Global Steel. Global Steel Analyst Views. Source: Thomson Reuters (RM 1.6x iron ore 0.6x met coal 0.15x scrap)

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1 Global Equity Research Steel Research Analysts Michael Shillaker Jeremy Chen jeremy.chen@credit-suisse.com Trina Chen trina.chen@credit-suisse.com Liam Fitzpatrick liam.fitzpatrick@credit-suisse.com James Gurry james.gurry@credit-suisse.com Semyon Mironov semyon.mironov@credit-suisse.com Ravi Shankar ravi.shankar@credit-suisse.com Minseok Sinn minseok.sinn@credit-suisse.com Michael Slifirski michael.slifirski@credit-suisse.com Ivano Westin ivano.westin@credit-suisse.com Curt Woodworth, CFA curt.woodworth@credit-suisse.com Shinya Yamada shinya.yamada@credit-suisse.com Specialist Sales: James Brady james.brady@credit-suisse.com Global Steel SECTOR REVIEW Global Steel Analyst Views Figure 1: Global steel equities vs. RM mix ($/t) (ore coal and scrap ) 1,875 1,675 1,475 1,275 1, WORLD-DS Iron & Steel - PRICE INDEX (RM 1.6x iron ore.6x met coal.15x scrap) Ore, coal and scrap RM mix ($/t) Summary: We have collated our global steel analysts' views from around the world as well as key regional and global data. In general, our analysts are much more bullish on the prospects for demand than last year/earlier this year as the global destocking of 215 looks to have ended in Q Outlook: Our analysts have flagged supply discipline in an improving market and protectionism as two positives in addition to improving demand, but they remain wary of the risks of excessive global exports, the sideeffects of protectionism and a possible ramp-up of capacity, which they are watching closely. Chinese exports remain stable in 216, which is a positive. Inflationary pressures have increased in 216 with first iron ore, then scrap and now metallurgical coal increasing (materially), but history shows that low inventory globally and cost inflation are typically prerequisites to kick-start a cycle. 216 looks to be a much better earnings year than 215, and 217 could be better still. We believe the steel industry globally has turned a corner. Global top picks: Angang, ArcelorMittal, Gerdau, Tata Steel, US Steel and MMK are our global top picks 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 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.

2 Table of contents Summary 3 Global 6 China 2 EU 24 India 28 Japan 31 LatAm 34 Russia 38 South Korea 42 US 45 Global Steel 2

3 Summary Figure 2: Global steel equities vs. RM mix ($/t) (ore coal and scrap ) 1, , , ,275 1, WORLD-DS Iron & Steel - PRICE INDEX Ore, coal and scrap RM mix ($/t) (RM 1.6x iron ore.6x met coal.15x scrap) We have collated the views of our global steel analysts as well as key regional and global data. In general, our regional analysts are much more positive on the demand outlook than, for example, a year ago, with the outlook for flat products appearing to be materially better than that for longs. Protectionism is a theme that continues to raise its head with the US, Europe and India (as well as Brazil which already had protectionist actions in place) being the key regions taking action. The global team recognises that the actions against protectionism in regions such as US, Europe and India have positive implications but have negative implications for China and S Korea, among others. Chinese demand is stronger this year than last year and, under the spotlight of protectionist actions, Chinese exports have remained relatively stable this year versus 215. What has changed is a decrease in exports from China to the US, Europe and India, leading to a diversion of steel into the Middle East or South East Asia. So far, however, this diverted material appears to have caused little disruption. Our analysts note that supply discipline appears to be holding up and this has come through ytd in the data. But our analysts are also wary of the risks of a ramp-up in output should the cycle stay this strong for longer, which they, as a global team, are watching closely. Regionally, steel prices have been volatile through the year, with the Chinese price falling sharply in Q2 after its rapid rise, only to rise again over the summer. European prices fell at the time of the Brexit vote but recovered thereafter. The US market is currently undergoing a similar drop in the steel price, although we expect this to stabilise in Q4 under low inventory and still low levels of imports. Inflation is back, or so it seems, after five years of deflation. Metallurgical coal has been the latest surprise with a very strong move up in the price (from cus$12/t to above US$ per tonne in the past three weeks or so) prompting some fears of further margin squeeze for steel makers. Global Steel 3

4 But what appears to be clear is that the deep global destocking of 215 ended in early 216, and that absence of destocking, coupled with low inventory levels and now inflationary pressures from raw materials, has helped and is helping steel prices and earnings to recover. The correlation of the sector with the underlying price of raw materials says it all to us. Inflation is positive and deflation is negative, and the deflationary spiral of 211 to 215 appears to have come to an end. We appear to be back to a world of inflation, at least for now. Just looking at the normalisation of the cycle, our analysis suggests that the Chinese export price (which should be the benchmark global price) should normalise with the absence of destocking at around US$435/t, above the current US$378/t and materially above the US$27/t at the end of 215. As long as global demand continues to improve, we see scope for the positive cycle momentum to continue into 217, and if our regional analysts' views are correct, real demand should continue to improve over the next year or so Our global top picks are: ArcelorMittal (Europe) Gerdau (Brazil) Tata Steel (India) Angang (China) USX (US) MMK (Russia) Global Steel 4

5 Global Steel Research Team Figure 3: Credit Suisse Global Steel coverage analysts Credit Suisse Global Steel Research Team Asia Jeremy Chen jeremy.chen@credit-suisse.com Taipei Minseok Sinn minseok.sinn@credit-suisse.com Seoul Ravi Shankar ravi.shankar@credit-suisse.com Mumbai Shinya Yamada shinya.yamada@credit-suisse.com Tokyo Trina Chen trina.chen@credit-suisse.com Hong Kong Australia Michael Slifirski michael.slifirski@credit-suisse.com Melbourne Europe James Gurry james.gurry@credit-suisse.com London Michael Shillaker michael.shillaker@credit-suisse.com Madrid Latin America Ivano Westin ivano.westin@credit-suisse.com Sao Paulo Russia Semyon Mironov semyon.mironov@credit-suisse.com Moscow United States Curt Woodworth curt.woodworth@credit-suisse.com New York Source: Credit Suisse research Global Steel 5

