1、DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be awar
2、e 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.8 January 2019Americas/United StatesEquity ResearchSteel US Steel-2019 Outlook SECTOR REVIEWResearch Anal
3、ystsCurt Woodworth,CFA212 325 5117curt.woodworthcredit-Peter Mitropoulos212 325 2703peter.mitropouloscredit-Jonathan Chang212 325 2656jung-yung.changcredit-Supply Side Risks Now Well Known&Upside to Long/Plate Spreads a Key Offset;Upgrade STLD&NUE to Outperform and D/G X to NThe near-term outlook fo
4、r the US steel industry actually looks constructive in our view as seasonal weakness and aggressive destocking should fade by early 1Q-19.Demand growth has improved the past few months and the steel trade stalemate with Canada would suggest the 25%tariff is structural for now.The negative announceme
5、nts on capital spending and supply side tail risks are fully embedded in valuation for most stocks,in our view.While the wall of new sheet supply should impair fundamentals starting late 2021,there is still substantial FCF generation potential between now and then,especially if tariffs remain in pla
6、ce.Upgrade NUE/STLD to Outperform and Downgrade X to Neutral:Metal spread expansion in plate and long products is a major tailwind for Nucor in 2019&2020 and the Gallatin expansion will be first to market among the new mills.The buy vs build decision at STLD is bullish from the basis of not buying B
7、ig River.STLD continues to generate very strong FCF and the unlevered balance sheet should allow for robust capital return.Sharp declines in HRC prices in the US and Europe as well as US OCTG(against higher rounds costs)warrant caution in X.We see negative FCF in 2019 and minimal FCF in 2020 limitin
8、g capital return potential.US Sheet Prices to Rebound in 1H-19:This seasonal pattern has been evident the past three years and assuming no change in trade policy,sheet prices should rebound in 1Q-19.However,we remain cautious over the longer term owing to the wall of supply set to enter the US sheet
9、 market in 2020/2021,as well as the absorption of JSW supply starting in 2Q-19.We are lowering our price deck to account for expected steeper declines in 2H-19 and a return to more normalized HRC prices in 2020.We see integrated mills most at risk longer term from new EAF mills.Price Deck Lowering S
10、heet and Raising Longs/Plate:We cut our HRC price deck to$725/ton for 2019 and$680/ton for 2020,levels we see as very realistic.EAF metal spreads will remain above long term averages and long products should see higher earnings contribution on a relative basis.The variable nature of cost structure w
11、ill allow for continued strong earnings and FCF at NUE,STLD,and CMC.Scrap should bottom in January and move higher in Feb/March as demand recovers.HRC Driver-Metal Spread or Arbitrage?In tight markets whereby imports are required to balance the market,and in todays case Canadian imports,the price sh
12、ould be set off the import arb adjusted for tariffs.The new supply from JSW and X Granite City will disintermediate some foreign sheet supply and lessen the impact of the Section 232 tariffs.However,with tariffs set to stay in place,prices should remain well above mid-cycle levels.Also,new sheet sup
13、ply could be delayed in event tariffs go away.8 January 2019US Steel-2019 Outlook22019 Steel OutlookThe near-term outlook for the US steel industry actually looks constructive in our view as seasonal weakness and aggressive destocking should fade by early 1Q-19 and demand trends appear stable.This s
14、easonal pattern has been evident the past three years and assuming no change in trade policy,sheet prices should rebound in 1Q-19.However,we remain very cautious over the medium term owing to the wall of supply set to enter the US sheet market in 2020/2021 as well as the absorption of JSW supply sta
15、rting in 2Q-19.We are lowering our price deck to account for expected steeper declines in 2H-19 and a return to more normalized HRC prices in 2020.Figure 1:CS US Hot HRC Fair Value Analysis Deficit Conditions Warrant Arbitrage Based Value but as new EAF Capacity Ramps,Domestic Supply Curves Become K
16、ey to Price Level on Crowding Out Effect$/sht1BaseBase Bear2012-142016201720182019e2020e2020eCommentsGlobal HRC Value($/st)High620500560600The global average starting point is very key Low 440280450485to our analysis and we assume prices near long Avg530390500555525510480term averages with weaker ye
17、ar in 2020 Tariff 25%139131128120CS deflator is a function of highger US supply CS Tariff Deflator100%60%40%0%and supply chain readjustment to lower costsuppliers diminishing power of blanket tariffsEffective Seaborne Price530390500694604561480 +Ocean Freight,Port&TraderFees60606060606060In a fallin
18、g market,US buyers need higher landed =HRC CIF Gulf Coast590450560754664621540discounts.Canada remains the major binary +Landed Discount to US Buyer60606060606060trade event for the US in 2019 in our view=US HRC Fair Value650510620815725680600US HRC($/st)Spot prices are now at$740/st and still falli
19、ng.High700640660915JSW is starting to ramp but seasonally demand Low 560380580660will recover in 1H and imports should fade.By Avg6455306208307006505802020 more newcapacity will enter the market.Variance to CS Fair Value-520015-25-30-20Premium to Global($/st)The size of the US deficit and the amount
