US Metals & Mining Americas/United States Equity Research ...

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6 October 2016Americas/United States

Equity ResearchMetals & Mining

US Metals & Mining SECTOR FORECASTResearch Analysts

Curt Woodworth, CFA212 325 5117

[email protected]

Serena Rocha Calejon212 325 3482

[email protected]

Gayle Podurgiel, CFA212 325 6568

[email protected]

In Search of Price Bottom – Mini Down-Cycle Set to End in November as Global Arb ClosesWe are publishing a new price deck for steel in the US and are modestly lowering our medium term views owing to the sharper than anticipated decline in hot rolled sheet. We have made minor changes to our outlook for value add sheet. We now forecast 4Q-16 HRC/CRC at $510/720 per ton, which is near the current spot price level. We expect the market to tighten more in early 2017 due to restocking, cost push inflation (higher scrap and coking coal), seasonal demand strength, and lower imports due to the circumvention petition and the lower global arbitrage. We are making changes to our EPS estimates, as outlined inside. We revise our NUE TP to $52 (from $55) and reinstate coverage of CLF with an Underperform rating and $2 TP.■ Flat Rolled Freakonomics: The US value add sheet market is structurally

significantly more attractive relative to the commodity hot band market owing to a more consolidated market base, greater import protection levels, and stronger demand side fundamentals which has driven value add rolling mills to well above 90% utilization rates. CRC-HRC spreads have continued to expand supporting our views for continued scarcity premiums going forward for value add sheet. While EAFs have ~50% of sheet volumes tied to HRC, that figure is less than 15% for most integrated mills today following blast furnace curtailments at end of 2015.

■ Vietnam Case a Major Catalyst: Having consulted with trade law experts, we believe the US has a very strong case to make against Chinese transshipping through Vietnam. The DOC will make a decision before November 6th and we see a strong chance that that a preliminary judgment will be made at that point in time. The August trade data from Vietnam was very bearish showing over 1.0mmt runrate in total sheet exports to the United States (note China was ~2.0mt at its peak rate).

■ Sentiment Very Bearish: US demand has weakened over the past several months owing to destocking, seasonal softness, rising import levels, and weaker end market pull from auto and energy. The correction in the market was widely expected but the pace of decline in HRC (not value add sheet) was modestly worse than the market expected. Global prices have surprised to the upside with trade case momentum taking hold in Europe and China benefiting from stable demand, consolidation, capacity restrictions, and cost push from higher in coking coal prices. Higher bulk material prices should support scrap prices and steepen the global cost curve relative to the US which has captive bulk material supply sources.

■ Stock Picks: Are best long ideas remain US Steel, AK Steel and Steel Dynamics. We rate NUE and CMC Neutral on rebar / MBQ weakness. We rate CLF Underperform owing to very bearish CS iron ore price forecasts.

6 October 2016

US Metals & Mining 2

In Search of a Price Bottom – October to Mark LowThere is no debating that supply / demand fundamentals for the domestic flat rolled market has certainly weakened more than expected over the past month as destocking, macro weakness, seasonality, and rising import levels all contributed to the downdraft seen in lead times and sheet price levels. Mills have responded by aggressively cutting production and are expected to see more significant downtime for maintenance in 4Q-16, which should continue to be impacted from rising import levels and normal seasonal weakness. The US arbitrage window was most wide open from June to August suggesting imports will likely peak by November given ~4-5 month lead times. We expect import rate of change to shift sharply back to the negative delta by January owing to the sharply narrow arbitrage in hot rolled sheet and virtual halt to value add sheet imports from Vietnam, which achieved an annual runrate in sheet exports of 1.0mt in August relative to China's runrate near 2.0mt though much of 2014 and 1H 2015.

Figure 1: Credit Suisse U.S. Steel Price Deck

3Q16e 4Q16e 2016e 1Q17e 2Q17e 3Q17e 4Q17e 2017e 2018e 4Q16e 2016e 1Q17e 2Q17e 3Q17e 4Q17e 2017e 2018eFlat Rolled Products Hot Rolled Sheet $/st 586 510 518 520 530 500 510 515 495 575 538 550 530 530 510 530 520 Cold Rolled Sheet $/st 805 720 712 700 680 680 680 685 660 770 723 730 690 680 650 688 650 Hot Dipped Galv $/st 860 780 769 760 740 740 740 745 730 820 780 780 740 720 690 733 700 Plate $/st 576 520 546 530 540 540 550 540 570 630 590 630 620 620 620 623 616Long Products Structural Beam $/st 669 640 642 630 650 650 650 645 670 650 638 630 630 630 630 630 640 Rebar $/st 554 480 519 470 500 500 500 493 515 525 530 520 520 510 500 513 515 Wire Rod $/st 632 475 576 470 470 470 470 470 460 475 539 470 470 470 470 470 460 Merchant Bar $/st 614 580 589 570 570 580 580 575 600 610 596 600 600 600 600 600 610Raw Materials Busheling Scrap $/lt 262 225 230 240 240 240 240 240 230 265 244 235 235 235 235 235 225 Shredded Scrap $/lt 226 215 221 235 235 225 225 230 240 245 236 215 215 215 215 215 210 IODEX $/mt 58 55 53 48 52 40 40 45 40 40 44 45 45 35 35 40 40

New CS Deck Previous Forecasts

Source: Credit Suisse estimates, CRU, AMM

The sentiment in the market remains weak owing to very short lead times for hot rolled sheet and generally stable end demand. The end use channel has been destocking aggressively over the past several months in effort to buy cheaper in the following monthly or quarterly contract cycle. Historically the fourth quarter is usually a soft quarter from a price basis owing to year end destocking efforts, November and December holidays, and impact from weather. However, globally the market is experiencing a reflation trade owing to trade case impacts and a surge higher in the seaborne coking coal market, where spot prices continue to move higher despite Chinese efforts to improve domestic liquidity.

Historically, a spike in bulk material markets results in sharp cost push steel price inflation and drives up the price of scrap given its interplay in both EAF and blast furnace usage. China steel margins have come under pressure as the Chinese spot coke price has risen ~$80/tonne since June relative to the $35/tonne move up in the steel price.

US scrap have values have trended lower during this time period reflecting the very weak demand pull from US EAFs and integrated mills. We note that integrated mills use ~20-25% scrap charge in the US. We expect that scrap prices will start to move higher in November owing reduced collection rates (both seasonal and from weak prices), higher prices for China billet and Turkish scrap, and restocking needs among EAFs. In our view HRC prices are likely to remain range bound near $500-520/ton through year end with value add sheet prices range bound as well. The sharp decline expected in imports from Vietnam coupled with potential demand pull from rolling operations that used this substrate

6 October 2016


(California Steel - CSI) could tighten up the market heading into auto contract but this is not our base case.

We note that CSI recently closed its galvanized order book for the year. We understand that integrated lead times for CRC and coated products is still near 7-8 weeks and thus supportive of strong price levels vis a vis hot rolled sheet.

It is important to note that on December 1 of last year CRC spot was trading at $485/ton (and $520/ton on November 1). Both Platt's and CRU peg spot CRC at ~$730/ton today with SMU quoting a lower number at $715/ton. Overall automotive demand remains solid in the US and mill level economics are very favorable at any CRC price near $650-700/ton in our view. In our view hot rolled sheet accounts for less than 5% of total EBITDA at AK Steel and less than 10% of EBITDA at US Steel.

The three major integrated mills control the vast majority of the value-add sheet contract market in the U.S. and are the major players in the spot coated market. In our view the structural dynamics affecting the value add sheet market are now significantly different than the hot rolled market owing to integrated mills exiting the hot rolled market via substantial blast furnace shutdowns and trade case protection that is far more substantive and effective relative to hot rolled sheet, the most fungible and over-capacitized sheet product globally.

Figure 2: CRU Price Data and CS Forecasts$/ton

CRU Average Price Levels1Q-15 2Q-15 3Q-15 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16e 1Q-17e

HRC 530 453 457 385 402 569 585 510 520CRC 666 575 586 515 559 757 804 740 700HDG 734 648 653 572 616 814 859 780 760

SpreadsCRC-HRC 136 122 129 130 158 188 219 230 180HDG-CRC 68 72 67 57 57 57 56 40 60

Q/Q Delta -77 4 -72 16 167 16 -75 10-90 11 -71 44 197 47 -64 -40-86 6 -81 44 198 46 -79 -20

AVERAGE -84 7 -75 35 187 36 -73 -17

Source: CRU, Credit Suisse estimates

The fact remains that despite the sharp deterioration in fundamentals over the past several months, value add sheet prices have remained relatively resilient post the shortages experienced in early summer and spreads versus HRC have actually widened further. This dynamic runs contrary to most analyst expectations which had forecast spreads to narrow significantly by year end owing to the wide import arbitrage. Clearly, value-add sheet prices remain under pressure currently owing to the sharp decline in busheling scrap and impacts from seasonality and destocking. According to CRU data as of October 5th, CRC prices have declined $83/st since end of August while HDG has declined by $63/ton.