6 Global Supply Global production remains stable, although the second derivative of supply growth troughed along with the cycle in early 216. Steel price recovery has been material but so far there has been a limited global supply response to this. Figure 4: Global steel production vs. yoy Figure 5: Global steel production vs. CIS HRC export price (yoy) 16, 25% 4% % 14, 12,, 8, 6, 4, Oct-96 Jul-97 Apr-98 Oct-99 Jul- Apr-1 Jan-2 Oct-2 Jul-3 Apr-4 Jan-5 Oct-5 Jul-6 Apr-7 Oct-8 Jul-9 Apr-1 2% 15% 1% 5% % -5% -1% -15% 3% 2% 1% % -1% -2% -3% Oct-96 Jul-97 Apr-98 Oct-99 Jul- Apr-1 Jan-2 Oct-2 Jul-3 Apr-4 Jan-5 Oct-5 Jul-6 Apr-7 Oct-8 Jul-9 Apr-1 8% 6% 4% 2% % -2% -4% -6% -8% -% Global steel production (kt) Global steel production y/y Linear (Global steel production y/y) Global steel production y/y CIS hrc export price y/y Source: WSA, WSA Figure 6: Crude steel production Steel production (Mt) EU CIS Russia North America US South America Brazil Africa Middle East Asia China Japan India South Korea Oceania World Steel production (Mt) EU CIS Russia North America US South America Brazil Africa Middle East Asia ,27 1,124 1,14 1,11 China Japan India South Korea Oceania World ,63 1,148 1,25 1,348 1,343 1,239 1,433 1,538 1,56 1,65 1,67 1,617 Source: WSA Global Steel 6

7 Demand The charts below show the extent of global destocking in 215 the end of destocking coincided with the recovery in steel prices and raw materials in early 216. Figure 7: Global steel production (kt) vs. Global IP Figure 8: Global steel production vs. Global IP (yoy) 15, 14, 13, 12, 11,, 9, 8, 7, 6, % 2% 15% 1% 5% % -5% 13% 11% 9% 7% 5% 3% 1% -1% -3% 5, 7-1% -5% Jan-97 Sep-97 May-98 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Sep-11 May-12 Sep-13 May-14 Sep-15 May-16 Jan-97 Sep-97 May-98 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Sep-11 May-12 Sep-13 May-14 Sep-15 May-16 Global steel production (kt) Global IP (production weighted) Global steel production y/y Global IP (production weighted) y/y Source: WSA, Thomson Reuters Source: WSA, Thomson Reuters Figure 9: Ex-China apparent demand (kt) vs. OECD IP Figure 1: Ex-China apparent demand vs. OECD IP (YoY) 75, 7, 65, 6, 55, % 2% 15% 1% 5% % -5% 6% 4% 2% % 5, -1% -2% 45, 9-15% -2% -4% 4, 85-25% -6% Jan-97 Sep-97 May-98 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Sep-11 May-12 Sep-13 May-14 Sep-15 May-16 Jan-97 Sep-97 May-98 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Sep-11 May-12 Sep-13 May-14 Sep-15 May-16 Ex-China apparent demand (kt) OECD IP Ex-China apparent demand y/y OECD IP y/y Source: WSA, Thomson Reuters, ISSB Source: WSA, Thomson Reuters, ISSB Global Steel 7

8 Pricing Figure 11: Prices and implied margin $/t Trend HRC prices: US EU China LatAm Japan Iron ore price Met coal price Scrap price Steel making cost Global export price Implied spread $/t Sep-15 Nov-15 Dec-15 Feb-16 Mar-16 May-16 Jun-16 Aug-16 Sep-16 m-o-m y-o-y Trend HRC prices: US % 19% EU % 14% China % 29% LatAm % 23% Japan % 33% Iron ore price % -2% Met coal price % 152% Scrap price % 7% Steel making cost % 44% Global export price % 25% Implied spread % 2% Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters, CRU (216 YTD avg) (domestic prices for US, EU and China. Export prices for LatAm and Japan. CIS export price for global export price. 216 is ytd avg) Steel prices have recovered globally in the first period of combined global price recovery since Figure 12: Iron ore price vs. CIS export HRC price (Iron ore trough 11-Dec-215=) Figure 13: CIS HRC export price ($/t) Dec-15 Feb-16 Mar-16 May-16 Jun-16 Aug-16 Sep-16 Jan-95 Jan-97 Jan-98 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-9 Iron (62% Fe) CIS hrc export price CIS hrc export price ($/t) Linear (CIS hrc export price ($/t)) (Iron Ore 62% Fe CFR Tianjin Port China) Global Steel 8

9 Raw materials Raw material costs have also risen in 216 with iron ore, scrap and now metallurgical coal all rising from a very low base. While on the commodity research side there has been much focus on supply, and hence a generally bearish view in the market for raw materials, we think that better demand, a troughing of the decline in global cost curves and a consequent return to inflationary expectations are all helping to drive raw material prices higher. History suggests low inventory of steel and higher raw material prices are highly positive for the sector outlook. Figure 14: Iron ore price 62% Fe($/t) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 Iron Ore 62% Fe CFR Tianjin Port Chn Figure 15: Met coal price ($/t) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 Premium Hard Coking Coal Australia Export $/t Source: the BLOOMBERG PROFESSIONAL service, CRU Figure 16: US scrap price ($/t) Figure 17: Ore coal blend ($/t) vs. US scrap price ($/t) Feb-15 Mar-15 May-15 Jun-15 Aug-15 Sep-15 Nov-15 Dec-15 Feb-16 Mar-16 May-16 Jun-16 Aug-16 Sep Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 US scrap price ($/t) Ore coal ($/t) Scrap ($/t) Source: the BLOOMBERG PROFESSIONAL service, CRU, Thomson Reuters Global Steel 9

