SSAB Time for Special Steels to shine BUY TP: SEK47.0

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1 EQUITY RESEARCH Research report prepared by DNB Markets, a division of DNB Bank ASA Materials Initiating coverage SSAB Time for Special Steels to shine We believe SSAB s growing share of niche steel deliveries combined with improved pricing discipline in Europe s steel industry will support earnings. We expect a clear pick-up for the Special Steels division in 218, as production stoppages have meant SSAB has not benefited from improved end-user demand YTD. Our EBITDA estimates are above consensus by 9% for 218 and 1% for 219. We initiate coverage with a BUY recommendation and SEK47 target price. Supportive fundamentals despite Chinese cool-off. The steel market has had support from China, as supply-side reform combined with a strong property market and higher industrial output has boosted sentiment and steel prices globally. Although we believe a slowdown is imminent, we expect more resilient steel prices following production restrictions in China and improved pricing discipline in Europe. SSAB s product mix has been improving (moving towards longer pricing contracts) and we do not expect a margin collapse even if Chinese steel demand cools off. Special Steels could make all the difference. We see clear step-up potential in the Special Steels division s earnings in 218. We believe that underlying demand in key segments (yellow goods, mineral processing, lifting) is stronger than the division s YTD performance might suggest. Production disturbances in Oxelosund have been a bottleneck YTD, but should not limit production hereon in. Growth in most of the division s profitable products (Hardox, wear parts) supports group margin expansion. We see room for the valuation to improve. SSAB has historically traded at a c3% premium to peers, but is now trading at only a 14% premium and a 2% discount to its own 5-year average. In our view its exposure to niche products (c3% of all steel deliveries in 216) should support prices if steel margins contract, while SSAB s growing share of niche steel shipments should mean above-market growth for the group. Initiating coverage with a BUY recommendation and SEK47 target price, which corresponds to a 218e EV/EBITDA of 7.3x, a 3% premium to peers, which is in line with the historical average. Our EBITDA estimates are above consensus by 3% for 217, 9% for 218, and 1% for 219, with the main deviation being Special Steels. Year-end Dec e 218e 219e Revenue (SEKm) 35,89 47,752 56,864 55,354 65,218 67,392 66,848 EBIT adj (SEKm) -1, ,292 4,65 4,989 4,537 PTP (SEKm) -1,728-1,589-1, ,984 4,97 3,854 EPS rep (SEK) EPS adj (SEK) DPS (SEK) EBIT growth adj (%) nm nm nm nm EPS growth adj (%) nm nm nm nm EBIT margin adj (%) nm 1.9 nm EV/EBITDA adj (x) EV/EBIT adj (x) nm nm nm P/E (x) nm nm nm P/E adj (x) nm 5.5 nm P/Book (x) ROE (%) nm nm nm Dividend yield (%) (historical figures), DNB Markets (estimates) BUY TP: SEK47. SSABA versus DJ Stoxx 6 TR (12m) Aug Oct Dec Feb Apr Jun Aug SSAB DJ Stoxx 6 TR (Rebased) Source: Factset SUMMARY Recommendation (prev.) BUY (N/A) Share price (SEK) 4.2 Target price (previous) (SEK) 47. (N/A) Upside/downside potential (%) 17 Tickers SSABA SS, SSABa.ST CAPITAL STRUCTURE No. of shares (m) 1,29.8 No. of shares fully dil. (m) 1,29.8 Market cap. (SEKm) 41,379 NIBD adj end-217e (SEKm) 12,58 Enterprise value adj (SEKm) 53,959 Net debt/ebitda adj (x) 1.68 SHARE PRICE PERFORMANCE Abs. 1/3/12m (%) -5/1/54 Rel. 1/3/12m (%) -3/16/4 High/Low 12m (SEK) 44/23, DNB Markets (estimates) NEXT EVENT Q /1/217 ANALYSTS Antti Kansanen antti.kansanen@dnb.no +44 () Please see the last two pages for important information. This research report was not produced in the US. Analysts employed by non-us affiliates are not registered/ qualified research analysts with FINRA in the United States.