What the Micro Data Is Telling UsWe received the Platt's data sets this Wednesday which provided volume data for August for the US industry both by product type and end market classification. The data was correlated to the MSCI data as AISI hot rolled sheet demand remains very weak with volume growth negative 3% in July and up 2% in August, reflecting weak energy demand

6 October 2016


primarily. Cold rolled has been much stronger up on average 7% the past two months while domestic coated product volumes have been roughly flat y/y in the same time period. In our view hot rolled sheet is generally more exposed to destocking event relative to value add sheet owing to a significantly higher proportion of volume flowing through the service center channel, which partly explains the greater demand side weakness (in addition to high energy tube exposure).

Figure 3: AISI Total Shipments Growth Turned Negative in July and AugustAISI Construction Shipments (y/y growth - 2mma) AISI Energy Shipments (y/y growth - 2mma)

AISI Ag Shipments (y/y growth - 2mma) AISI Automotive Shipments (y/y growth - 2mma)

AISI Industrial Shipments (y/y growth - 2mma) AISI Total Shipments (y/y growth - 2mma)

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AISI Construction Shipments(y/y growth - 2mma)

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AISI Automotive Shipments(y/y growth - 2mma)

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35%


AISI IndustrialShipments (y/y growth -2mma)

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AISI Total Shipments(y/y growth - 2mma)

Source: Company data, Credit Suisse estimates

6 October 2016


Figure 4: Credit Suisse U.S. Flat Rolled Supply / Demand ModelUS$ in millions, unless otherwise stated

2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16 Apr May Jun 2Q16 Jul Aug Sep-E 3Q16e 4Q16e 2016e

Domestic AISI Volumes

Hot Rolled Sheet 22.8 5.1 5.3 5.3 4.9 20.6 5.3 1.9 1.9 1.9 5.7 1.8 1.9 1.8 5.4 5.5 21.9

% yoy 5% -6% -8% -9% -15% -10% 4% 13% 11% -2% 7% -3% 2% 9% 2% 13% 6%Cold Rolled Sheet 11.8 2.6 2.7 2.7 2.5 10.5 2.5 1.0 1.0 1.0 3.0 1.0 1.0 0.9 2.9 2.7 11.2

% yoy -4% -10% -15% -8% -10% -11% -7% 17% 16% 9% 14% 5% 9% 7% 7% 7% 6%Coated Sheet 18.2 4.4 4.5 4.6 4.4 17.7 4.3 1.6 1.6 1.6 4.7 1.5 1.6 1.6 4.7 4.7 18.4

% yoy 2% 1% -2% 1% -5% -3% -1% 10% 11% -2% 6% -4% 2% 6% 2% 6% 4%All Other Sheet 8.8 1.7 1.5 1.6 1.4 6.3 1.3 0.4 0.4 0.5 1.3 0.5 0.5 0.5 1.5 1.4 5.5

% yoy -1% -19% -32% -30% -34% -29% -26% -14% -9% -12% -12% -17% -11% 0% -9% 2% -12%Total Value Add Sheet 30.0 7.0 7.1 7.4 7.0 28.2 6.8 2.6 2.6 2.6 7.7 2.4 2.7 2.5 7.6 7.4 29.6

% yoy 0% -4% -7% -2% -7% -6% -3% 13% 13% 2% 9% -1% 5% 6% 4% 6% 5%Total Domestic Sheet 61.6 13.8 14.0 14.3 13.3 55.1 13.3 4.9 4.9 5.0 14.8 4.7 5.0 4.9 14.6 14.4 57.0

1% -7% -11% -9% -14% -11% -3% 10% 10% -1% 6% -3% 2% 7% 2% 8% 4%US Product Utilization Rates

HRC 85% 76% 77% 79% 75% 78% 76% 83% 85% 86% 85% 81% 86% 83% 83% 82% 82%

CRC 92% 81% 83% 84% 78% 82% 81% 90% 92% 92% 91% 87% 90% 85% 88% 87% 87%

Coated 87% 83% 85% 88% 84% 84% 86% 93% 94% 95% 94% 88% 98% 95% 94% 92% 91%

DOC Import Data

HRC 4.5 1.2 1.0 1.0 0.9 4.0 0.9 0.2 0.3 0.2 0.7 0.3 0.3 0.3 0.9 0.8 3.3

CRC 3.1 0.8 0.8 0.7 0.6 2.9 0.6 0.2 0.2 0.2 0.6 0.2 0.3 0.3 0.8 0.8 2.7

Coated 4.5 1.2 1.2 1.1 0.9 4.5 0.9 0.3 0.3 0.4 1.1 0.4 0.4 0.4 1.1 1.1 4.1

Total Sheet Imports 12.1 3.2 3.0 2.9 2.4 11.5 2.3 0.8 0.8 0.8 2.4 1.0 0.9 0.9 2.7 2.6 10.1

Import Deltas Y/Y

Annualized Rate Total Sheet (y/y) 4.4 2.8 0.5 -1.5 -4.3 -0.6 -3.5 -2.9 -2.6 -1.2 -2.3 -0.8 -1.6 0.6 -0.6 1.0 -1.4

- HRC 45% 21% 2% -17% -34% -10% -27% -25% -20% -33% -26% 11% -34% -8% -12% -7% -19%

- CRC 79% 42% -1% -13% -39% -8% -31% -29% -22% 3% -18% -7% 12% 6% 3% 29% -7%

- Coated 54% 27% 9% -6% -21% 1% -26% -20% -21% 2% -14% -19% -6% 19% -4% 15% -9%Total Sheet Imports (y/y%) 56% 28% 4% -12% -31% -5% -27% -24% -21% -11% -19% -7% -13% 6% -5% 11% -12%

US Apparent Demand

HRC 27.2 6.3 6.3 6.3 5.8 24.6 6.1 2.1 2.2 2.1 6.4 2.2 2.1 2.0 6.3 6.3 25.2

CRC 14.9 3.5 3.4 3.5 3.1 13.4 3.0 1.2 1.2 1.2 3.6 1.2 1.3 1.2 3.7 3.5 13.8

Coated 22.7 5.6 5.7 5.8 5.3 22.2 5.2 1.9 1.9 2.0 5.8 1.8 2.0 2.0 5.8 5.7 22.5

Total Sheet Products 64.9 15.3 15.4 15.6 14.2 60.3 14.4 5.2 5.3 5.3 15.9 5.2 5.4 5.2 15.8 15.5 61.6

US Demand Growth Rates

HRC 10% -2% -6% -10% -19% -10% -2% 7% 6% -6% 2% -1% -5% 6% 0% 10% 2%

CRC 7% -2% -12% -9% -17% -10% -12% 5% 7% 8% 7% 2% 10% 7% 6% 11% 3%

Coated 9% 6% 0% 0% -8% -2% -6% 3% 3% -1% 2% -7% 1% 8% 0% 7% 2%

Total US Steel Products 9% 1% -5% -7% -15% -7% -6% 5% 5% -2% 3% -3% 1% 7% 2% 9% 2%

MSCI Data

Flat Rolled Volume 28.0 6.8 6.8 6.5 5.9 26.0 6.5 2.2 2.2 2.3 6.7 2.0 2.3

Flat Rolled Inventory 5.8 6.1 5.7 5.8 5.6 5.6 5.1 4.9 4.8 4.8 4.8 5.0 5.0

Industry Stock Chg 3.5x Mulitpler 3.1 3.0 1.9 1.4 -0.6 -0.6 -3.3 -3.2 -3.3 -3.0 -3.2 -2.7 -2.7

Y/Y Growth in Shipments 4% -2% -8% -8% -10% -7% -6% -3% 1% 0% -1% -10% 5%

Inventory % of Annualized Volume 21% 22% 21% 22% 24% 22% 20% 19% 18% 17% 18% 21% 18%

SMU Lead Time Data

HRC 4.4 2.7 3.7 3.3 3.0 3.2 3.8 4.9 5.4 5.0 5.1 4.0 3.7 3.2

CRC 6.6 4.8 5.5 5.6 4.9 5.2 6.3 7.6 7.9 7.4 7.6 6.6 6.0 5.6

Coated 6.6 5.6 6.0 6.6 6.1 6.1 6.6 8.1 8.4 8.3 8.3 7.2 6.8 6.2

Source: SMU, CRU, MSCI, DOC, Credit Suisse estimates

6 October 2016


Imports have not been as much as headwind as many in the market have projected as August and September average import rates are actually down 7% relative to the 1Q-16 rate for HRC compared with up 39% for CRC and 18% for coated. In our view, the price action in the market has been driven primarily by weakness in scrap, destocking, and seasonality. While imports could move higher over the next several months owing the long lead times associated with import orders placed over the summer, the September license data supports are view that rate of change is plateauing. Furthermore, we understand that many trade companies are cancelling orders of Vietnamese sheet which could result in a potential restocking need among end users before year end in our view.