20、 of High180240190350countries affected by tariffs determine the Low 205550100US HRC price premium to global.Avg115140120275175140100EAF Metal Spread($/ton)By 2021,new low cost EAF capacity will have High345410390580forced imports out of the market and pressured Low 220220310390BOFs to close in a rec
21、ession scenario.At that Avg290320355510345320270point prices move to below fair value spreads off EAF supply curves.Historical US HRCMetallicsspread to scrap is$270/st.Shred Scrap($/lt)385230290355355330310Busheling Scrap($/lt)395240350390400370340New EAF plants will drive higher demand for Brazil P
22、ig Iron($/mt)400240345380405375345premium metallics such as prime scrap,pig iron and DRI/HBI.The elevelated price ofBulksinputs could support cost curve fair value.Iron Ore(62%CIF China,$/mt)120587170615850Integrated mills likely must continue to focusPrem HCC(FOB Oz,$/mt)180135185205175150120on val
23、ue add contract markets over time.Source:Company data,The BLOOMBERG PROFESSIONALTM service,Credit Suisse estimates8 January 2019US Steel-2019 Outlook3Figure 2:Credit Suisse 2019 Monthly U.S.Steel Price Deck Credit Suisse Monthly Price DeckJan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19N
24、ov-19Dec-19Flat Rolled($/st)HRC720730750750740740720720710710710700 CRC840850870870860860840840830830830820 Plate10001000980960960940920920920920920900Long($/st)Rebar700700700700700700680680680680680680 MBQ700700700700700700700700700700700700 Beam830830830840840840820820820810810810Scrap Shredded370
25、370360360350350350350350350350350 Busheling410410400400400400400400400400390390EAF Metal SpreadsJan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19Nov-19Dec-19 HRC350360390390390390370370360360360350 Plate630630620600610590570570570570570550 Rebar330330340340350350330330330330330330 Beam460
26、460470480490490470470470460460460Source:Company data,Credit Suisse estimatesFigure 3:Credit Suisse Quarterly U.S.Steel Price Deck and World Export Prices Quarter Average Prices 20171Q-182Q-183Q-184Q-1820181Q-192Q-193Q-194Q-1920192020 HRC 616749883907783830733743717707725680 CRC8199001000995897948853
27、863837827845800 CRC-HRC Premia20315111788113118120120120120120120 Rebar546640692705705685700700680680690660 Beam695725830860842814830840820810825800 Shred 302348377352353358367353350350355330HRC Metal Spread315401506555430473367390367357370350Beam Metal Spread393377453508488457463487470460470470Reba
28、r Metal Spread245292315353352328333347330330335330World Export Price($/st)20171Q-182Q-183Q-184Q-1820181Q-192Q-193Q-194Q-1920192020 HRC495575560550500546505525540530525500 CRC580655635630585626585605620610605585 Rebar475560545545520543560560560560560540 Beam550640640645640641640640640640640630US Prem
29、ium HRC128174323357283284228218177177200180%25%Tariiff1832191581481028742446955%12.5%Tariif253288221216165153109110134118 Rebar8080147160185143140140120120130120 Beam14485190215202173190200180170185170Source:Company data,Credit Suisse estimates8 January 2019US Steel-2019 Outlook4US Flat Rolled Day o
30、f Reckoning Comes in 2022Sentiment in steel is extremely negative and prices have been in freefall since late July.Part of the unwind was driven by supply lines readjusting to the Trump tariffs and over the past month we view the decline as a function of year end destocking and seasonality.This has
31、been evident globally as well with significant pressure on China,but we argue China is less relevant to the US owing to tariffs and the reduced net export position.Figure 4:2H-2020 Through Late 2021 the US Market Will be Force Fed Cheap EAF Based Hot Rolled Sheet Million stUS HRC Supply Curve2019202
32、3ExpansionVolume$/ton Start Up Nucor6.37.4EAF at Gallatin 1.46504642H-20 Steel Dynamics4.06.12 EAF-Greenfield3.01,8006002H-21 US Steel3.53.52 BOF at Granite City2.1n/a2H-18 Arcelor Mittal4.84.8Modernization project AK Steel0.50.4Ashland Remains Idle Big River0.71.5Phase II 1.61,1006882H-21 Bluescope
33、 Northstar2.02.0Evaluating 0.9kt expansiion JSW1.02.5Approved for Phase II 1.55003332023 JSW-Slab Processing0.00.5Excess rollling capacity of 1.5mt0.575150 Stelco0.20.3Hamilton restart binary on US quota2.06030n/a NLMK 0.40.5Deal with ATI for slab processing0.21Q-19ATI,Calvert,etc Slab Tolling0.40.6
34、Requests for exclusions pending California Steel0.20.2Requests for exclusions pending 2019 Merchant Market Size24.030.3Implied Increase in HRC Supply-Total Sheet Increases 11.8mtTimeline for New Supply AddsVolComments New Supply 2018-193.8 X,JSW,NLMK New Supply 20201.9 Nucor,JSW Toll-JSW has 1.4mt o
35、f excess rolling capacity New Supply 20214.6 STLD,Big River Phase II New Supply 20220.0 New Supply 20231.5 JSW Phase IITotal New Sheet Supply11.8Equals 18%of 2018e US Sheet Demand Probable Restarts2.0Stelco Hamilton Potential Brownfield0.8Bluescope NorthstarPotential New Sheet Supply14.6Total new do
36、mestic sheet supply=23%of 2018e US Sheet DemandImport Data201620172018eCommentsHRC Sheet Imports Mexico/Canada Sheet Imports1.31.31.5At some point the 25%tariff on Mexico and Canada will end and European Sheet Imports0.40.40.3the new framework will likely provide enough window for Stelco Remainder1.