2 216 Special Steels Europe Others 217e Special Steels Europe Others 218e DNB Markets SSAB Investment case overview Share price performance, DNB Markets target price, bear- and bull-case scenarios 55. SEK55. (37%) 5. SEK47. (17%) 45. SEK SEK24. (-4%) 2. Aug 216 Dec 216 Apr 217 Aug 217 Dec 217 Apr 218 Aug 218 Target price methodology Our target price is based on our DCF value and a peer group-based valuation (historical 3% EV/EBITDA premium to peers) of SEK47. Our 218e EBITDA is 9% above consensus. Our bear-case fair value of SEK24 is based on our valuation of the fixed assets and working capital. Our bull-case fair value of SEK55 is based on peak EBITDA/t and 22 delivery targets. Historical Share Price Performance Price Target (Aug 18) Current Share Price Source: FactSet, DNB Markets Source: DNB Markets Downside risks to our investment case Lack of support for key end-user segments, mineral handling, yellow goods and automotive. US plate market enters another trough as end-user demand cools and Section 232 fails to support the industry. Chinese steel industry capacity cuts fall short of targets. DNB Markets investment case and how we differ from consensus We expect earnings to improve in 218 driven by a pick-up in demand in the Special Steels division. Automotive deliveries continue to expand as existing contracts enter mass production. Our EBITDA estimates are above consensus by 3% for 217e and 9% for 218e. Upside risks to our investment case Section 232 prevents steel imports into the US. Chinese stimulus continues to support the country s steel demand and raises global prices in 218. Divestment of Ruukki Construction could strengthen the balance sheet. Source: DNB Markets Source: DNB Markets Source: DNB Markets EBITDA adj. bridge e (SEKm) 1, 9, 8, , 6, 5, 217 2,132 4, 3, 2, 1, 5,3 7,828 8,741 Source: DNB Markets (forecasts), company (historical data) 2

3 Contents Investment case 4 Company overview 6 Divisional overview 6 Production set-up 8 Costs 9 Recent trends in global steel markets 11 Short-term outlook 13 Trade protection 14 Consolidation in European steel industry 17 Divisional breakdown 19 SSAB Special Steels (23% of 216 sales) 19 SSAB Europe (47% of 216 sales) 24 SSAB Americas (19% of 216 sales) 32 Tibnor (12% of 216 sales) 36 Ruukki Construction (1% of 216 sales) 38 Strategy 4 Financial targets 4 Industrial targets for 22 4 Sum of the parts for 22 targets 42 Balance sheet 45 Gearing close to 3% target 45 We expect the first dividends since Capex 45 Guidance 47 Valuation and recommendation 49 DCF valuation 49 Peer group valuation 49 Appendices 54 Company history 54 Management and board 54 Shareholders 56 Important Information 65 3

4 Investment case SSAB is a specialised steel company focused on manufacturing advanced high-strength steels (AHSS) and quenched and tempered steels (Q&T). In addition, it produces standard grade strip, plate and tubular products, and construction solutions. Customers include manufacturers of agricultural, construction, mining, materials handling and heavy transport and lifting equipment, commercial and heavy vehicle OEMs, and the energy sector. We expect more stable steel prices, despite potential China slowdown Robust steel demand in China is supporting global steel prices, and the closure of outdated Chinese production assets is limiting global capacity growth for the first time in 1 years. Consolidation in Europe (with the confirmed ArcelorMittal-Ilva and likely ThyssenKrupp-Tata tie-ins) should improve pricing discipline, which is particularly important if the Chinese steel market cools off. We expect structural changes to lead to a more stable pricing environment for commodity steel in Europe. SSAB has two divisions focused on producing commodity carbon steel products: SSAB Europe and SSAB Americas. Its strength in both is that it can offer the lowest cost for regional end-users and it is the market leader in delivery volumes. One third of SSAB Europe s deliveries are non-standard steel, including advanced highstrength steel (AHHS), with the automotive industry being the largest product segment. An increasing share of speciality products reduces SSAB s exposure to spot prices, as contracts are set for longer periods. We see upside potential from Special Steels SSAB s Special Steels division is focused on producing quenched and tempered (QT) and high-grade advanced high-strength steels, with lifting, construction and mining and mineral processing equipment and heavy transport being the largest end-user segments. In our view, underlying demand in key segments is stronger than the division s YTD performance suggests. Production disturbances in Oxelosund have been a bottleneck, and should not hamper production in H2 217 onwards. We see a clear step-up in the division s earnings in 218e and this is the main reason why our forecasts are above consensus. Increasing opex and capex in the mining industry supports the profitable Hardox and wear parts business. Balance sheet in order SSAB s balance sheet is not a short-term worry to us, and we expect the company to pay its first dividends since 213 in spring 218. End-Q2 net debt was SEK15.7bn, implying gearing of 3%, in line with the company s target. We believe SSAB has no major capex needs in the coming years to expand production or invest in existing production assets outside its normal maintenance. Initiating coverage with a BUY recommendation and SEK47 target price Our target price of SEK47 is based on a peer valuation, and corresponds to a 218e EV/EBITDA of 7.3x; this is a 3% premium to European and US peers and is in line with the 5- and 3-year average. It is a 12% and 8% discount to SSAB s historical 5- and 3-year average, respectively. We believe that such a premium is justified, due to price stability and volume growth prospects from exposure to niche markets. Specialised steel company focused on manufacturing advanced high-strength steels and quenched and tempered steels Better pricing discipline in Europe combined with increasing share of niche product deliveries should mean more stable selling prices We see room for Special Steels earnings to improve next year, as recent production disturbances have ruled out gains from supportive end-user markets Gearing is at the target level, which could mean the first dividends since 213 Initiating coverage with a BUY recommendation and SEK47 target price 4