Figure 5: US Blast Furnace Production Has Turned Sharply Lower Y/YYear on Year Chg in US Steel Production

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US BOF Raw Steel Production (y/y %)

Total Raw Steel Production (y/y %)

Source: AISI.

Figure 6: Despite Integrated Cuts, Spreads to China Are Now Below Fair ValueMt $/ton

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US HRC spreat to China ($/st)


The lower scrap price has likely be the key driver of the most recent downturn as busheling prices have fallen from ~$270/lt in early June to $200/lt in early October including the $25/lt decline in the bid week. In our view scrap prices have reached a

6 October 2016


bottom and will trend higher in November and December as obsolete scrap is impacted from seasonally lower collection rates as well as price elasticity. It is our understanding that scrap recycler economics are severely challenges at shredded scrap values near $200-210/lt. However, the decline in scrap does beg the question of what caused such a large price decline given the backdrop of stable iron ore prices and the sharp spike in coking coal values. Much of the reason likes in weaker US demand from destocking as well as sharply lower Turkish scrap values which have been impacted weakness from the political crisis and Chinese aggressive dumping of rebar into MENA which has depressed rebar production and willingness to pay fair value for scrap.

Cost Push Deflation a Risk in OctoberGiven weak lead times, seasonal demand weakness, destocking, and a relatively wide import arbitrage the EAF producers have had little choice but to pass along the scrap cost savings to end users. However, it is important to note that metal spreads for EAFs remain very wide on a historical basis and even with HRC at $500/ton metal spreads using a shredded cost basis are still near $300/ton today, which reflects a strong market environment. While the EAFs have room to lower sheet prices further they are mindful of cannibalization of the value add sheet market as they also have plenty of skin in the game for upcoming contract resets and new automotive / appliance business to be won. Also the strategy among EAFs to acquire downstream tubing operations will potentially tighten the market as they source all their hot rolled substrate internally and push out whatever import buy was previously utilized.

Figure 7: US Lead Times Confirm Demand Side Weakness Post Labor DayUS flat rolled lead times

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HRC CRC Galvanized

Source: SMU.

While concerns on automotive remains at the forefront of most investors' minds, the potential recovery in energy and construction markets are likely to be very supportive factors for the U.S. steel industry in 2017, especially if infrastructure spending were to accelerate. We expect a sharp rebound in energy tube demand by mid-2017 given the recovery in the rig count and aggressive moves by the channel to destock given the sharply lower HRC price trend (and therefore OCTG).

The challenge with price forecasting that there are some many variables up in the air right now as new supply enters the US market (Big River, MT Calvert ramp), supply exits the market (HRC arb closed, Vietnam), domestic prices remain challenged while Europe and China trend higher, the duration of the coking coal price spike and cost push inflation tied

6 October 2016


to seaborne consumers (ie Europe and Asia), the impact of European trade cases and other cases against China (39 cases in process or recently finalized), and widely expected weakness in the iron ore market come 2017.

We note that the supply side remains well balanced in our view from blast furnace production cuts, EAF outages in 4Q-16, and limited impact from Big River. Big River is likely to ramp up HRC production in January and CRC production in April and we don't expect them to reach scale until mid-2018 at the earliest. Also note that MT's restart of IHW#3 BF was to feed slab into the Calvert rolling mill and MT is reducing hot mill capacity in Indian Harbor.

Figure 8: 2Q Was Solid Volume Quarter for US Industry as Imports Fell Mt Import Share %

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US Domestic Sheet Volumes

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Source: AISI, DOC

Finally, investors also need to add into the equation global macro risks around US Dollar strength as the Fed starts to raise rates, potential recession risks in 2018, and China macro risks. Steel industry equity investors have often been a shoot first and ask questions later trading philosophy, however, real structural changes are underway in the US, European, and Chinese market which position the industry for much higher through the cycle margins going forward in our view.

Scrap Is Critical to Near Term Price TrendIn our view, the single most important dynamic in the US is the direction of scrap and the outcome of the US trade petition contending transshipment of value add sheet through Vietnam by China. We continue to believe the sharp increase in coking coal prices likely has more staying power than the market realizes and that the sharp steepening of the cost curve in Asia and Europe is fundamentally bullish for US steel prices. While the bears will argue that the US price arbitrage is already too high to be impacted by rest of world cost inflation, we disagree.

Note that US hot rolled sheet prices have traded down to $500/ton spot relative to European prices which now stand at $415/ton and MT's recent price increase would bring European prices to $440/ton. Chinese hot rolled prices which have yet to fully pass on the coking coal price spike are trading at $380/ton, suggesting a full landed value near $480/ton. Thus the import arbitrage is very closed for hot rolled in our view and sets the stage for much lower import levels in 1Q-16. We note that Europe accounted for 20% of

6 October 2016


total US hot rolled imports in 2015 and 33% in 2014 before the crowding out effect from Asia. Asia accounted for 32% of total hot rolled sheet imports in 2015 and 29% in 2014.

Thus, the global arbitrage window is saying that US hot rolled sheet is moderately undervalued in our view however the cost curve in the US (ie EAF metal spreads at $300/ton) is saying US HRC is at fair value. It is the supply / demand balance in the US by product line which ultimately determines where on the US or global cost curve the product will trade. When the market gets oversupplied the price tends to base around the US EAF cost curve (ie scrap plus variable costs) and when the market is balanced or in deficit the price is often based on relative value to rest of world with premiums moving beyond $200/ton in a deficit market condition.

Clearly the US hot rolled sheet market is not in deficit and likely in modest surplus however based on our imputed figures for US cold mill and coating line capacity, utilization rates are still running above 90% and thus allowing those products to maintain scarcity value premiums to rest of world.

Figure 9: HRC Metal Spreads Back to Fair Value $/ton

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Also we have written in the past how not all import tons are created equal and buyers of import steel have significantly different parameters sets both by country of origin and product category. For example most service centers we talk we note that on the value add side just in time delivery and perfect product quality are vital preconditions for any import buy and given the much longer lead times relative to hot rolled, landed discounts need to be at least $50-100/ton. The discounts can widen further if the supplier is view as being higher risk but often these buyers won't take such risks. Most traders we talk with uniformly agree that finding new reliable seaborne suppliers to replace China, Kore, and Japan on the value add side of the market is an immense challenge and one that will not be completely solved for.

Prices a Multi Variable Equation with 3 Key ComponentsWe believe the market is correct to focus on the import datasets but in our view imports only account for 25-30% of the factors that determine scarcity value for steel in the US. Strong US price levels are almost always driven by domestic factors which allow the arbitrage to open in the first place. In the past, strong demand side growth has allowed US

6 October 2016


to maintain a strong price premium to global even with elevated import levels. Localized supply dynamics also play a major role in supporting wider spreads to global as was evident in 2014 when numerous blast furnaces in the US experienced unplanned outages and supplies were restricted from the polar vortex. We outline the three key factors below, and our view of their path ahead.

■ Demand: US demand should remain supportive for the sheet market going forward as energy and construction demand recovers in 2017. While automotive demand is likely near a medium term peak, we don't forecast meaningful weakness ahead while HVAC and appliance demand looks well supported. Note that US coating capacity continues to operate near effective capacity at 95% with CRC lines above 90%.