10 Spreads Figure 18: CIS HRC export price vs. Implied raw material cost vs. Spread ($/t) Figure 19: CIS steel margin vs. scrap price ($/t) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 Implied margin $/MT (RHS) Steel HR Coil CIS $/MT Raw material cost $/MT Implied margin $/MT (RHS) US scrap price ($/t) Source: the BLOOMBERG PROFESSIONAL service, CRU, Thomson Reuters (raw material cost 1.6x iron ore,.6x met coal,.15x scrap) Source: the BLOOMBERG PROFESSIONAL service, CRU, Thomson Reuters (raw material cost 1.6x iron ore,.6x met coal,.15x scrap) Export market metal spreads improved sharply in early 216 but have subsided slightly since prices in the export market fell in late Q2. Spreads, however, remain elevated relative to most of the post 8 crisis period. China and regional normalised pricing updated Figure 2: China HRC export price vs. raw material cost (Jan 9 = ) Figure 21: China HRC export price and raw material cost vs. implied margin (spread) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct China hrc export price Raw material cost China epxorts implied margin $/t (RHS) China hrc export price $/t Raw material cost $/MT Source: CRU, the BLOOMBERG PROFESSIONAL service, Thomson Reuters, Credit Suisse research Source: CRU, the BLOOMBERG PROFESSIONAL service, Thomson Reuters (raw material cost 1.6x iron ore,.6x met coal,.12x scrap) As we have done throughout this year, above and below, we look at the average spread of Chinese domestic steel prices versus raw materials and the implications this has on global pricing. In the spread was relatively stable at around US$192/t over raw material costs. This spread grew to over US$25/t in 214 in the global restock and fell to a trough of US$11/t in the 215 destock (but averaged around US$192/t in the period). Global Steel 1

11 Figure 22: China HRC export price raw material cost spread Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 China export implied margin $/t Normalised (21-14) Source: CRU, the BLOOMBERG PROFESSIONAL service, Thomson Reuters, Credit Suisse research Figure 23: Normalised HRC export price calculation China normalised hrc export price ($/t) Normalised China hrc export margin Iron ore (Fe 63.5) 58 Coking coal 26 China heavy scrap 226 Spot Raw material cost x iron ore+.6x coal+.12x scrap Normalised hrc export price 435 Spot 378 Upside (downside) risk 15% Source: CRU, the BLOOMBERG PROFESSIONAL service, Thomson Reuters, Credit Suisse research Looking at the detail behind the numbers, using spot iron ore, coking coal and scrap prices, the implied raw material cost for China stands at US$243/t per tonne of steel. The spread between the China HRC export price and the raw material cost on a normalised basis (21-14) is US$192/t (we update our table for new spot coal series). This should give a normalised China HRC export price of US$435/t. Given that China is the largest global exporter of steel, it is this price that should in the long term drive regional domestic prices. We would assume a spread of around US$/t to account for shipping cost, insurance, delivery and time factors on top of the Chinese export price, meaning regional prices should normalise somewhere around US$535/t (the export price plus costs of importing). US$435/t is significantly above the low of around US$27/t, which was seen in Q4 215/Q1 216 in China and also in global export markets. Regional prices derived from the China export price spread Figure 24: US domestic HRC price vs. China HRC export price ($/t) 1, Figure 25: US domestic HRC price China HRC export price spread ($/t) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 Spread vs. US ($/t) RHS US domestic hrc price ($/t) China hrc export price ($/t) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 China export-us domestic hrc spread ($/t) Normalised (21-14), CRU, Credit Suisse research, CRU, Credit Suisse research On a normalised basis (21-14), the spread between the US domestic HRC price and the China HRC export price stood at US$139/t, on average, which accounts for factors such as freight, insurance and quality/service discount. We disregard 9 given that it was the height of the financial crisis and hence abnormal from a comparison perspective. Adding this to the normalised China HRC export price at spot raw material cost, we get a normalised US domestic HRC price of US$574/t. Similarly, we get the normalised spreads for EU domestic, Brazil domestic, Japan export, LatAm export and CIS export prices as we show below. Global Steel 11

12 Figure 26: German domestic HRC price China HRC export price spread ($/t) 25 Figure 27: China vs. CIS HRC export prices ($/t) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct-1 China export-eu domestic hrc spread ($/t) Normalised (21-14) Steel China FOB HR Coil $/MT Steel HR Coil CIS $/MT, CRU, Credit Suisse research, CRU, Credit Suisse research The normalised spread for Europe is more like US$81/t and adding this back to the above indicates a normalised European HRC price of around USD$516/t. We see in Figure 27 that the CIS HRC export price follows the China HRC export price closely, implying zero spread versus the Chinese export prices. Figure 28: Normalised regional HRC prices USD per metric tonne Normalised hrc prices ($/t) US domestic EU domestic Brazil domestic CIS export Japan export Normalised China hrc export price Normalised spread LatAm export Implied normalised hrc price Spot price Implied normalised price less spot price (9) Upside (downside) risk Q1 average price Implied normalised price less Q1 avg Q2 average price Implied normalised price less Q2 avg. (53) Upside (downside) risk Source: CRU, Thomson Reuters, Credit Suisse research Global Steel 12