5 Figure 1: Chinese steel prices have recovered somewhat from their 216 low China - Hot rolled coil (USD/t) Source: Metal Bulletin (underlying data), DNB Markets (further calculations) Figure 2: with a bounce-back following spring weakness Oct-16 Jan-17 Apr-17 Jul-17 China - Hot rolled coil (USD/t) Source: Metal Bulletin (underlying data), DNB Markets (further calculations) Figure 3: Special Steels volume growth (kt) 1,6 1,4 1,2 1, Figure 4: SSAB Europe mix shift 45% 4% 35% 3% 25% 2% 15% 1% 5% 217e 218e 219e % 217e 218e 219e Special Steels deliveries 12m rolling 22 Target Share of premium products 12 rolling 22 Target Source: DNB Markets (forecasts), company (historical data) Source: DNB Markets (forecasts, further calculations), company (historical data) Figure 5: Peers trading below historical average (EV/EBITDA 12-month forward) /8/212 24/8/213 24/8/214 24/8/215 24/8/216 Figure 6: SSAB s premium has come down (EV/EBITDA 12- month forward) 9% 8% 7% 6% 5% 4% 3% 2% 1% % 24/8/212 24/8/213 24/8/214 24/8/215 24/8/216 Peer Group 5y average 3y average 1y average Current Valuation premium/discount 3y average Current 5y average 1y average Source: Bloomberg (underlying data), DNB Markets (further calculations) Source: Bloomberg (underlying data), DNB Markets (further calculations) 5

6 Company overview SSAB is a specialised steel company focused on manufacturing advanced high-strength steels (AHSS) and quenched and tempered steels (Q&T). In addition, it produces standard grade strip, plate and tubular products, and construction solutions. Customers include manufacturers of agricultural, construction, mining, materials handling and heavy transport and lifting equipment, commercial and heavy vehicle OEMs, and the energy sector. SSAB has c16, employees and reported 216 revenue of SEK55bn. Specialised steel company focused on manufacturing advanced high-strength steels and quenched and tempered steels Figure 7: Global steel market 216 Figure 8: SSAB s share of key markets 216 3% 2-25% Heavy plate, Americas 4-5% Flat carbon steels and tubes, Nordic 5-4% QT & AHSS SSAB Market share Global steel market, 1,5mt SSAB market share Total market size, mt (underlying data), DNB Markets (further calculations) (underlying data), DNB Markets (further calculations) In early 214 SSAB made a recommended public share exchange offer to Finnish steelmaker Rautaruukki s shareholders to combine the two companies into a Nordic and US-based steel manufacturer with global reach, and realise cost synergies of SEK1.4bn. The total value of the share exchange offer was SEK1.1bn. Divisional overview SSAB has five divisions: SSAB Special Steels, SSAB Europe, SSAB Americas, Tibnor and Ruukki Construction. The first three are responsible for steel making, with SSAB Europe being the largest by sales and volumes. Tibnor is a Nordic-based steel distributor and Ruukki Construction offers building components and solutions to the Nordic, East European and Russian construction markets. 214 public share offer to Rautaruukki s shareholders to combine companies into a Nordic and US steel manufacturer Five divisions: SSAB Special Steels, SSAB Europe, SSAB Americas, Tibnor and Ruukki Construction Figure 9: Product offering SSAB Special Steels SSAB Europe SSAB Americas Tibnor Ruukki Construction High strength structural steels Hot-rolled plate products Heavy plate Distributor of Steel roofs Wear steels Hot-rolled strip products Quenched and tempered plate steel and other metals Rainwater systems Protection steels Cold-rolled strip products Sandwich panels Tool steels Metal-coated strip products Load-bearing sheets Colour-coated strip products Façade claddings Tubes and sections Frame solutions Infra products 6

