have risen by USD8 over the past three months.

Coking Coal

• Premium Coking Coal (Australian Exports): Prices were stable at USD178. Prices have risen by USD18 over the past three months.

Scrap

• European Scrap: Prices fell by USD4/t to USD283. Prices have fallen by USD29 in Q3.
• US Scrap: Prices were stable at USD282. Prices have fallen by USD10 over the past three months.
• Turkish Scrap: Prices rose by USD1/t to USD304. Prices have fallen by USD24 over the past three months.

Company Valuation and Risks

ArcelorMittal (MT.AS)

• Current Price: EUR25.12
• Target Price: EUR28
• Valuation Method: Equal blend of forward EBITDA (6.0x 2018E) and DCF (7.9% WACC, 1.1 beta, 6.5% market risk premium, 2.5% risk-free rate, 2% terminal growth)
• Key Risks: Macroeconomic weakness, trade regulations, steel prices, raw material costs, project development, and FX rates.

Voestalpine (VOES.VI)

• Current Price: EUR47.12
• Target Price: EUR50
• Valuation Method: DCF (7.7% WACC, 1.0% terminal growth)
• Key Risks: Lower steel prices/demand, higher-than-expected raw material costs, and execution of upcoming growth projects.

Industry Valuation and Risks

• Valuation Methodologies: DCF, normalised earnings, and sum-of-the-parts (SOTP) analysis.
• Key Risks:
  1. Global economic growth not meeting expectations.
  2. Lower-than-expected steel prices.
  3. Higher raw material and operating costs.
  4. Political influence in steel trade.
  5. Expansion projects not progressing.
  6. M&A valuation and integration risks.

Price Announcements

• Flats:

  • Usiminas (Brazil): Negotiating a 25% price hike for automotive steel in 2018.
  • NLMK USA (US): Increased sheet prices by USD40/st.
  • Nucor (US): Increased sheet prices by USD40/st.
  • ArcelorMittal USA (US): Increased minimum HRC to USD625/st, CRC and HDG to USD825/st.

• Longs:

  • Icdas (Turkey): Increased rebar prices for 12-32mm diameter to TRY2,380/mt.
  • Jiujiang Wire Co. (China): Increased rod prices by Yuan70/mt.
  • Izmir Demir Celik (Turkey): Increased rebar prices by TRY20 ($5.40)/mt.
  • Feng Hsin (Taiwan): Decreased rebar list prices by TWD300/mt.

• Stainless:

  • Outokumpu (Finland): Increased November alloy adjustment factor for type 304 flat products by EUR12/mt.
  • Nippon Steel & Sumikin Stainless (Japan): Increased domestic stainless prices by Yen10,000/mt.
  • ATI (US): Reduced functional discount by 2% points for cold-rolled sheet.
  • Carpenter Technology (US): Increased base prices by 3-8% on new non-contract orders.

Key Financial Metrics

ArcelorMittal (MT.AS)

• Buy Recommendation
• Valuation Metrics:
  • P/E (DB): 11.5 to 9.7
  • P/BV: 1.31 to 1.14
  • FCF Yield: 1.6% to 8.1%
  • Dividend Yield: 3.0% to 3.0%
  • EV/Sales: 0.9 to 0.9
  • EV/EBITDA: 6.5 to 5.4
  • EV/EBIT: 11.5 to 8.8

Voestalpine (VOES.VI)

• Buy Recommendation
• Valuation Metrics:
  • P/E (DB): 11.5 to 9.7
  • P/BV: 1.31 to 1.14
  • FCF Yield: 1.6% to 8.1%
  • Dividend Yield: 3.0% to 3.0%
  • EV/Sales: 0.9 to 0.9
  • EV/EBITDA: 6.5 to 5.4
  • EV/EBIT: 11.5 to 8.8

Summary of Key Information

• Steel prices in Europe and Turkey have declined, while US prices have increased.
• Chinese export prices have seen a mixed trend with some products rising and others falling.
• ArcelorMittal and Voestalpine are highlighted as top picks due to their strong cash flow and valuation.
• The steel industry faces several risks including macroeconomic factors, trade regulations, and cost pressures.
• Price announcements from various steel producers indicate a mix of price increases and decreases across different regions and product categories.