13 Figure 29: Implied margin trend USD per metric tonne ($/t) Q1 Q2 Q3 (qtd) Spot Trend US Domestic hrc Iron ore contract Met coal contract Scrap Raw material cost Implied margin EU Domestic hrc Iron ore contract Met coal contract Scrap Raw material cost Implied margin China Export hrc Iron ore contract Met coal contract Scrap Raw material cost Implied margin Source: CRU, Thomson Reuters, Credit Suisse research (raw material cost 1.6x iron ore,.6x met coal,.15x scrap,.12x for China) For Chinese exports specifically, as we show above, spot spreads have now moved close to the very weak levels in Q1 216 when Chinese steel makers were forced to cut output. Export tonnes should be losing profitability rapidly, especially as Chinese producers tend to buy met coal on a spot basis. We think there could be significant upward pressure on steel prices in the next quarter as long as global demand remains robust. Global Steel 13

14 Trade data Figure 3: Steel trade data Exports of Semi- finished and Finished Steel Products Mt EU Other Europe CIS Russia North America US South America Brazil Africa Middle East Asia China Japan India South Korea Oceania World Imports of Semi- finished and Finished Steel Products Mt EU Other Europe CIS Russia North America US South America Brazil Africa Middle East Asia China Japan India South Korea Oceania World Net Imports (Exports) of Semi- finished and Finished Steel Products Mt EU 28 (17.4) (27.9) (24.4) (1.4) (9.5) (9.9) (9.1) (11.1) (11.2) (1.5) (12.8) (11.1) (8.9) (6.8) (16.2) (11.7) (7.9) 3.9 Other Europe.2 (.8) (.4).7 (1.3) 1.7 (2.5) 3.5 (1.4) (3.) (.2) (3.2) (5.3) (1.4) (5.3) (5.2) (.9) (.3) 7.3 CIS (35.4) (35.8) (39.9) (38.1) (45.9) (49.2) (49.4) (53.4) (52.2) (55.4) (53.2) (54.3) (49.8) (48.1) (45.8) (44.8) (4.1) (38.3) (35.2) (37.8) (39.2) Russia (23.4) (22.8) (22.) (2.8) (24.7) (24.6) (22.5) (25.5) (24.9) (26.3) (26.3) (25.6) (22.1) (22.7) (24.) (22.2) (17.5) (19.8) (17.1) (21.6) (25.3) North America US South America (7.6) (9.4) (6.7) (5.7) (9.4) (8.2) (7.7) (12.3) (13.9) (11.5) (11.5) (7.5) (4.6) (.7) (3.) Brazil (9.4) (9.9) (8.4) (7.9) (9.4) (8.7) (8.2) (1.9) (12.4) (11.4) (11.8) (1.7) (8.8) (6.6) (6.3) (3.1) (7.) (5.9) (4.4) (5.8) (1.5) Africa Middle East Asia (5.1) (29.7) (37.4) (28.) 3.8 (16.6) (28.8) (35.) (39.1) (62.9) (69.4) China (.1) (32.6) (49.2) (4.7) (1.6) (24.5) (31.6) (4.6) (46.8) (78.) (98.4) Japan (15.1) (13.3) (16.5) (2.1) (21.3) (23.4) (25.4) (31.9) (3.5) (3.6) (26.8) (3.1) (3.9) (32.4) (3.3) (37.7) (35.1) (35.7) (37.1) (34.6) (34.9) India (.2) (1.2) (1.4) (1.8) (3.) (2.7) (.7) (1.2) 1.1 (.5) (2.7) (.9) 5.7 South Korea (1.9) (14.8) (4.8) (2.4) (3.2) (6.) (9.8) (9.9) (9.5) (9.5) Oceania (2.) (2.1) (2.) (.5) (1.5) (.6) Source: WSA Global Steel 14

15 Figure 31: Exports vs. production of semi and finished steel products (Mt) Figure 32: Global steel demand by sector (214) 1,8 1,6 1,4 45% 4% Automotive, 13% Other Transport, 5% World 1, 1, % 3% Metal Products, 11% Construction, 5% 4 25% % Mechanical Machinery, 16% Electrical Equipment, 3% Domestic Appliances, 2% Production Of which exports Exports % production Source: WSA Source: WSA Figure 33: Global trade flows in 215 Exporter Importer 215 (Mt) EU 28 Other Europe CIS NAFTA Other America Africa and Middle East China Japan Other Asia Oceania Total imports extraregional imports EU Other Europe CIS NAFTA Other America Africa Middle East China Japan Other Asia Oceania Total exports extra-regional exports Net exports (imports) (3.9) (7.3) 39.2 (35.6) (3.5) (55.7) (63.9) (2.6) Source: WSA Global Steel 15

16 Equity performance Figure 34: Global steel equities vs. non-financials (1996=) Figure 35: Global steel equities vs. non-financials (211=) Sep-96 May-97 Jan-98 Sep-98 May-99 Jan- Sep- May-1 Jan-2 Sep-2 May-3 Jan-4 Sep-4 May-5 Jan-6 Sep-6 May-7 Sep-8 May-9 Sep-1 May-11 Sep-12 May-13 Sep-14 May-15 Sep-16 World steel equities World non-financials World steel equities World non-financials (Datastream Iron & Steel equities for all regions) (Datastream Iron & Steel equities for all regions) Figure 36: Regional steel equities performance (Jan- 21=) Figure 37: Regional steel equities performance (Iron ore trough 11-Dec-215=) Apr-1 Jul-1 Oct-1 Dec-15 Feb-16 Mar-16 May-16 Jun-16 Aug-16 Sep-16 China EU India Japan Brazil Russia South Korea US China EU India Japan Brazil Russia South Korea US Global Steel 16

