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Steel Price Analysis Summary

Core Content and Key Insights

The document outlines the current trends and valuation of the global steel industry, focusing on price movements, company performance, and investment opportunities. It highlights that steel prices are continuing to rise across the board, with strong momentum indicating potential for further margin expansion. The report also discusses the impact of protectionism, global demand, and consolidation on the steel sector, as well as the valuation of major players like ArcelorMittal.

Steel Price Trends

• Hot Rolled Coil (HRC):

  • Northern Europe: Prices rose by E7 to E568 (up USD11 to USD704), with a 3-month increase of E71 (up USD59).
  • Southern Europe: Prices increased by E1 to E551 (up USD4 to USD682), with a 3-month increase of E92 (up USD56).
  • Turkey: Prices rose by E10 (up USD39) in the last three months.
  • United States: Prices increased by USD18, with a 3-month increase of USD136.
  • Chinese Exports: Prices rose by USD2 to USD585, with a 3-month increase of USD39.

• Plate:

  • Northern Europe: Prices fell by E1 to E601 (up USD3 to USD744), with a 1-month increase of E7 (up USD3).
  • Southern Europe: Prices remained stable at E582 (up USD3 to USD721), with a 1-month increase of E3 (up USD9).
  • United States: Prices increased by USD24 to USD915, with a 3-month increase of USD236.

• Iron Ore:

  • Fines 62% Fe: Prices increased by USD1 to USD78/dmt.
  • Fines 58% Fe: Prices increased by USD1 to USD64/dmt.
  • Premium Coking Coal (Australian Exports): Prices increased by USD1 to USD233, with Euro prices stable at E188.

• Scrap:

  • European Prices: Increased by USD6 to USD343/t, with a potential QoQ increase of USD33 if prices remain stable until the end of Q1.
  • Turkish Prices: Increased by USD6 to USD352/t.
  • US Prices: Increased by USD62 in the last three months.

Key Industry Drivers

• High global price levels and protectionist policies are contributing to the upward trend in steel prices.
• Demand growth and consolidation are also supporting the industry's performance.
• The section 232 decision in the US is expected to positively impact US-exposed steel players, with the final decision due by April 11th.
• The price differential between the US and China increased to USD240/t, indicating a growing gap in steel pricing.

Investment Recommendation

• ArcelorMittal (MT.AS) is highlighted as the top pick due to its strong cash flow (9-11% FCF yield), attractive valuation, and additional upside potential.
• The company is valued using a blend of forward EBITDA (6.0x 2018E) and DCF (7.9% WACC, 2% terminal growth).
• The target price is set at EUR36, with the current price at EUR28.80.

Risks and Challenges

• Weaker steel prices could erode earnings.
• Higher raw material costs may limit earnings growth.
• Political influence in steel trade could disrupt markets.
• Project development delays and M&A risks are also noted.
• FX rate fluctuations and commodity price shocks could impact margins.

Main Points

• Steel prices are on an upward trend across all regions, with HRC and Plate showing significant increases.
• ArcelorMittal is recommended as a buy due to its strong financials, high FCF yield, and favorable valuation.
• The US-China trade tensions are a key factor influencing steel price dynamics.
• Protectionism and global demand are key drivers for margin expansion.
• The valuation of steel companies is based on multiple methodologies, including DCF, forward EBITDA, and SOTP.
• Industry risks include macroeconomic conditions, price volatility, and operational challenges.

Key Information

• Steel price increases have been observed in HRC, Plate, and Rebar in Northern Europe, Southern Europe, Turkey, and the United States.
• Iron ore and coking coal prices have also seen positive changes, with premium coking coal showing a notable increase.
• Scrap prices have risen in Europe and Turkey, with potential for further growth.
• ArcelorMittal has a strong position in the automotive sector, which is a key market for value-added steel.
• The valuation metrics include P/E, P/BV, FCF Yield, and EV/EBITDA, with ArcelorMittal showing strong performance in terms of EBITDA margin and ROE.

Summary Table

Company Profile and Valuation

• ArcelorMittal is the global steel leader with operations in five continents.
• The company has iron ore mines in Kazakhstan, Ukraine, Africa, Latin America, and North America, meeting ~50% of its iron ore needs.
• Valuation Metrics for ArcelorMittal:
  • P/E (DB): 16.2x (2018E)
  • P/E (Reported): 8.6x (2018E)
  • P/BV: 0.86x
  • FCF Yield: 13.2%
  • Dividend Yield: 2.8%
  • EV/EBITDA: 5.4x
  • EV/Sales: 0.6x
  • Net Debt/Equity: 6.6%
  • ROE: 10.9%

Income Statement Highlights

• Sales Revenue: Increased from USD63,578m to USD81,656m in 2018E.
• EBITDA: Rose from USD5,231m to USD10,723m.
• Net Profit: Increased from USD-8,171m to USD5,363m.

Cash Flow and Balance Sheet

• Free Cash Flow (FCF): Increased from USD-175m to USD4,595m.
• Net Debt: Decreased from USD15,684m to USD-129m in 2018E.
• Shareholders’ Equity: Rose from USD25,272m to USD53,786m.

Key Risks

• Macroeconomic conditions affecting global growth.
• Steel price volatility impacting margins.
• Rising raw material costs limiting profit growth.
• Protectionist policies altering trade dynamics.
• Project delays and M&A risks.
• FX rate fluctuations affecting earnings.

Conclusion

The steel industry is experiencing strong price momentum and potential for margin expansion. ArcelorMittal stands out as a buy recommendation due to its strong cash flow, attractive valuation, and value-added market presence. However, the industry faces risks from global economic conditions, price volatility, and protectionist policies, which could impact demand and profitability. The US-China trade dynamics are a key factor to monitor, as they may influence steel trade flows and price differentials.