7 Figure 1: Net sales by division 216 Figure 11: EBITDA by division % 9% 21% SSAB Special Steels SSAB Europe 14% 4% 6% 28% SSAB Special Steels SSAB Europe 17% SSAB Americas Tibnor SSAB Americas Tibnor Ruukki Construction Ruukki Construction 42% 48% Source: DNB Markets (forecasts), company (historical data). Excludes group adjustments & other Source: DNB Markets (forecasts), company (historical data). Excludes other Figure 12: Net sales (SEKm) and EBITDA margin Figure 13: Steel deliveries (kt) 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, - Q114 Q115 Q116 Q117 Q118e 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.%.% 2, 1,8 1,6 1,4 1,2 1, Q114 Q115 Q116 Q117 Q118e Net Sales EBITDA-margin SSAB Special Steels SSAB Europe SSAB Americas Source: DNB Markets (forecasts), company (historical data) Source: DNB Markets (forecasts), company (historical data) Figure 14: Revenue per tonne of delivered steel (SEK) 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Q114 Q115 Q116 Q117 Q118e Figure 15: EBITDA per tonne of delivered steel (SEK) 3, 2,5 2, 1,5 1, 5 Q114 Q115 Q116 Q117 Q118e SSAB Special steel SSAB Europe SSAB Special steel SSAB Europe SSAB Americas SSAB Americas Source: DNB Markets (forecasts), company (historical data) Source: DNB Markets (forecasts), company (historical data) 7

8 Production set-up SSAB s main production sites are in Sweden, Finland, and the US. It operates five furnaces for steelmaking (Lulea, Raahe, Oxelosund, Mobile, and Montpelier) with annual production capacity of 8.8m tonnes. In 216 headcount was 15,, of which c7% were in Finland and Sweden in the Special Steels and Europe divisions. Main production sites are in Sweden, Finland, and the US Figure 16: SSAB locations Montepelier Established 1997 Heavy plates, R&D center SSAB Americas 5 employees Mobile Established 21 Heavy plates SSAB Americas 6 employees Lulea Established 1941 Steel production SSAB Europe 1,1 employees Borlange Established 1878 Strip products SSAB Europe 1,8 employees Oxelosund Established 1913 Steel production, heavy plates SSAB Special steels 2,1 employees Raahe Established 196 Steel production, heavy plates and strip products SSAB Europe 2,5 employees Hameenlinna Established 1972 Strip products and tubes SSAB Europe 9 employees Figure 17: Employees by country 216 Figure 18: Employees by division 216 Sweden Finland SSAB Special Steel SSAB Europe Russia SSAB Americas USA Tibnor Rest of Europe Rest of the World Ruukki Construction Other SSAB s EMEA production facilities are in Sweden and Finland. It has three blast furnaces, the largest with capacity of 2.3m tonnes in Lulea (Sweden) and two of 2.6m tonnes combined in Raahe (Finland). Raahe is an integrated mill with hot and cold rolling lines. SSAB has a processing and coating plant in Hameenlinna (Finland) and material from Lulea is shipped to Borlange to be cold-rolled. SSAB has two plate mills in the US, one in Mobile (Alabama) and one in Montpellier (Iowa), with combined capacity of 2.5m tonnes. Both are electric arc furnace based mills, producing steel mainly from recycled material using electricity. Special steel is manufactured mainly in Oxelosund with one active blast furnace (other idled with no plans to ramp up) and plate mills and quenching and tempering lines. SSAB also has two Q&T lines in Raahe and one in each of Borlange and Mobile. 8