17 Figure 38: Equity performance Name STEEL Asia Ticker Market Cap (US$m) Share price (Local) Share Price Currency 1W 1M 3M 6M YTD 12M 2Y 3Y 5Y Angang Steel Company Ltd 347.HK 4, HKD -7% 5% 11% 12% 24% 2% -21% -17% -11% Baosteel 619.SS 12, CNY % % % -6% -12% -13% 14% 17% -4% China Steel 2.TW 11, TWD % -3% 7% -1% 22% 13% -16% -14% -23% Hitachi Metals , JPY % 5% 21% 2% -2% -14% -38% -2% 36% Hyundai Steel Co. 42.KS 6, KRW 2% 1% 14% -8% 3% % -33% -39% -42% JFE , JPY -3% -6% 16% -9% -25% -13% -36% -46% -11% Jindal Steel & Power Ltd JNSP.BO 1, INR 1% -4% 23% 35% -14% 4% -56% -66% -84% JSW Steel Ltd JSTL.BO 6, INR 1% 1% 24% 45% 73% 15% 45% 142% 211% Kobe Steel 546 3, JPY -2% % 1% -14% -32% -37% -5% -51% -32% Maanshan Iron & Steel Co Ltd 323.HK 2, HKD -6% -4% 6% 22% 6% 2% 2% -9% -3% Nippon Steel & Sumitomo Metal , JPY -1% -3% 8% -1% -16% -11% -31% -43% NA POSCO 549.KS 18, KRW 2% 3% 15% 9% 38% 34% -31% -29% -38% Steel Authority of India Ltd SAIL.BO 3, INR 2% 2% 14% 15% 1% -5% -32% -5% -54% Tata Steel Ltd TISC.BO 5, INR 3% 3% 22% 27% 48% 81% -2% 32% -11% Australia Arrium OST.AX 5.22 AUD % % % -4% -62% -76% -94% -98% -98% BlueScope Steel BSL.AX 3, AUD 8% -1% 3% 31% 8% 18% 45% 72% 115% Sims Metal Management SGM.AX 1, AUD 1% -6% 17% 4% 26% -6% -19% -6% -27% Europe Acerinox ACX.MC 3, EUR 2% 1% 21% 23% 3% 56% 3% 51% 52% Aperam APAM.AS 3, EUR 3% 6% 33% 26% 22% 77% 54% 247% 25% ArcelorMittal MT.N 18, USD 5% -1% 34% 42% 88% 52% -43% -43% -51% Evraz EVRE.L 2, GBp 2% 14% 24% 73% 114% 122% 24% 27% NA Kloeckner & Co. KCOGn.DE Magnitogorsk Steel MAGNq.L 5, USD 1% -6% 26% 45% 76% 45% 127% 84% 17% Novolipetsk Steel NLMKq.L 8, USD -1% -5% 6% 1% 57% 23% -9% -2% -39% Outokumpu OUT1V.HE 2, EUR 8% 11% 68% 78% 118% 188% 5% 34% -49% Salzgitter SZGG.DE 1, EUR 2% -1% 23% 19% 26% 31% 4% -8% -22% Severstal SVSTq.L 9, USD 2% % 16% 2% 47% 19% 24% 39% 13% SSAB SSABa.ST 2, SEK 2% -1% 29% 18% 41% 23% -48% -24% -38% Tenaris TENR.MI 14, EUR -3% -11% -8% 9% 6% 1% -35% -31% 26% Thyssen Krupp AG TKAG.DE 13, EUR 1% -2% 19% 23% 14% 37% -1% 18% 8% Vallourec VLLP.PA 1, EUR -6% -12% 25% 11% -29% -22% -83% -86% -87% Voestalpine VOES.VI 6, EUR % % 8% 11% 8% 5% -4% -13% 33% Latin America Companhia Siderurgica Nacional CSNA3.SA 3, BRL -3% -2% 15% 1% 115% 117% -7% -11% -42% Gerdau GGBR4.SA 4, BRL -2% -6% 5% 39% 86% 47% -29% -49% -38% Industrias CH S.A.B. de C.V. ICHB.MX 1, MXN 1% 8% 17% 46% 58% 56% 24% 12% 122% Ternium TX 3, USD -4% -9% 3% 6% 52% 61% -22% -22% -9% Usiminas United States USIM5.SA AK Steel Holding Corp. AKS.N 1, USD 3% 6% 14% 17% 117% 117% -43% 27% -27% Commercial Metals Co. CMC.N 1, USD 1% 2% 1% -2% 19% 21% -8% -4% 69% Nucor Corporation NUE.N 15, USD 3% 1% 4% 5% 22% 33% -11% 1% 54% Steel Dynamics, Inc. STLD.OQ 6, USD 2% 3% 8% 14% 42% 52% 1% 54% 15% United States Steel Corp. X.N 3, USD 7% -3% 22% 24% 141% 89% -54% -6% -14% (share price as of 27 Sep 216) RESTRICTED RESTRICTED Global Steel 17