37、40.60.9to restart Hamilton,given excess rolling capacity of 1.0mt.Imports as%US HRC Demand13%9%11%Canada/Mexico=55%of US HRC ImportsTotal Sheet ImportsSection 232 overtime will fade away and either be replaced by Mexico/Canada Sheet Imports3.33.33.7quotas or nothing at all depending on Presidential
38、leadership.European Sheet Imports1.41.31.2At that point export levels in China and global PMI will ultimately drive Remainder5.45.54.4the arbitrage level for sheet products into the US marketImports as%US Sheet Demand17%16%15%Imports Still Major Source of US Supply Base for SheetSource:Company data,
39、AMM,DOC,Platts,Credit Suisse estimates8 January 2019US Steel-2019 Outlook5Never Underestimate the Seasonal Trade in SteelLate Cycle Demand Concerns will Remain but Recent Micro Data is Positive and Seasonality/Restocking is Your Friend in 1H-19:Rising interest rates and the fact that we are late in
40、an economic cycle sharply increases odds of recession in the next few years,which depending on timing could coincide with substantial new capacity entering the U.S market.This would be the“black swan”event,driving HRC prices sharply lower and causing severe distress to integrated producers.Figure 5:
41、Seasonal Trade has been Powerful Driver the Past Several Years and While HRC Might Not be Significantly Below Fair Value,Equities are in our View2014-20152015-20162016-20172017-2018AverageLead timesDecember Low3.53.14.34.23.82Q Peak4.15.44.95.75.0Lead Time Delta(wks)0.52.40.61.51.3HRC Price4Q Low600
42、3554705875032Q Peak465640660916670HRC Delta($/st)(135)285190329167Equity Returns4Q Low-1H Next Yr PeakSTLD16%55%57%41%42%NUE2%27%38%27%24%X1%176%142%74%98%AKS8%136%138%57%85%CMC15%29%48%42%33%Average Return(%)8.3%84.6%84.6%48.0%56.4%8.3%84.6%84.6%48.0%0%10%20%30%40%50%60%70%80%90%2014-20152015-20162
43、016-20172017-2018Average Equity Return(%)Source:The BLOOMBERG PROFESSIONALTM service,Platts,SMU.As lead times start to extend and price hikes reenter the lexicon,buyers will come off the sidelines and HRC prices will start to move back up.We predict this to occur in February.Given steel equities ten
44、d to rally 1-2 months before a price bottom is set,we argue that risk/reward is bullish across all steel equities from where we sit today.We note that in late 2016 the US arb spread hit a low of$55/ton in Nov and in 2017 a$50/ton low was reached in October,both levels well below fair value and predi
45、cated big moves up in 1Q-18.Currently the arb spread is$255/ton and US Steel and JSW will both add incremental volume into 1Q-18,especially JSW which just relighted its EAF.Imports are coming into the Gulf at$655-675/ton with tariff paid.Historically US prices trade at$50-60/st premium to landed imp
46、ort values.This would put US fair value at$710/ton versus spot at$730-740/ton.8 January 2019US Steel-2019 Outlook6Figure 6:Dont Fight the Fed and Never Fight Seasonal Patterns in Steel Unless of Course Trade Policy Creates an Asymmetric Price Move Such as 2018.US HRC/CRC lead times23456789Jan-16Apr-
47、16Jul-16Oct-16Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-18WeeksHRCCRCSource:SMU.Figure 7:The Equities Peaked Earlier than Historical Patterns as the Market Viewed Section 232 as Transitory Play for Seasonal Bounce in EAF StocksUS HRC($/st)CS Steel Equity Index202530354045505530040050060070080090
48、01000Sep-14Feb-15Jul-15Dec-15May-16Oct-16Mar-17Aug-17Jan-18Jun-18Nov-18US HRC Prices($/st)CS Steel Equity IndexSource:Platts,The BLOOMBERG PROFESSIONALTM service,Credit Suisse estimates8 January 2019US Steel-2019 Outlook7So What Should Happen in 1Q-19?Prices should recover modestly in our view from
49、current levels near$720-730/ton.JSW is unlikely to materially impact the market until 2Q-18 given the time required for fine tuning the asset and undergoing qualification.US Steel might also show more discipline now that the furnaces at Granite City furnaces are ramped up and X has stated they plan
50、to increase capital spending and revitalization in 2019.However,what arb level is the right one?Fully loaded with 25%tariffs,or middle ground to account for US supply response?Below we show various scenarios and how to think about fair value.Figure 8:US HRC Premiums Under Nominal,25%Tariff,and 12.5%