■ Local Supply: US integrated mills have reduced capacity by ~7-8mt in the past 12-18 months with the vast majority of blast furnaces idled likely to remain out of the market through the end of 2017, given high exposure to HRC products. The supply chain is operating with very low inventories and will likely need to restock at some point in 2017. We estimate destocking negatively impacted US mill volumes by 2-3mt in 2015. EAFs have captured most of this lost HRC market share from US integrated suppliers. Note US integrated production is off ~2mt or 7% YTD despite the sharp recovery in price levels. Based on product mix, we estimate integrated mills have shipped 3.2m fewer tons of flat rolled steel on an annualized basis, compared to the prior year.

■ Import Supply: Imports will increase from relatively low levels over the past several months but not surge higher at year end in our view. Our analysis of recent import trends and channel checks with traders shows that import availability from reliable sources are nearly maxed out, particularly in Asia ex-China. As a result, incremental imports from these sources are likely to be only on marginal volumes. Imports from alternative sources are also for the most part limited to smaller orders in the near term as buyers look to test out quality and reliability.

Figure 10: Key Drivers of Market Balance in Flat Rolled ProductsMt, $ton for steel price data

Actual Actual Actual CSe Bear CaseMarket Driver 2014 2015 2016YTD 2016 2016US Demand (mt) 64.9 60.5 60.3 60-62 mt 59-60 mtUS Demand YoY 9% -7% -0.4% flat to better flat to worseDomestic Supply YoY 2% -7% 7% up LSD up HSDImports YoY 56% -5% -22% -15-20% -5-0%MSCI Avg Inventories YoY (kt) 508.9 412.3 -831.1 -400 kt YoY -800 kt YoYChina Domestic HRC (H1 avg-H2 avg) 516-484 388-300 338 340 300

Value-Add Premium to GlobalCRC 177 162 273 175-225 150Galv 176 177 256 175-225 150

Import Tipping Point


Import Supply: Expect Gradual AdjustmentWhile we do expect new sources of imported flat rolled steel to continue arriving in the US, we believe it is unlikely that we'll see a disruption in the same order of magnitude as 2014-2015, at least not in the near term, particularly as it pertains to value-add sheet. Based on

6 October 2016


channel checks with steel traders, we believe that reliable seaborne capacity of cold-rolled and galvanized capacity is likely tapped out for now as countries like Vietnam have already maximized their exposure to the US market. As an example, Vietnamese exports to the US have increased from 18% of all exports in 1Q-15 to 79% in the first quarter of this year, per our estimates. As a result, we believe additional tons from these suppliers will probably to be on marginal volumes.

Figure 11: Trade Protection Eliminated "Bad Actors" From US Value-Add Market

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As evidenced by trade data, trade cases have successfully eliminated some source countries from the US value-add market. China in particular has been essentially blocked, with CRC AD / CV duties at 256% / 266% respectively, and coated duties of 39% / 210% respectively. As a result, CRC imports from China were 240kt lower in Q2-16 compared to the prior year; coated imports were 298kt lower. After ocean freight, handling and other fees, and CV / AD duties, the gross net back for Chinese product ranges around ~$2,943/st of CRC and $1,852/st of cold rolled.

As expected, new sources of supply have emerged, as we show on Figures 12 , 13 and 14.

6 October 2016


Figure 12: Recent Trends in HRC Imports – Trade Case Countries vs. New Sources

Trend (Jan-14 start) August Jul

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Hot Rolled - Total 263,754 347,689 284,904 292,080 -34% 46% 42% 21%

Korea, South 70,672 131,796 108,544 80,454 -18% 59% 38% 73% 24% 34%Brazil 184 92 1,386 23,269 -100% -77% -93% -100% 12% 0%Japan 18,256 53,904 20,306 22,039 -59% >500% >500% 178% 8% 9%Netherlands 11,506 16,887 11,626 16,158 -55% 62% 80% 5% 7% 5%Australia 0 0 0 15,207 -100% nm nm -100% 6% 0%Turkey 10,204 25,188 8,414 9,675 61% >500% >500% 201% 5% 4%United Kingdom 227 252 265 4,838 -93% -22% 0% -95% 3% 0%Trade case subtotal 228,119 96,904 110,258 166,933 -18% 135% 107% 37% 65% 51%

Canada 100,154 87,339 96,652 78,223 22% -10% -9% 13% 20% 34%Belgium 2,456 1,488 4,519 3,194 10% -72% -69% -55% 1% 1%Italy 15,644 498 4,020 1,651 >500% -96% -88% -71% 0% 3%

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Figure 13: Recent Trends in CRC Imports – Trade Case Countries vs. New Sources


Prev. 3M Avg

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Cold Rolled - Total 277,540 246,037 221,741 211,630 22% 10% 17% 18%

China 619 1,243 1,517 18,750 -98% -11% -75% -94% 23% 0%Brazil 1,999 2,871 1,830 10,509 -95% 151% 113% -74% 9% 1%Korea, South 19,475 15,572 14,967 15,123 39% 27% 20% 3% 7% 6%Japan 4,861 5,353 6,147 8,233 -57% -7% -12% -37% 5% 2%United Kingdom 7,760 10,115 11,992 10,312 -42% -10% -14% -2% 5% 4%India 1,630 1,628 1,788 1,778 -28% -27% -1% -9% 3% 1%Russia 0 0 0 4,554 -100% nm nm -100% 3% 0%Trade case subtotal 36,782 34,081 38,863 71,965 -71% 8% -5% -49% 55% 14%

Vietnam 87,469 36,394 36,389 20,210 >500% 4% 12% 93% 2% 21%Australia 12,846 21,378 7,245 3,697 >500% >500% >500% >500% 1% 5%Turkey 6,778 20,339 13,786 8,429 >500% 25% 76% 174% 1% 6%Taiwan 7,903 10,402 7,182 5,626 96% 116% 91% 99% 2% 3%New Sources subtotal 88,514 56,376 50,939 33,748 >500% 57% 74% 162% 6% 35%

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Figure 14: Recent Trends in Galv Imports – Trade Case Countries vs. New Sources


Prev. 3M Avg

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Galv. - Total 362,136 368,281 364,170 339,649 -6% -3% 4% 9%

China 1,417 1,234 1,209 16,375 -97% 18% -18% -93% 17% 0%India 0 18,560 7,538 13,878 -100% >500% 172% 38% 7% 2%Italy 5,903 652 1,569 6,697 -24% -82% -85% -91% 4% 1%Korea, South 49,730 68,943 58,624 53,398 58% 19% 44% 32% 16% 16%Taiwan 54,878 53,055 55,650 42,734 -34% -22% 10% 27% 15% 16%Trade case subtotal 142,444 132,562 108,459 132,301 -29% 7% 31% 8% 92% 52%

Vietnam 28,680 20,903 25,515 14,725 >500% -22% -13% 47% 1% 7%Japan 6,367 12,870 10,442 9,286 -28% 20% 42% 43% 2% 3%South Africa 11,386 15,514 9,946 9,403 55% 36% 32% 74% 1% 3%Netherlands 5,597 10,284 9,378 5,920 -6% 30% 43% 85% 1% 2%Germany 8,548 8,178 10,123 7,001 102% -24% -14% 18% 1% 2%New Sources subtotal 67,749 67,682 61,576 44,551 143% 0% 10% 52% 10% 26%

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Figure 15: Credit Suisse U.S. Steel Valuation Table

Source: Company data, Credit Suisse estimates, Thomson Reuters Datastream

6 October 2016


Americas/United StatesSteel

United States Steel Corp. (X)Rating OUTPERFORM [V]Price (06-Oct-16,US$) 17.93Target price (US$) 29.0052-week price range 27.49 - 6.67Market cap (US$ m) 2,969.46*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.[V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts


[email protected]


[email protected]


[email protected]

Mid-Cycle Earnings Power UnderappreciatedWe believe the Street is overly bearish on US Steel's ability to generate meaningful EBITDA and FCF under a $500/ton environment for US HRC prices. We estimate that HRC accounts for ~5-10% of total EBITDA for X. We also believes the Street underestimates the earnings leverage X has to a recovery in energy markets (very high OCTG incremental margins and substrate pull through from mill segment) as well as the potential asset sale of USSE, which we value at ~$1.2bn. Across the US and Europe, X has ~6.5mt of contract exposure and 9.5mt of spot exposure. Below we run through our assumptions for next year to bride our $1.15bn EBITDA target. We start from the implied $1.6bn annual runrate EBITDA guide from 2Q-16.