18 Figure 39: Valuation sheet Valuations VALUATION (FY BASIS) Investment MktCap EV Share Target Target PE EV:EBITDA P/B DivYld Name Ticker Rating USD USD price Price Price FYE US$mn US$mn (local) (local) Upside Date x x x x x x x % STEEL Asia Angang Steel Company Ltd 347.HK OUTPERFORM 4,767 8, % Dec % Baosteel 619.SS OUTPERFORM 12,96 17, % Dec % China Steel 2.TW NEUTRAL 11,23 19, % Dec % Hitachi Metals 5486 OUTPERFORM 5,148 6,37 1,211. 1,52. 26% Mar % Hyundai Steel Co. 42.KS OUTPERFORM 6,235 16,547 51,. 72,. 41% Dec % JFE 5411 OUTPERFORM 8,227 19,98 1,435. 2,. 39% Mar % Jindal Steel & Power Ltd JNSP.BO OUTPERFORM 1,122 8, % Mar % JSW Steel Ltd JSTL.BO OUTPERFORM 6,459 12,264 1,775 2,. 13% Mar % Kobe Steel 546 NEUTRAL 3,267 8, ,. 11% Mar % Maanshan Iron & Steel Co Ltd 323.HK OUTPERFORM 2,845 5, % Dec % Nippon Steel & Sumitomo Metal 541 NEUTRAL 17,72 34,664 2,17.5 2,35. 16% Mar % POSCO 549.KS OUTPERFORM 18,261 35,58 229,5. 28,. 22% Dec % Steel Authority of India Ltd SAIL.BO UNDERPERFORM 3,3 8, % Mar % Tata Steel Ltd TISC.BO OUTPERFORM 5,551 17, % Mar % Australia Arrium OST.AX UNDERPERFORM 5 1, % Jun % BlueScope Steel BSL.AX OUTPERFORM 3,56 4, % Jun % Sims Metal Management SGM.AX NEUTRAL 1,385 1, % Jun % Europe Acerinox ACX.MC OUTPERFORM 3,61 4, % Dec % Aperam APAM.AS NEUTRAL 3,512 3, % Dec % ArcelorMittal MT.N OUTPERFORM 18,483 39, % Dec % Evraz EVRE.L OUTPERFORM 2,879 7, % Dec % Kloeckner & Co. KCOGn.DE RESTRICTED Magnitogorsk Steel MAGNq.L OUTPERFORM 5,49 6, % Dec % Novolipetsk Steel NLMKq.L OUTPERFORM 8,1 9, % Dec % Outokumpu OUT1V.HE OUTPERFORM 2,781 4, % Dec % Salzgitter SZGG.DE OUTPERFORM 1,925 3, % Dec % Severstal SVSTq.L OUTPERFORM 9,987 1, % Dec % SSAB SSABa.ST NEUTRAL 2,541 5, % Dec % Tenaris TENR.MI UNDERPERFORM 14,936 12, % Dec % Thyssen Krupp AG TKAG.DE OUTPERFORM 13,21 25, % Sep % Vallourec VLLP.PA UNDERPERFORM 1,834 3, % Dec % Voestalpine VOES.VI NEUTRAL 6,21 11, % Mar % Latin America Companhia Siderurgica Nacional CSNA3.SA UNDERPERFORM 3,555 11, % Dec % Gerdau GGBR4.SA OUTPERFORM 4,355 9, % Dec % Industrias CH S.A.B. de C.V. ICHB.MX UNDERPERFORM 1,971 1, % Dec % Ternium TX NEUTRAL 3,787 5, % Dec % Usiminas USIM5.SA RESTRICTED United States AK Steel Holding Corp. AKS.N OUTPERFORM 1,155 3, % Dec % Commercial Metals Co. CMC.N NEUTRAL 1,862 2, % Aug % Nucor Corporation NUE.N NEUTRAL 15,622 18, % Dec % Steel Dynamics, Inc. STLD.OQ OUTPERFORM 6,192 8, % Dec % United States Steel Corp. X.N OUTPERFORM 3,185 5, % Dec % Source: IBES, Thomson Reuters, Credit Suisse estimates (share price as of 27 Sep 216) Global Steel 18

19 Figure 4: EV/sales vs. EBITDA margin 216E JSW CSN --EV/Sales Tata Steel Sims Metal Acerinox Thyssen USX Angang Nucor Gerdau Maanshan Nippon POSCO Voestalpine JFE Arcelormittal BlueScope Hyundai steel Novolipetsk EBITDA margin-- Source: Credit Suisse estimates Global Steel 19

20 China Figure 41: China steel dashboard Dashboard China Unit Trend Steel production Mt y-o-y 4% 18% 2% 22% 23% 3% 18% 16% 5% 13% 11% 1% 4% 12% % -2% BOF 83% 84% 83% 82% 82% 88% 9% 88% 87% 9% 9% 9% 91% 93% 94% 94% EAF 16% 16% 17% 18% 18% 12% 11% 12% 12% 1% 1% 1% 9% 7% 6% 6% Other 1% 1% % % % % % % % % % % % % % % Hot rolled production: Flat 43% 39% 32% 41% 43% 37% 37% 4% 42% 4% 42% 4% 38% 38% 38% Long 57% 61% 68% 59% 57% 63% 63% 6% 58% 6% 58% 6% 62% 62% 62% Steel price $/t y-o-y 13% -7% 6% 22% 33% -3% -6% 16% 3% -25% 16% 14% -13% -5% -11% -31% Inventory at major cities kt 7,482 1,374 15,121 14,834 14,942 16,562 13,917 11,697 y-o-y 39% 46% -2% 1% 11% -16% -16% China net exports (imports) Mt (1) (19) (23) (35) (13) () y-o-y 12% -86% -23% -54% 62% 97% nm 57% -14% -97% 183% 29% 3% 15% 67% 26% USD to CNY nm y-o-y % % % % % -1% -3% -5% -9% -2% -1% -4% -2% -3% % 2% Steel equities vs. Shanghai SE Steel equities perf. 48% -25% -12% 46% -16% -29% 89% 164% -72% 92% -32% -29% -6% -23% 71% -14% Relative perf. -2% -4% 6% 32% % -23% -18% 35% -19% 7% -21% -9% -9% -17% 12% -21% Trailing months Unit Aug-15 Sep-15 Nov-15 Dec-15 Feb-16 Mar-16 May-16 Jun-16 Aug-16 Sep-16 Steel production Mt y-o-y -6% -3% -3% -3% -2% -5% -7% -4% 3% 1% 2% 2% 3% m-o-m -5% 3% -1% % -4% 2% -3% -6% 21% -2% 2% -1% -4% Steel price $/t y-o-y -37% -38% -37% -37% -4% -4% -33% -25% -9% 11% 5% 2% 16% 25% 29% m-o-m -11% -1% -4% -3% -5% -1% 4% 2% 19% 2% -6% -8% 1% 7% -1% Inventory at major cities kt 11,688 1,63 1,26 9,642 9,151 8,63 9,123 12,637 11,475 9,87 9,482 8,978 8,858 9,367 9,65 y-o-y -1% -14% -11% -8% -6% -1% -17% -14% -25% -33% -27% -3% -24% -12% -6% m-o-m -9% -9% -3% -6% -5% -6% 6% 39% -9% -21% 4% -5% -1% 6% 3% China net exports (imports) kt 8,481 8,55 1,2 7,922 8,562 9,289 8,591 7,66 8,554 7,772 8,174 9,613 8,989 7,9 y-o-y 21% 26% 33% 6% -1% 5% -5% 5% 3% 6% 2% 24% 6% -6% m-o-m 1% % 16% -2% 7% 11% -9% -17% 23% -9% 4% 16% -6% -11% USD to CNY nm y-o-y % 4% 4% 4% 4% 4% 6% 4% 4% 4% 5% 6% 8% 4% 5% m-o-m % 3% % % % 1% 2% -1% % % 1% 1% 1% -1% % Steel equities vs. Shanghai SE Steel equities perf. -18% -13% -16% 6% -5% 1% -16% -1% 6% 4% -8% -4% 1% 4% -3% Relative perf. -5% -1% -11% -4% -6% -1% 8% 1% -5% 6% -7% -5% -1% % %, WSA, ISSB, the BLOOMBERG PROFESSIONAL service Analyst comments: Trina Chen China 7M16A steel production was 468mnt, -.8% yoy. We expect production for the full year to reach 83mnt, i.e. almost flat yoy. On 217E, we expect production to decline slightly to 795mnt, driven by lower exports, post the first batch of capacity closure to be executed by 216 year end. Steel demand has been well supported by the start of new infrastructure since March 216, while property remains stable. We expect the trend to continue in 217. Steel inventory has been 3-4% below the 215 level in general, with the exception of rebar inventory, which has picked up recently. Apparent demand outlook real demand plus inventory build or destock potential ahead. Steel margin remains structurally better than in 215, and we expect current levels (Unit cash profit between US$2-6/t) to continue, amid mini-cycles. Global Steel 2