9 Costs SSAB gave the split between fixed and variable costs in its three steel-making divisions at its CMD in June 217. The split between fixed and variable costs is not as clear-cut in the US, where the cost base is more adjustable, due to scrap fed EAFs and more flexible employment contracts. Figure 19: Fixed and variable costs, SSAB Special Steels Figure 2: Fixed and variable costs, SSAB Europe Figure 21: Fixed and variable costs, SSAB Americas Fixed Variable Fixed Variable Fixed Variable CMD material 217 CMD material 217 CMD material 217 Raw materials account for 36% of operating costs in 216, with iron ore, coal and scrap being the most important. 216 opex was SEK55bn, of which SEK2bn was raw material costs. Raw materials account for 36% of 216 operating costs Figure 22: Operating costs 216 Figure 23: Input material costs 216 Purchas ed products 8% Energy 6% D&A Miscellan 7% eous Iron ore, 2% pellets 25% Input materials 36% Personn el costs 17% Alloys 12% Coal 17% Manufact uring costs 26% Scrap 26% SSAB sources its iron ore from LKAB (Sweden) and Severstal (Russia). The agreement with LKAB runs from April 217 to March 218 and prices are fixed monthly. The agreement with Severstal runs from October 215 to September 218 and prices are fixed monthly. Raw materials sourced with monthly and quarterly contracts SSAB sources coking coal from Australia, the US, Canada and Russia. Price agreements for Australian, Canadian and Russian coal are entered into monthly, whereas those for most US coal are entered into quarterly. SSAB Europe purchases most of its coal in Q2 and Q3, owing to winter conditions in the Baltic Sea preventing deliveries to melt shops in Lulea and Raahe. SSAB s US operations regularly purchase scrap from the spot market as a raw material for production. Due to monthly and quarterly contracts as well as differences in quarterly purchase volumes, SSAB s purchase prices often deviate from spot prices. 9

10 Figure 24: Iron ore SSAB purchase price Figure 25: Coking coal SSAB purchase price, index /214 3/215 9/215 3/216 9/216 3/217 9/2 Iron ore pellets QQ average (indexed) SSAB purchase price (indexed) Coal QQ average (Indexed) Coal price SSAB purchase price (Indexed), Metal Bulletin (underlying data), DNB Markets (further calculations), Metal Bulletin (underlying data), DNB Markets (further calculations) Energy costs accounted for 6% of SSAB s 216 total costs. Electricity and natural gas are the main sources of energy. SSAB has a 3% shareholding in the Finnish Fennovoima project, which plans to build a nuclear power plant in northern Finland Energy costs account for 6% of 216 total costs Figure 26: Energy sources 216 Propane 12% Oil 3% Figure 27: Emissions 216 (kt) 1, 9, 8, 7, 6, Electricit y 51% 5, 4, 3, Natural gas 34% 2, 1, Production in Nordics Production in US Other reported sites Direct GHG emissions Indirect emissions* In 216, SSAB s CO2 emissions were 9,981kt. 9% of total CO2 emissions are generated in iron ore-based steel production at Lulea, Oxelosund and Raahe. 1