■ ASP EBITDA Impact of Negative $450mm: We assume negative US spot price impact of $830mm ($120/t x 6.9mt) offset by positive Euro impact of $110mm (spot up $45/t). US annual contracts should reset up $50/ton with Europe up $30/ton (total benefit of $300mm). Note US automotive contracts fell on average by $70-80/ton in 2016 based on industry checks.

■ Coking Coal a $240mm Headwind: US Steel buys ~5.5mt in the US and 2.0mt in Europe with US prices estimated up $25/ton and Europe up $50/ton.

■ Conversion Costs and JV Income a Positive $200mm: US Steel has ~$150mm of carryover savings into 2017. The 2.2mt of JV rolling mill interest should contribute additional $50mm on annual contract resets.

■ US Flat and Tubular Volumes a $125mm Positive: Tubular division forecast to cut EBITDA loss by ~$100mm in 2017

Share price performance

X.N S& P 5 0 0 IN D EX

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On 06-Oct-2016 the S&P 500 INDEX closed at 2160.77Daily Oct08, 2015 - Oct06, 2016, 10/08/15 = US$12.62

Quarterly EPS Q1 Q2 Q3 Q42015A -0.07 -0.79 -0.70 -0.232016E -2.15 -0.31 0.71 0.552017E 0.41 0.74 0.58 0.52

Financial and valuation metricsYear 12/15A 12/16E 12/17E 12/18EEPS (CS adj.) (US$) -1.79 -1.00 2.25 2.30Prev. EPS (US$) - 0.24 3.72 4.71P/E (x) -10.0 -17.9 8.0 7.8P/E rel. (%) -54.6 -97.9 49.2 54.0Revenue (US$ m) 11,574.0 10,439.7 11,557.0 12,247.9EBITDA (US$ m) -508.0 594.7 1,145.2 1,184.9OCFPS (US$) 2.46 4.95 3.91 5.08P/OCF (x) 3.2 3.6 4.6 3.5EV/EBITDA (current) -10.4 8.9 4.6 4.5Net debt (US$ m) 2,406 1,604 1,458 1,100ROIC (%) -24.48 2.80 13.94 13.86

Number of shares (m) 165.61 IC (current, US$ m) 4,953.00BV/share (Next Qtr., US$) 15.8 EV/IC (x) 1.1Net debt (Next Qtr., US$ m) 1,741.0 Dividend (current, US$) -Net debt/tot eq (Next Qtr.,%) 71.0 Dividend yield (%) -Source: Company data, Thomson Reuters, Credit Suisse estimates

6 October 2016


US Steel Equity Trading Dynamics

Figure 16: US Steel Historical Trading Pattern in Major US Steel HRC Up and Down Cycles Since 2010down up down up down up down up down up down

Cycle start date 5/10/2010 11/9/2010 4/4/2011 11/8/2011 2/13/2012 5/28/2013 1/13/2014 3/25/2014 7/27/2015 12/8/2015 6/20/2016Cycle end date 11/8/2010 4/3/2011 11/7/2011 2/12/2012 5/27/2013 1/12/2014 3/24/2014 7/26/2015 12/7/2015 6/19/2016 9/12/2016HRC price change -26% 71% -31% 21% -23% 20% -8% -25% -24% 80% -11%HRC price change ($/st) -179 368 -270 130 -165 112 -57 -152 -113 283 -72X price change -14% 15% -49% 7% -37% 55% -2% -41% -58% 154% -5%Up/Down cycle duration (days) 182 145 217 96 469 229 70 488 133 194 84


Figure 17: US Steel Price Trends relative to US Spot Hot Rolled Sheet

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6 October 2016



AK Steel Holding Corp. (AKS)Rating OUTPERFORM [V]Price (06-Oct-16,US$) 4.61Target price (US$) 8.0052-week price range 6.70 - 1.83Market cap (US$ m) 1,098.08*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.[V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts


[email protected]


[email protected]


[email protected]

Equity Value Is in the Value Add Mix (and FCF)AKS Steel has significant leverage to stainless, electrical, and coated markets which have all inflected strongly higher during 2016 and set the stage for much better price levels as annual contracts are set for 2017. While ~75-80% of AKS volumes are set on annual contract the vast majority of that exposure is in the value add and specialty categories, where AKS has a very strong market position. The company has quietly reinvented itself over the past year via the idling at Ashland, significant upgrades made at Dearborn, system wide cost reductions, and enhancing their position in auto via market share wins and a best in class next gen steel pipeline.

■ Recent Selloff a Compelling Opportunity: We don't believe AKS will need to raise equity in the medium term and believe US sheet fundamentals are near a bottom following the ~$100/ton move down in prices since the end of July. We note AKS sources ~400kt of coking coal for the captive AK Coal operation and industry consultants have noted AKS settled its coking coal contracts early again this year (yet to be confirmed by AKS). With scrap prices moving lower, AKS should see significant EBITDA margin expansion in 2017, especially if AKS continues to grow their automotive volumes at 2x the industry growth rate.

■ Specialty and Value Is Added Where the Money Is Made: The automotive stainless and electrical steel markets account for 20-25% of total EBITDA for AKS. The DOC stainless case and the decision by ATI to exit the standard efficiency electrical market (~70,000 tons with only ~3 months of production in 2016) have allowed volumes to recover meaningfully in our view.

■ Valuation: We believe AKS is undervalued trading at 4.8x 2017 EV/EBITDA and 23% FCF yield. We believe the compelling FCF outlook warrant a higher multiple. Our $8 TP is based on 2017 EV/EBITDA multiple of 5.8x


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Quarterly EPS Q1 Q2 Q3 Q42015A -1.73 -0.36 0.04 -0.832016E -0.08 0.08 0.22 0.172017E 0.22 0.38 0.31 0.34

Financial and valuation metricsYear 12/15A 12/16E 12/17E 12/18EEPS (CS adj.) (US$) -2.88 0.40 1.25 1.07Prev. EPS (US$) - 0.57 1.50 1.04P/E (x) -1.6 11.6 3.7 4.3P/E rel. (%) -8.7 63.6 22.8 29.8Revenue (US$ m) 6,692.9 6,013.6 6,380.7 6,503.1EBITDA (US$ m) 394.1 467.8 700.5 670.3OCFPS (US$) 1.13 1.77 1.76 1.84P/OCF (x) 2.0 2.6 2.6 2.5EV/EBITDA (current) 7.9 6.7 4.5 4.7Net debt (US$ m) 2,298 2,133 1,882 1,615ROIC (%) 5.96 16.89 25.41 22.68

Number of shares (m) 238.20 IC (current, US$ m) 1,697.80BV/share (Next Qtr., US$) -2.7 EV/IC (x) 1.7Net debt (Next Qtr., US$ m) 2,058.8 Dividend (current, US$) -Net debt/tot eq (Next Qtr.,%) -830.0 Dividend yield (%) -Source: Company data, Thomson Reuters, Credit Suisse estimates

6 October 2016



Steel Dynamics, Inc. (STLD)Rating OUTPERFORMPrice (06-Oct-16,US$) 24.23Target price (US$) 33.0052-week price range 27.98 - 15.86Market cap (US$ m) 5,906.34*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.

Research Analysts


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[email protected]

Best-in-Class Free Cash Flow Generation Remains UnderappreciatedSteel Dynamics remains well positioned to take market share in the medium term, especially as integrated mills operate on a reduced footprint and imports have receded owing to trade cases. STLD remains the lowest cost producer in the US for sheet, in our view. We expect conversion costs to remain at multi-year lows, following the impressive performance in Q2-16, but see metal margins compressing into 2017. We are adjusting our forecasts to reflect our updated price deck. Our FY16 EBITDA estimate goes to $1.29bn (from $1.50bn). Our FY17 and FY18 EBITDA forecasts go to $1.53bn / $1.528nb (from $1.99bn / $1.91bn). We reiterate out Outperform rating and $33 target price.

■ Organic growth potential remains compelling. Steel Dynamics has significant latent capacity in both sheet and bar/beam, and may seize additional upside from product mix upgrades, as well as incremental opportunities for internal growth projects and acquisitions such as the recent Vulcan Threaded Products deal.

■ Free cash flow generation to continue. Steel Dynamics has a strong track record of through-cycle FCF generation due to its best-in-class cost position and focus on capital efficiency. We forecast FCF of $665mn in FY17 ($2.70 per share) and $778mn in FY18 ($3.16).