21 We expect positive earnings surprises on Chinese steel names, with ROE at 7-1% level in the coming quarters. With respect to capacity cuts, YTD, we have seen mnt of capacity already in longsuspension, or 1% of the industry. The Chinese government also plans to close 15mnt capacity in the next three years. Risks include increased capacity/competition, protectionism (i.e. against China is a risk to China) and a swing in demand should unexpected events take place. Upcoming earnings should provide more comfort to the market on the sector. Angang (347 HK) is our top pick. We do not have Underperform ratings on any Chinese names. On a relative basis, we prefer Angang (347.HK) over Maanshan (323.HK). Key Charts Figure 42: China steel production vs. yoy 75, 65, 55, 45, 35, 25, 5% 4% 3% 2% 1% % Figure 43: China domestic HRC price ($/t) , 5, Oct-96 Jul-97 Apr-98 Oct-99 Jul- Apr-1 Jan-2 Oct-2 Jul-3 Apr-4 Jan-5 Oct-5 Jul-6 Apr-7 Oct-8 Jul-9 Apr-1-1% -2% China steel production (kt) China steel production y/y Linear (China steel production y/y) Jan-97 Sep-97 May-98 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Sep-11 May-12 Sep-13 May-14 Sep-15 May-16 China domestic hrc $/t Average (211-14) Source: WSA Figure 44: China HRC vs. raw material cost vs. implied margin ($/t) Jan-9 Apr-9 Jul-9 Oct-9 Apr-1 Jul-1 Oct Implied margin $/MT (RHS) China domestic hrc $/t Raw material cost $/MT Global Steel 21

22 Figure 45: China apparent demand vs. real demand index (yoy) Figure 46: China apparent demand vs. real demand index (yoy) vs. inventories (kt) 5% 4% 3% 2% 1% % -1% -2% Jan- Aug- Mar-1 Oct-1 May-2 Dec-2 Jul-3 Feb-4 Sep-4 Apr-5 Nov-5 Jun-6 Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Nov-12 Jun-13 Aug-14 Mar-15 May-16 3% 25% 2% 15% 1% 5% % -5% -1% -15% -2% Feb-8 Jun-8 Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 Oct-1 Feb-11 Jun-11 Feb-12 Jun-12 Feb-13 Jun-13 Feb-14 Jun-14 Feb-15 Jun-15 Feb-16 Jun-16 25, 2, 15, 1, 5, China apparent demand y/y China real demand y/y China inventories (kt), RHS China apparent demand y/y China real demand y/y, WSA, ISSB, the BLOOMBERG PROFESSIONAL service, WSA, ISSB, the BLOOMBERG PROFESSIONAL service, MySteel Figure 47: China steel inventory at major cities (kt) vs. implied I/S ratio Figure 48: China steel exports (kt) vs. yoy 25,.4 12, 2,.35 1, 125% 15,.3 8, 75% 1,.25 6, 25% 4, 5,.2 2, -25% - May-8 Sep-8 Jan-9 May-9 Sep-9 May-1 Sep-1 May-11 Sep-11 May-12 Sep-12 May-13 Sep-13 May-14 Sep-14 May-15 Sep-15 May-16 Sep Jan-97 Sep-97 May-98 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Sep-11 May-12 Sep-13 May-14 Sep-15 May-16-75% China steel inventory at major cities (kt) Implied I/S ratio China steel exports (kt) Exports y/y Source: MySteel Source: ISSB, the BLOOMBERG PROFESSIONAL service Figure 49: China steel equities vs. SSE A shares index (1996=) 1, 1, Figure 5: China steel equities vs. SSE A shares index (211=) Sep-96 May-97 Jan-98 Sep-98 May-99 Jan- Sep- May-1 Jan-2 Sep-2 May-3 Jan-4 Sep-4 May-5 Jan-6 Sep-6 May-7 Sep-8 May-9 Sep-1 May-11 Sep-12 May-13 Sep-14 May-15 Sep-16 China steel equities Shanghai SE A China steel equities Shanghai SE A Global Steel 22

