21 December 2008
Steel in the Americas
2009 outlook: HOPE, global
stimulus and USD
David S Martin
Research Analyst
(1) 212 250 5580
david.s.martin@db.com
Jorge Beristain, CFA
Research Analyst
(1) 212 250 2723
jorge.beristain@db.com
Cutting estimates again; US Steel to Hold; Nucor to Buy
We are reducing forecasts again and earnings risk remains high for the coming
quarters. Our 2009 forecasts have been lowered an average of 44%. These
revisions reflect lower volume and steel price assumptions for all coverage
companies. Our estimates are now ~40% below consensus for 2009. Lastly, we
maintain a cautious outlook on steel for 2009 and have adjusted 2 ratings reflect
this view; US Steel to Hold and Nucor to Buy.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Recommendation/Estimate
Top picks
US Steel (X.N),USD37.34 Hold
CSN (SID.N),USD13.08 Buy
Companies featured
AK Steel (AKS.N),USD9.83 Hold
2007A 2008E 2009E
EPS (USD) 3.36 4.03 1.15
P/E (x) 10.3 2.4 8.5
EV/EBITDA (x) 4.6 1.4 2.0
Gerdau (GGB.N),USD6.59 Hold
2007A 2008E 2009E
EPS (BRL) 2.22 3.97 1.88
P/E (x) 10.1 3.9 8.3
EV/EBITDA (x) 7.1 3.6 5.5
Gerdau Ameristeel (GNA.N),USD5.81 Hold
2007A 2008E 2009E
EPS (USD) 1.55 1.90 0.71
P/E (x) 8.0 3.1 8.2
EV/EBITDA (x) 6.7 3.2 4.4
Arcelor-Mittal (MT.N),USD25.04 Hold
2007A 2008E 2009E
EPS (USD) 7.40 10.34 2.29
P/E (x) 8.3 2.4 10.9
EV/EBITDA (x) 5.6 2.7 5.2
Arcelor-Mittal (MTP.PA),EUR18.16 Hold
2007A 2008E 2009E
DB EPS (USD) 7.40 10.34 2.29
P/E (x) 8.3 2.5 11.5
EV/EBITA (x) 7.2 3.7 10.9
Nucor (NUE.N),USD42.99 Buy
2007A 2008E 2009E
EPS (USD) 4.94 5.75 4.00
P/E (x) 12.1 7.5 10.8
EV/EBITDA (x) 6.4 4.3 5.3
CSN (SID.N),USD13.08 Buy
2007A 2008E 2009E
EPS (BRL) 3.30 4.39 3.46
P/E (x) 10.7 7.0 8.9
EV/EBITDA (x) 6.6 4.5 6.0
Ternium (TX.N),USD8.53 Hold
2007A 2008E 2009E
EPS (USD) 4.10 4.66 1.21
P/E (x) 7.4 1.8 7.1
EV/EBITDA (x) 5.1 2.5 5.1
Usiminas (USIM5.SA),BRL28.60 Hold
2007A 2008E 2009E
EPS (BRL) 6.41 6.43 3.03
P/E (x) 7.5 4.5 9.4
EV/EBITDA (x) 4.4 2.8 6.1
US Steel (X.N),USD37.34 Hold
2007A 2008E 2009E
EPS (USD) 8.68 18.41 4.00
P/E (x) 11.4 2.0 9.3
EV/EBITDA (x) 8.9 1.9 4.3
Global Markets Research Company
2009 a major challenge for steel industry; volumes cut
DB recently lowered its Global GDP forecast to 0.2% for 2009 from 1.2%
previously. In this environment, we expect steel demand to slow considerably,
and steel mill shipments are likely to be extremely weak in 4Q08 and 1Q09. We
are now expecting volume declines of ~15% in 2009 for our coverage companies.
Outlook for benchmark steel prices cut
Our view reflects a market surplus in ‘09 and DB’s expectation that benchmark
iron ore and coal prices will fall 30%-40% and 50%-60% in ‘09 (prior est. was
declines of 5-15%). We have trimmed our forecasts for benchmark HRC prices in
the U.S. and Europe by an average of 5% for ‘08 and 24% for ‘09. We now expect
an average U.S. HRC price of $946/tonne (+62% y/y) for ‘08 and $643/tonne (-32%
y/y) for ‘09. We’ve also lowered contract prices for ‘09.
A rough bottom
The correction in steel prices have been swift and with average U.S. HRC prices
nearing $600/tonne (vs $1,100 in August), industry players believe steel prices are
bottoming. We accept this view, but caution that volume pressures, stubborn
input costs (labor, contracted costs, etc.) and financing costs will limit profitability
in the near-term. Production cuts throughout the industry have been massive and
the inventory de-stocking significant, but we expect these trends to continue.
Potential catalysts are scrap prices, govt. stimulus packages and USD moves.
Balance sheets & cost programs to get attention
As previously highlighted, we expect balance sheets to gain importance. Following
positive steel price trends in recent years, most companies maintain strong cash
and liquidity positions. However, some players possess debt maturity & renewal
risks if this demand environment persists. We'd highlight Nucor and AK Steel as
having the strongest balance sheets in the industry and Arcelor-Mittal and Ternium
as having the weakest. Additionally, we expect dividends and capital spending to
get scrutinized and more cost reduction programs to be rolled-out.
PTs tweaked; US Steel to Hold; Nucor to Buy; CSN remains Buy
Our new PTs are underpinned by an average sector PE of 10x and NPV multiple of
0.8x. Given our cautious sector view, our recommendations remain relative ‘calls’
with attention to balance sheets and competitive positions. CSN remains a Buy
with a new PT of $17. Lastly, US Steel goes to a Hold (PT $40) and Nucor goes to
a Buy (PT $53). Risks are global growth, metal prices, operating costs, FX rates,
etc. For company-specific risks please refer to companies’ section of this report.

Table of Contents
Executive summary ........................................................................... 3
Shares bounce ..........................................................................................................................3
Summary changes to earnings and PTs....................................................................................3
DB steel price forecast summary..............................................................................................5
Volumes: looking for a floor ......................................................................................................5
Cost cutting, to become a focus...............................................................................................6
Raw material costs; seeking relief ............................................................................................6
Balance sheet; strength critically important ..............................................................................8
Valuation ..................................................................................................................................9
Risks ......................................................................................................................................10
Company valuation & risks............................................................. 11
AK Steel .................................................................................................................................11
Arcelor-Mittal ..........................................................................................................................13
CSN........................................................................................................................................16
Gerdau ...................................................................................................................................18
Gerdau Ameristeel ..................................................................................................................20
Nucor .....................................................................................................................................22
Ternium..................................................................................................................................24
Usiminas ................................................................................................................................26
U.S. Steel ...............................................................................................................................28