■ Steel Dynamics trades at 5.1x our FY16 EBITDA estimate, which we believe is below fair value in light of the historical average of 6.8x. We forecast a FCF yield of 11% in FY17, compared to 7-9% historically. Our $33 target price values STLD at 6.5x FY17 EV/EBITDA.


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Quarterly EPS Q1 Q2 Q3 Q42015A 0.17 0.13 0.25 0.092016E 0.26 0.58 0.69 0.582017E 0.70 0.78 0.68 0.54

Financial and valuation metricsYear 12/15A 12/16E 12/17E 12/18EEPS (CS adj.) (US$) 0.64 2.11 2.70 2.70Prev. EPS (US$) - 2.65 3.90 3.70P/E (x) 37.9 11.5 9.0 9.0P/E rel. (%) 206.3 62.9 55.5 62.2Revenue (US$ m) 7,594.4 8,036.1 8,569.2 8,703.5EBITDA (US$ m) 215.7 1,282.9 1,526.2 1,523.7OCFPS (US$) 4.29 2.87 3.46 3.93P/OCF (x) 4.2 8.4 7.0 6.2EV/EBITDA (current) 34.5 5.8 4.9 4.9Net debt (US$ m) 1,868 1,617 1,097 471ROIC (%) -0.99 13.25 16.56 16.84

Number of shares (m) 243.76 IC (current, US$ m) 4,412.74BV/share (Next Qtr., US$) 12.1 EV/IC (x) 1.7Net debt (Next Qtr., US$ m) 1,828.4 Dividend (current, US$) 0.56Net debt/tot eq (Next Qtr.,%) 64.6 Dividend yield (%) -Source: Company data, Thomson Reuters, Credit Suisse estimates

6 October 2016



Nucor Corporation (NUE)Rating NEUTRALPrice (06-Oct-16,US$) 47.96Target price (US$) (from 55.00) 52.0052-week price range 56.90 - 34.86Market cap (US$ m) 15,268.34*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.

Research Analysts


[email protected]


[email protected]


[email protected]

Fair Value Stock; Earnings at Inflection PointWe believe Nucor’s Q3 results should mark an inflection point for earnings, as quarterly EPS should trend lower following Q3 results. We are adjusting our forecasts to reflect marked to market Q3 estimates as well as our updated price deck. Our FY16 EBITDA estimate goes to $2.24bn (from $2.50bn), and out FY17 and FY18 EBITDA go to $2.23bn / $2.26bn (from $2.9bn / $2.7bn). There are no changes to our Neutral rating; we are revising our target price to $52 (from $55).

■ Lower scrap prices have been a positive for EAFs, and allowed them to buy market share by leading the spot market down, while maintaining metal spreads, especially on the sheet side (~50% of Nucor’s volumes). That said, we see a more challenging outlook from here with sheet margins declining gradually, and continued pressure on bar spreads. In addition, we note that 50% of Nucor’s flat rolled volumes are in commodity hot band, where demand and price fundamentals are less compelling.

■ We view Nucor’s broad product diversity and size as a competitive advantage over the cycle, however in the short run we remain concerned with the weakness in its bar and plate. While the new rebar trade case against Turkey may provide some support in the future, but we have yet to see imports abate. Note that between Jun-Aug rebar imports fulfilled 29% of the US apparent demand, up from 22% in the same period last year. Turkey has historically been the source of more than half of rebar imports into the US.

■ Nucor trades at 7.8x our FY17 EBITDA estimate, which we view as fair value. Risks to our rating and target price include stronger than expected demand (and therefore pricing) for long products.


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Financial and valuation metricsYear 12/15A 12/16E 12/17E 12/18EEPS (CS adj.) (US$) 1.76 2.55 2.45 2.50Prev. EPS (US$) - 3.10 4.00 3.60P/E (x) 27.3 18.8 19.5 19.2P/E rel. (%) 148.2 103.0 120.7 133.1Revenue (US$ m) 16,439.3 16,757.2 16,524.5 17,098.4EBITDA (US$ m) 1,815.1 2,244.1 2,227.1 2,257.0OCFPS (US$) 6.73 5.27 4.50 5.74P/OCF (x) 6.0 9.1 10.7 8.4EV/EBITDA (current) 9.8 8.0 8.0 7.9Net debt (US$ m) 2,472 2,245 1,730 834ROIC (%) 7.60 9.90 9.47 9.97


6 October 2016



Commercial Metals Co. (CMC)Rating NEUTRALPrice (06-Oct-16,US$) 15.99Target price (US$) 15.0052-week price range 18.30 - 12.91Market cap (US$ m) 1,832.91*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.

Research Analysts


[email protected]


[email protected]


[email protected]

Rebar Imports Remain a ConcernWe are updating our price deck and earnings estimates for CMC. Our FY16 EBITDA goes to $355mn, from $$343mn, on account of marked to market steel and scrap estimates. Our FY17 and FY18 EBITDA is revised to $306mn / $485mn (from $$385mn / $528mn) as we now expect lower metal margins. We remain with a cautious stance given continued price softness on rebar and merchant bar; however, additional anti-dumping and countervailing action against Turkish rebar may help set the market bottom. There are no changes to our Neutral Rating and $15 TP.

■ Metal spreads and earnings outlook: We expect CMC’s Americas Mills metal margins to increase sequentially in FQ4, as better rebar pricing should more than offset higher scrap prices. Volumes should grow high single digits Y/Y, in line with the FQ3 trend. Note that construction has been one of the best performing end-markets year-to-date. Per AISI data, shipments to the construction industry (not restricted to rebar) increased 12% YTD through August. Following this election year, we see a better set up for infrastructure investment, which would be supportive for demand.

■ Imports continue to be an important (and harmful) factor in the rebar market: In the last three months ending Aug-16, imports of rebar increased 51% compared to the previous-year period. Imports of rebar filled 29% of domestic demand between Jun-Aug this year, compared to 22% in the previous year. Turkey has historically been the source of more than half of rebar imports into the US.

■ CMC trades at 8.5x 2017 CSe EV/EBITDA estimates, vs historical avg. of 6.5x. We believe a higher near term multiple is appropriate given our view that FY17 earnings will be below mid cycle for CMC. Risks to our rating and target price include any material and unexpected movement in steel and scrap prices, as well as long product demand


CM C.N S& P 5 0 0 IN D EX


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Quarterly EPS Q1 Q2 Q3 Q42015A 0.29 0.11 0.34 -0.052016E 0.22 0.09 0.30 0.302017E 0.22 -0.00 0.14 0.27

Financial and valuation metricsYear 8/15A 8/16E 8/17E 8/18EEPS (CS adj.) (US$) 0.69 0.92 0.62 1.53Prev. EPS (US$) 0.55 0.84 1.09 1.78P/E (x) 23.3 17.5 25.8 10.5P/E rel. (%) 126.6 95.4 159.4 72.6Revenue (US$ m) 5,988.6 4,708.6 4,843.4 5,209.8EBITDA (US$ m) 338.6 355.1 305.6 484.7OCFPS (US$) 2.66 3.20 0.94 3.66P/OCF (x) 5.9 5.0 17.0 4.4EV/EBITDA (current) 7.2 6.8 7.9 5.0Net debt (US$ m) 823 836 946 707ROIC (%) 6.54 7.30 4.87 10.35

Number of shares (m) 114.63 IC (current, US$ m) 2,142.11BV/share (Next Qtr., US$) 12.0 EV/IC (x) 1.2Net debt (Next Qtr., US$ m) 836.4 Dividend (current, US$) 0.48Net debt/tot eq (Next Qtr.,%) 60.4 Dividend yield (%) -Source: Company data, Thomson Reuters, Credit Suisse estimates

6 October 2016



Cliffs Natural Resources Inc. (CLF)Rating UNDERPERFORMPrice (06-Oct-16,US$) 5.58Target price (US$) 2.0052-week price range 8.11 - 1.26Market cap (US$ m) 1,274.00*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.[V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts


[email protected]


[email protected]


[email protected]

SoTP Valuation Challenged at $500 HRC LevelWe are reinstating coverage of CLF resources with an Underperform rating owing primarily to the bearish iron ore view from CS commodity strategists, forecasting $45/$40 per tonne iron ore in 2017/18. We see most of the strategic and operational catalysts behind CLF owing following the substantial improvement made to unit costs, the positive contract renewal with Mittal, market share gains at Stelco and AK Steel, as well as successful efforts to repair the balance sheet. We value CLF on a SOTP basis given the low mine life remaining at APIO. Assuming 7.0x EV/EBITDA for USIO and 5.0x for APIO off 2017 estimates we derive fair value at $2 per share. Note that CLF currently trades at 8.8x our 2017 EBITDA forecast of $354 million.