23 Figure 51: USD in CNY vs. yoy Figure 52: China steel demand by sector (215) % 8% 6% 4% 2% White goods, 1% Energy-related, 4% Containers, 1% Railways, 1% Others, 11% China 7. % Shipbuilding, 2% % -4% -6% -8% Automobiles, 8% Construction, 53% 5.5 Oct-96 Jul-97 Apr-98 Oct-99 Jul- Apr-1 Jan-2 Oct-2 Jul-3 Apr-4 Jan-5 Oct-5 Jul-6 Apr-7 Oct-8 Jul-9 Apr-1-1% Machinery, 19% USD to CNY y/y Source: CISA Global Steel 23

24 Figure 53: EU steel dashboard EU Dashboard EU Unit Trend Steel production Mt y-o-y 6% -3% % 2% 5% -3% 6% 1% -5% -3% 24% 3% -5% -1% 2% -2% BOF 62% 61% 62% 62% 61% 61% 59% 59% 58% 56% 59% 57% 58% 6% 61% 61% EAF 37% 38% 38% 38% 38% 38% 4% 4% 42% 44% 41% 43% 42% 4% 39% 39% Other 1% % % % % % % % % % % % % % % % Hot rolled production: Flat 61% 6% 6% 6% 61% 61% 6% 59% 59% 57% 61% 6% 61% 61% 62% Long 39% 4% 4% 4% 39% 39% 4% 41% 41% 43% 39% 4% 39% 39% 38% Steel price $/t y-o-y 17% -21% 12% 34% 58% 2% 4% 14% 39% -38% 21% 12% -14% -6% -8% -26% Flat carbon inventory kt 1,129 1,188 1,154 1,97 1,166 1,315 1,27 1,476 1,49 1,196 1,314 1,549 1,513 1,38 1,432 1,264 y-o-y 15% 5% -3% -5% 6% 13% -8% 22% 1% -2% 1% 18% -2% -9% 4% -12% EU net imports (exports) kt 465 (3,554) (8,116) (6,338) (8,15) 3,58 1,55 1,968 (9,517) (9,259) (5,89) (13,855) (1,179) (7,734) (1,298) y-o-y nm -128% 22% -29% nm 245% -81% nm 3% 36% -135% 27% 24% 83% USD to EUR nm y-o-y 16% 3% -5% -17% -9% % -1% -8% -6% 5% 5% -5% 8% -3% % 2% Steel equities vs. Stoxx 6 Steel equities perf. -39% 3% -2% 54% 53% 24% 111% 37% -65% 87% -6% -42% -2% 1% -25% -36% Relative perf. -36% 25% 45% 35% 4% % 79% 37% -36% 46% -14% -35% -14% -14% -28% -4% Trailing months Unit Aug-15 Sep-15 Nov-15 Dec-15 Feb-16 Mar-16 May-16 Jun-16 Aug-16 Sep-16 Steel production Mt y-o-y -2% % -5% -5% -8% -8% -7% -4% -8% -5% -6% -5% -5% m-o-m -6% -11% 11% 4% -6% -12% 17% -1% 7% -6% 7% -5% -6% Steel price $/t y-o-y -23% -22% -23% -27% -31% -31% -28% -24% -16% -8% 4% 7% 7% 9% 14% m-o-m -2% % -4% -6% -1% -3% -2% 3% 7% 8% 16% 4% -3% 1% 1% Flat carbon inventory kt 1,273 1,34 1,315 1,296 1,168 1,11 1,184 1,223 1,24 1,253 1,347 1,363 1,391 y-o-y -15% -6% -4% -4% -12% -17% -8% -5% -5% -1% 8% 4% 9% m-o-m -3% 2% 1% -1% -1% -6% 8% 3% 1% 1% 8% 1% 2% EU net imports (exports) kt (356) (355) 23 y-o-y nm nm nm nm nm 65% nm nm nm nm nm nm 351% m-o-m 143% -47% 126% 35% -93% nm nm -34% -72% 39% 32% nm nm USD to EUR nm y-o-y 23% 2% 15% 13% 16% 13% 7% 2% -3% -5% -1% % % -1% % m-o-m 2% -1% -1% % 5% -2% % -2% % -2% % 1% 2% -1% % Steel equities vs. Stoxx 6 Steel equities perf. -6% -9% -18% 1% -4% -8% -13% 8% 22% 14% -6% -1% 16% -4% -2% Relative perf. -9% % -15% 2% -6% -3% -7% 11% 21% 13% -8% 4% 12% -5% % Source: WSA, CRU, Eurofer, Thomson Reuters (German domestic hrc price for steel price, flat and long steel for trade data) Analyst comments: Mike Shillaker Europe has seen a rather sharp pricing recovery ytd with the benchmark HRC price rising from around 3/t at the start of the year to 44/t over the summer. Steelmakers are attempting to push through a further 4/t increase on Q4 business; we also think the semiannual contract price rose by around 8/t for the 1 July contract period. Europe, like the ROW, destocked materially in 214 and more so in 215; inventory was low at the start of the year, and so when the inflationary pressures of iron ore and metallurgical coal began, apparent demand and steel prices began to recover. Metal spreads have widened and earnings have recovered, although many European steel producers will benefit more from price increases in Q3 216 than Q2 given lagged contracts. Spot prices fell sharply immediately after the Brexit vote but also recovered sharply and are now higher than pre-vote. Global Steel 24