11 Recent trends in global steel markets Global steel production had a CAGR of 4%. During the same period, production in China expanded eightfold (CAGR 11%) while the rest of the world grew by only 1.2%. Chinese production in 216 accounted for half of global production. Chinese domestic apparent 1 steel demand per capita was 493kg in 216, more than double the global 28kg and considerably above Europe s 311kg. However, consumption in China has already declined from the peak of 54kg in 213 and steel intensity of a country has historically declined as the economy matures. Looking at more recent trends, Figure 29 illustrates that Chinese crude steel production has flat-lined over the past four years and if we deduct exports, domestic apparent demand actually declined by 6m tonnes in , while exports were up by 47mt tonnes. That increase is equal to 6% of global production outside China. Chinese crude steel production has flatlined over the past four years Figure 28: Crude steel production (Mt) 1,8 1,6 1,4 1,2 1, Figure 29: Chinese steel production (Mt) Rest of the world China Domestic demand Exports Source: Eurofer, OECD Source: Eurofer, World Steel Association Figure 3: Steel capacity (Mt) New capacity e 216 YOY change Under way Planned Total Change from 216 Asia 2,586 1% % CIS 148 2% % Latin America 72 6% % Middle East 6 5% % Africa 35 1% % Europe 283-2% 2 2 1% NAFTA 157 1% 1 1 % Oceania 9 % % World 2,35 2% % Source: OECD Global apparent consumption of steel grew by 39m tonnes in (CAGR 2.7%). At the same time, global production capacity rose by 96m tonnes, resulting in a fall in utilisation from 85% to 68%. 95% of the capacity increase comes from non-oecd countries, including China. In 216 China began a capacity-reduction programme, targeting to cut up to 15m tonnes in five years. The first year was a success, according to Chinese officials, with c65m tonnes shut down and another 5m tonnes targeted for 217. However, the amount closed in 216 was more than offset by capacity additions, resulting in a net increase of 32.4m tons per year. OECD s data suggests that nearly 4m tons of new capacity will come online in , with an additional 54m tons in the planning stages for start-up during the same period. China began a capacity-reduction programme in 216, with mixed success 1 Apparent demand is the sum of production and net imports. The difference between 'apparent' consumption and 'real' consumption is the inclusion of changes in stock levels 11

12 China s capacity reductions have accelerated YTD. According to National Development and Reform Commission production capacity was cut by c42m tonnes in H1 217, 84% of the annual target of 5m tonnes. In June China s State Council sent teams to 18 provinces to investigate whether substandard steel production was taking place. New limitations to production during the country s heating season (November to March) were also set. In early August 217 it was reported that steel production would be capped at 5% of capacity in the key steel-making province of Hebei. The Chinese government is sending out similar inspection teams to other provinces later this month. but capacity reductions have accelerated YTD The three bars on the right on Figure 31 illustrate three scenarios for 22: 1 No new capacity is added and China achieves its 15m tonnes reduction target. 2 New gross capacity of 94m is added and China achieves its 15m tonnes target. 3 New gross capacity of 94m is added and China does not cut additional capacity after 216. With apparent demand growth of 2% p.a., global capacity utilisation improves slightly to 72 78% from 68% in Figure 31: Estimated overcapacity 4, 3,5 3, 2,5 2, 1,5 1, 5 78% 75% 72% 68% e Apparent consumption (Mt) Overcapacity Capacity utilization 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Source: OECD, Eurofer, World Steel Association (underlying data), DNB Markets (further calculations) In the past 12 months Chinese hot-rolled coil prices have been volatile, rallying by 4% between Q3 216 and Q1 217 before falling by 2% in the spring and recovering 25% in the summer. Chinese steel prices have been volatile YTD China s steel PMI, released by the China Federation of Logistics & Purchasing, reached a 14- month high of 54.9 points in July, driven by new orders (up 4.7 points to 63.1 points) and export orders (up 3.6 points to 49.8 points). The elimination of out-dated capacity and government-led plans to cut blast furnace production during winter season, combined with strength in Chinese property sector has pushed the domestic prices higher. China Iron & Steel Association (CISA) reported stable mill inventories at comparatively low levels, suggesting higher production is driven by end-user consumption. Prices of steel futures have increased so rapidly that CISA stated on its social media account that steel futures gains were not a driven by strengthening demand or reduced supply but by misreading of the effect of capacity reductions in H While the cautious statement caused steel futures in China to decline, domestic offer prices are unchanged and export prices continue to increase.. 12