■ 2017 Earnings Outlook: CLF mgmt outlined a path to $500mm in EBITDA in 2017 based on $60/tonne iron ore and $650/ton domestic HRC prices. With spot HRC trading at ~$500/ton and spot iron ore at $55/tonne, using the 2016 sensitivity would result in EBITDA level closer to $340mm.

■ USIO Outlook: CLF is likely to run at capacity in the medium term owing to re-establishment of the legacy Algoma contract (~1.5mt), significant market share wins at Stelco (~500kt per quarter), and potential uplift at AK Steel following the Magnetation shutdown. Overall the USIO ASP has greater "beta" to the iron ore market but we understand the new MT contract has increased leverage to spot HRC prices, which have come under pressure recently. Unit costs are likely to remain flat into 2017.

■ APIO Outlook: We estimate cash breakeven near $42/t iron ore and thus APIO continues to generate FCF for CLF. CLF has ~4 year mine life remaining and is unlikely to invest capital to expand mine life in our view.

■ Balance Sheet: CLF remains highly levered (~$1.9bn net debt) but has no maturities until 2020, when ~$1.7bn of debt is due.


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Quarterly EPS Q1 Q2 Q3 Q42015A 0.87 -0.28 0.19 -0.242016E 0.61 0.07 0.21 0.212017E -0.08 0.11 0.06 0.05

Financial and valuation metricsYear 12/15A 12/16E 12/17E 12/18EEPS (CS adj.) (US$) 0.68 1.05 0.14 -0.40Prev. EPS (US$) -5.13 - - -P/E (x) 8.2 5.3 41.3 -14.1P/E rel. (%) 44.7 28.9 255.2 -97.9Revenue (US$ m) 2,013.3 2,082.7 2,091.3 2,015.6EBITDA (US$ m) -216.4 411.0 354.3 214.7OCFPS (US$) -0.08 1.67 0.76 0.18P/OCF (x) -20.4 3.3 7.3 30.5EV/EBITDA (current) -16.9 8.9 10.3 17.0Net debt (US$ m) 2,414 1,771 1,700 1,716ROIC (%) 11.52 50.89 42.86 19.02

Number of shares (m) 228.31 IC (current, US$ m) 602.60BV/share (Next Qtr., US$) -7.0 EV/IC (x) 5.7Net debt (Next Qtr., US$ m) 1,852.8 Dividend (current, US$) -Net debt/tot eq (Next Qtr.,%) -142.2 Dividend yield (%) -Source: Company data, Thomson Reuters, Credit Suisse estimates

6 October 2016


Americas/United StatesNon Ferrous Metals

Alcoa, Inc. (AA)Rating OUTPERFORMPrice (06-Oct-16,US$) 31.78Target price (US$) 39.0052-week price range 33.93 - 20.22Market cap (US$ m) 13,934.26*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.

Research Analysts


[email protected]


[email protected]


[email protected]

Aerospace Supply Chain a Concern, but Upstream and Auto Sheet Market ImprovingDownstream aluminum fundamentals have splintered to some degree in 2016 with aerospace margins impacted by significant contract resets, reduced wide body build rates, and destocking while the automotive sheet market (ABS) gains momentum. While aerospace fears have been in the front of investor minds, the overall outlook for aerospace over the medium term remains positive in our view given the record backlog, strong narrow body build rates and expectations for much stronger jet engine deliveries in 2017. AA has done well with RTI and should see improved margins at Firth Rixson in 2017 also.

■ Auto and Upstream are Key Positives: The automotive sheet business continues to ramp with upside potential for the Ford SUV launch and GM's more aggressive entry into aluminum. We see packaging markets tightening in 2018 from hot mill capacity shift to ABS. LME aluminum prices are benefiting from stable production in China and rising thermal coal costs, which historically have provided for cost push inflation.

■ Aerospace Fears Peaking: The broad-based slowdown in wide body airframe deliveries and jet engine channel destocking to some degree has been mitigated by stronger growth in the narrow body market. Alcoa has noted recently that it is "meeting its commitments" in the fan blade market which was called out by Pratt and Whitney as the supply chain bottleneck for its PW1000G engines. More talk of channel issues in aero plate have also added to investor concern about this key end market for Arconic.

■ Valuation: Reiterate Outperform rating on SOTP thesis and acceleration in EPS segment ATOI in 2017. Upstream fundamentals near a bottom. AA trades at 6.7x 2017 EV/EBITDA and at 9% FCF yield. Our SOTP value ranges from $39-45 based on our LME and downstream ATOI views for 2017/2018.


A A .N S& P 5 0 0 IN D EX


2 5

3 0

3 5

4 0



Financial and valuation metricsYear 12/15A 12/16E 12/17E 12/18EEPS (CS adj.) (US$) 1.72 1.17 1.80 2.13Prev. EPS (US$) - 1.20 2.05 2.39P/E (x) 18.4 27.2 17.6 14.9P/E rel. (%) 100.2 148.7 108.9 103.4Revenue (US$ m) 24,464.0 22,297.1 23,075.1 24,019.0EBITDA (US$ m) 3,248.0 2,804.0 3,201.6 3,544.2OCFPS (US$) 3.74 3.59 4.76 4.81P/OCF (x) 7.9 8.9 6.7 6.6EV/EBITDA (current) 6.5 7.5 6.6 6.0Net debt (US$ m) 7,184 5,409 4,299 2,956ROIC (%) 15.75 5.20 6.41 7.40


6 October 2016


Companies Mentioned (Price as of 06-Oct-2016)AK Steel Holding Corp. (AKS.N, $4.61, OUTPERFORM[V], TP $8.0)Alcoa, Inc. (AA.N, $31.78, OUTPERFORM, TP $39.0)Cliffs Natural Resources Inc. (CLF.N, $5.58, UNDERPERFORM[V], TP $2.0)Commercial Metals Co. (CMC.N, $15.99, NEUTRAL, TP $15.0)Nucor Corporation (NUE.N, $47.96, NEUTRAL, TP $52.0)Steel Dynamics, Inc. (STLD.OQ, $24.23, OUTPERFORM, TP $33.0)United States Steel Corp. (X.N, $17.93, OUTPERFORM[V], TP $29.0)

Disclosure AppendixImportant Global Disclosures I, Curt Woodworth, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for AK Steel Holding Corp. (AKS.N)

AKS.N Closing Price Target Price Date (US$) (US$) Rating 15-Oct-13 4.36 3.30 U * 21-Jul-14 8.46 R 18-Sep-14 9.74 9.00 U 03-Nov-14 7.43 5.50 28-Apr-15 5.35 5.50 N 14-Aug-15 3.15 NR 10-Mar-16 4.15 2.00 U * 23-Mar-16 4.08 3.50 28-Apr-16 4.99 R 29-Apr-16 4.99 3.50 U 08-Jun-16 5.35 7.00 O 21-Jul-16 5.40 8.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price AKS.N

01- Jan- 2014 01- Jan- 2015 01- Jan- 2016

2.5

5.0

7.5

10.0

U N D ERPERFO RMREST RIC T ED

N EU T RA LN O T RA T ED

O U T PERFO RM

3-Year Price and Rating History for Alcoa, Inc. (AA.N)

AA.N Closing Price Target Price Date (US$) (US$) Rating 12-Feb-14 33.81 NR 10-Mar-16 28.77 39.00 O * * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price AA.N

01- Jan- 2015 01- Jan- 201620

30

40

50

60

N O T RA T EDO U T PERFO RM

6 October 2016


3-Year Price and Rating History for Cliffs Natural Resources Inc. (CLF.N)

CLF.N Closing Price Target Price Date (US$) (US$) Rating 21-Oct-13 23.73 10.00 U 16-Dec-14 6.80 1.00 14-Aug-15 3.38 NR 10-Mar-16 2.48 1.00 U * 16-Jun-16 4.80 R 30-Sep-16 5.85 NR * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price CLF.N

01- Jan- 2014 01- Jan- 2015 01- Jan- 20161

11

21

31

U N D ERPERFO RMN O T RA T ED

REST RIC T ED

Trading Alerts for Cliffs Natural Resources Inc. (CLF.N) were produced onDate29-Jul-2014

3-Year Price and Rating History for Commercial Metals Co. (CMC.N)

CMC.N Closing Price Target Price Date (US$) (US$) Rating 24-Jan-14 18.94 22.00 N * 16-Oct-14 14.97 18.00 24-Feb-15 15.71 16.00 14-Aug-15 16.00 NR 10-Mar-16 16.31 16.00 N * 24-Mar-16 16.74 15.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price CMC.N

01- Jan- 2015 01- Jan- 201612

14

16

18

20

22

N EU T RA LN O T RA T ED

3-Year Price and Rating History for Nucor Corporation (NUE.N)

NUE.N Closing Price Target Price Date (US$) (US$) Rating 15-Oct-13 49.48 55.00 O * 14-Mar-14 48.50 50.00 N 10-Mar-16 44.99 42.00 * 23-Mar-16 46.05 45.00 08-Jun-16 51.76 55.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price NUE.N

01- Jan- 2014 01- Jan- 2015 01- Jan- 201630

40

50

60

O U T PERFO RMN EU T RA L

6 October 2016


3-Year Price and Rating History for Steel Dynamics, Inc. (STLD.OQ)

STLD.OQ Closing Price Target Price Date (US$) (US$) Rating 15-Oct-13 17.22 20.00 O * 23-Jul-14 21.79 23.00 22-Aug-14 23.30 23.00 N 24-Feb-15 19.69 20.00 14-Aug-15 20.90 NR 10-Mar-16 21.17 25.00 O * 23-Mar-16 21.91 27.00 08-Jun-16 26.68 33.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price STLD.OQ

01- Jan- 2014 01- Jan- 2015 01- Jan- 201615

20

25

30

35

O U T PERFO RMN EU T RA L

N O T RA T ED

3-Year Price and Rating History for United States Steel Corp. (X.N)

X.N Closing Price Target Price Date (US$) (US$) Rating 15-Oct-13 23.52 19.00 N * 14-Mar-14 24.05 19.00 U 29-Apr-14 26.34 25.00 22-Aug-14 37.81 50.00 O 24-Feb-15 25.13 40.00 14-Aug-15 19.27 NR 10-Mar-16 14.37 19.00 O * 23-Mar-16 14.84 22.00 08-Jun-16 17.70 26.00 22-Jul-16 21.16 29.00 08-Aug-16 25.83 R 10-Aug-16 24.27 29.00 O * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price X.N

01- Jan- 2014 01- Jan- 2015 01- Jan- 20160

10

20

30

40

50

N EU T RA LU N D ERPERFO RM

O U T PERFO RMN O T RA T ED

REST RIC T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activitiesAs of December 10, 2012 Analysts’ stock rating are defined as follows:Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

6 October 2016


Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings DistributionRating Versus universe (%) Of which banking clients (%)Outperform/Buy* 53% (55% banking clients)Neutral/Hold* 29% (24% banking clients)Underperform/Sell* 18% (44% banking clients)Restricted 0%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.htmlCredit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and RatingValuation Methodology and Risks: (12 months) for AK Steel Holding Corp. (AKS.N)

Method: Our target price of $8.00 assumes AKS trades at 7.6x 2017 EV/EBITDA, in line with its historical average. Our Outperform rating stems from over ~50% upside implied by our target price.

Risk: Risks to our Outperform rating and $8.00 target price for AKS include: big downward movements in steel pricing, weakening automotive outlook and rising risks associated with AK Steel's pension obligations.

Target Price and RatingValuation Methodology and Risks: (12 months) for Alcoa, Inc. (AA.N)

Method: Our $39 target price for AA is based on a sum-of-the-parts analysis, with our blended 2016-2017 EBITDA forecasts and a blended multiple of 7.7x, which reflects a 6.0x valuation for the Upstream Co. and 7.0x, 9.0x and 7.5x multiples for the TCS, EPS and GRP segments respectively, which make up the higher-margin value-add company. Our Outperform rating is based on over 20% upside implied by our target price.

Risk: Risks to our Outperform rating and $39 target price for AA include supply chain disruption in one if its end-markets, which can impact volumes and profitability; increase in electricity prices, which is a key component of AA's cost structure, and the threat of substitute materials.

Target Price and RatingValuation Methodology and Risks: (12 months) for Cliffs Natural Resources Inc. (CLF.N)

Method: We value CLF on a SOTP basis given the low mine life remaining at APIO. Assuming 7.0x EV/EBITDA for USIO and 5.0x for APIO off 2017 estimates we derive fair value at $2 per share. Our Underperform rating stems from over 60% downside reflected in our target price.

Risk: Risks to our Underperform rating and $2 per share target price for CLF include sustained iron ore price levels above ~60/t, a material pickup in domestic steel production.

Target Price and RatingValuation Methodology and Risks: (12 months) for Commercial Metals Co. (CMC.N)

Method: Our target price of $15 for CMC is 7x our estimated calendar 2016 EV/EBITDA compared to a historical average of 5.8x. We believe a higher near-term multiple is appropriate given our view that FY16 results will be well below mid cycle earnings for CMC. Our Neutral rating stems from the lack of meaningful up- or downside based on our target price.

Risk: Risks to our Neutral rating and $15 target price for CMC include: big movements in steel long products pricing, which can affect the company's profitability; increased competition with lower-price imported steel (and reinforcing bar in particular); a big swing in non-residential construction demand, which can impact the company's sales and profitability.

Target Price and RatingValuation Methodology and Risks: (12 months) for Nucor Corporation (NUE.N)

6 October 2016


Method: Our target price of $52 for NUE is based on 8.4x 2017 EV/EBITDA, which is in line with NUE's historical average. Our Neutral rating stems from less than 10% upside implied in our target price.

Risk: Risks to our Neutral rating and $52 target price for NUE include: meaningfully higher or lower spreads for rebar, merchant bar, and plate (~60% of volumes); stronger than forecasted hot rolled coil and rebar margins; failing to increase penetration in the higher value-add automotive market.

Target Price and RatingValuation Methodology and Risks: (12 months) for Steel Dynamics, Inc. (STLD.OQ)

Method: Our target price of $33 for STLD is based ontarget price assumes STLD trades at 6.5x 2017 EV/EBITDA The stock currently trades at only 5.1x 2017 EV/EBITDA and a 10% FCF yield. Our Outperform rating stems from over 30% upside embedded in our target price.

Risk: Risks to our Outperform rating and $33 target price for STLD include: meaningfully lower spreads for steel sheet and long products; lower than expected end-market demand, particularly in non-residential construction.

Target Price and RatingValuation Methodology and Risks: (12 months) for United States Steel Corp. (X.N)

Method: Our target price of $29 for X is based on 5.3x our 2017 EBITDA estimate. Our Outperform rating is based ~60% upside implied by our target price.

Risk: Risks to our Outperform rating and $29 target price for X include, mainly, lower than expected prices for hot rolled coil and lower than expected volumes. In addition, higher conversion or maintenance costs could impact the company's profitability.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (CMC.N, CLF.N, AA.N, NUE.N, STLD.OQ, AKS.N, X.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.Credit Suisse provided investment banking services to the subject company (CLF.N, AA.N, AKS.N, X.N) within the past 12 months.Credit Suisse provided non-investment banking services to the subject company (AA.N, X.N) within the past 12 monthsCredit Suisse has managed or co-managed a public offering of securities for the subject company (CLF.N, AA.N, AKS.N, X.N) within the past 12 months.Credit Suisse has received investment banking related compensation from the subject company (CLF.N, AA.N, AKS.N, X.N) within the past 12 monthsCredit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CMC.N, CLF.N, AA.N, NUE.N, STLD.OQ, AKS.N, X.N) within the next 3 months.Credit Suisse has received compensation for products and services other than investment banking services from the subject company (AA.N, X.N) within the past 12 monthsAs of the date of this report, Credit Suisse makes a market in the following subject companies (CLF.N, NUE.N, STLD.OQ, X.N).For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=261619&v=-78waddguyckg7mupohujop943 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (CLF.N, AA.N, AKS.N, X.N) within the past 3 years.Principal is not guaranteed in the case of equities because equity prices are variable.Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating.The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ

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6 October 2016


from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti.This research report is authored by:Credit Suisse Securities (USA) LLC ..........................................................Curt Woodworth, CFA ; Serena Rocha Calejon ; Gayle Podurgiel, CFAFor Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

6 October 2016


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