13 Figure 32: China hot-rolled coil price (USD/t) China - Hot rolled coil (USD/t) Source: Metal Bulletin (underlying data), DNB Markets (further calculations) Figure 33: China hot-rolled coil price (USD/t) Oct-16 Jan-17 Apr-17 Jul-17 China - Hot rolled coil (USD/t) Source: Metal Bulletin (underlying data), DNB Markets (further calculations) China is by far the largest gross and net exporter of steel, followed by Japan, Russia, Ukraine, Brazil and Korea. The EU, the US, and Korea are the largest importers. The majority of the steel trade is regional, within Asia (including China), NAFTA and Europe. The largest regional trade flows are CIS and other Europe to the EU, China to the Middle East and Africa and Asia to NAFTA. The EU and the US have placed numerous anti-dumping duties on China, and c65% of Chinese exports now go to other Asian countries. Of these countries only South Korea is a major exporter, mainly responsible for the 7.3t to the EU and 9.4t to NAFTA. In first seven months of 217 China s net steel exports were down c3% YOY at 4m tonnes, as driven strong domestic consumption. China is by far the largest gross and net exporter of steel Figure 34: Imports to Europe 25 3,5 2 3, 15 2, , 1,5-5 1, Figure 35: Imports to US 25 4,5 2 4, 15 3,5 1 3, 5 2,5 2, -5 1,5-1 1, Imports (kt) HCR spread - EUR - CHI (EUR/t) Imports (kt) HCR spread - USD - CHI (USD/t) Source: Bloomberg (underlying data), DNB Markets (further calculations) Source: Bloomberg (underlying data), DNB Markets (further calculations) Short-term outlook The World Steel Association expects global steel demand to grow by c1% p.a. in and Chinese demand to decline in 218, but in our view these forecasts are highly sensitive to mini-cycles driven by Chinese governmental stimulus (as seen in 216). EU and NAFTA growth remains in low single-digit rates. We dig deeper into the regional growth outlook later. With close to flat global demand outlook, we expect changes to Chinese governmental subsidies and restrictions on outdated production capacity to be the key mover of global prices in In July Chinese steel output grew by 1% YOY, in June the growth was 6% and in May 2.5%. China s exports of finished steel declined by 38% YOY in June and by 32% YOY in July, implying that output growth is driven by domestic demand. Inventory levels of HRC have 13

14 remained low, during the period, according to MetalBulletin, implying that the growth has been driven by end-user consumption, and not restocking. We expect global prices to continue to benefit from supply-side restrictions over the winter heating season. However, if China s stimulus to the property market cools off after the 19 th National Congress of the Communist Party (scheduled for November 217), we expect Chinese steel prices to decline, further affecting the price of key raw materials iron ore and coking coal and putting more pressure on steel prices globally. The slowdown would also test the effect of capacity cuts and effectiveness of the anti-dumping duties. Figure 36: Steel demand forecasts (Mt) e 218e YOY change 216 YOY change 217e YOY change 218e EU %.5% 1.4% Other Europe % 2.5% 3.6% CIS % 3.1% 3.4% NAFTA % 2.3% 2.4% Latin America % 3.6% 4.7% Africa % 1.3% 4.2% Middle East % 3.2% 3.6% APAC 1,6 1,16 1,15 2.3% 1.% -.1% World 1,515 1,535 1,549 1.% 1.3%.9% China %.% -2.% World excluding China % 2.4% 3.1% Source: Worldsteel Trade protection The EU Two major trade investigations into hot-rolled flat products have been held YTD, with the EC setting definitive duties on hot-rolled flat products from China in June and scheduled to give its decision on the same products from Ukraine, Russia, Iran, Brazil and Serbia in October. Two major trade investigations YTD in Europe Figure 37: Recent and ongoing carbon steel trade investigations by the European Commission Products Countries Initiation Measures Duties Hot-dipped galvanised coil China 9 December 216 Provisional (definitive measures 8 March 217) % Hot-rolled flat products Ukraine, Iran, Brazil, Russia 7 July 216 Ongoing (definitive measures 6 October 217) % + minimum import price Hot-rolled flat products China 13 May June % Heavy plate China 13 February February % Cold-rolled flat products China, Russia 14 May August 216 China 19 22%, Russia 19 36% Rebar China 3 April June % Source: European Commission In April 217, the EC imposed definitive anti-dumping duties on Chinese hot-rolled flat carbon steel imports to the tune of %. The overlapping anti-subsidy investigation had no impact on imposed duty levels since the injury elimination level caps rates to levels much lower than the dumping margin. Since October when the preliminary duties were imposed, Chinese steel has disappeared from the market while imports from other Asian countries have grown threefold. To our mind, this speaks of the limited effectiveness of the trade protection efforts on import volumes. However, the elimination of low-cost Chinese imports allows European producers to be competitive in pricing. 14

15 Figure 38: All carbon steel imports to EU (kt) monthly average 2,5 2, 1,5 1, Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Rest of the World Asia ex. China China Source: Eurofer In July 217, the EC initiated an investigation into hot-rolled flat carbon steel products originating from Russia, Ukraine, Brazil, and Iran. Metal Bulletin reported the EC calculated anti-dumping duties of % and included a minimum import price of ceur472/t to take into account the rise in raw material prices after the investigation period. Figure 39: Hot-rolled imports to EU (kt), monthly average Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Rest of the World China Asia ex. China Source: Eurofer The US On 8 April 216, the United States International Trade Commission (USITC) initiated an AD/CVD investigation into cut-to-length steel plate from various countries, with preliminary determination coming out in May 216 and the final determinations during spring 217. There is also an ongoing review of CTL plate imports from India, Indonesia, and Korea. The previous review (conducted in 211) concluded that revocation of AD orders would likely lead to a recurrence of dumping at rates of 42%, 51%, and 8% respectively. The review is scheduled to end on 27 November

16 Figure 4: New CTL plate duties imposed in January May 217 Dumping margin Subsidy rate Selected producer(s) All others Selected producer(s) All others China 68.3% 251.% Brazil 74.5% South Africa 87.7% 94.1% Turkey 5.% 42.% Korea 7.4% 4.3% Italy 22.2% 6.1% Japan 48.7% 14.8% Germany 5.4% 21.% France 148.% 8.6% Austria 35.7% Taiwan 7.% 5.3% Belgium 51.8% 5.4% Source: USITC Figure 41: All carbon and alloy steel imports to US (mt) Source: USITC Figure 42: Plate imports to US (kt) 6, Figure 43: Plate imports to US, monthly (kt) 5 5, 4 4, 3, 2, , LTM CTL plate Plate in coils CTL plate Plate in coils Source: USITC Source: USITC The US steel sector has received a lot of attention since President Trump was elected in 216 and particularly since his announcement of greater protection against steel imports to the US. As numerous steel tariffs had been initiated and implemented by the Obama administration, President Trump has taken what we consider to be an unorthodox approach regarding Section 232 of the Trade Expansion Act of This allows the President to take action against imports if they pose a threat to US national security. President Trump taking unorthodox approach regarding Section 232 of Trade Expansion Act of

17 By law, The US Commerce Department has to complete the report before January 218. In May, USCD secretary Wilbur Ross suggested the report would be completed by 3 June. Since then the probe has faced headwinds. We understand the findings were ready in June, but there was intense lobbying from: 1) the US manufacturing sector, citing their competitiveness would be badly hurt if too restrictive barriers were placed; and 2) trade organisations concerned about the backlash from other nations. In his recent public appearances the President has not addressed the issue. Some market participants have said they expect the report to come out in November, but most have cited zero visibility. Section 232 report has to be completed within 27 days We believe the most likely outcome is a hybrid model where imports are capped at a certain percentage of the total market, calculated in a way that domestic capacity utilisation will be c85 9% and a strict tariff placed on any volumes exceeding the cap. It is not clear which steel grades are to be included in the final tariff system. SSAB America has exposure only to plate market, which is widely used in energy, infrastructure, heavy transport and other fixed asset investment driven sectors and should in all likelihood be included in Section 232. SSAB also imports material to the US, including speciality products to the automotive sector. Most specialised products are not replicable short-term and we do not expect a major negative impact to SSAB s US exports. US plate producers ArcelorMittal, SSAB and Nucor increased their prices by USD3/t in June 216. Distributor comments following the price hike indicated that steel mills were trying to remain ahead of the curve on Section 232, as there was little justification form markets to push through a price hike. Lead times and demand for plate in the US were shrinking ahead of the summer slowdown, and distributors were not restocking. Service centres have not been restocking inventories ahead of Section 232 decision US cut-to-length plate imports were 1,51kt in 216, c15% of the market. The share of imports declined to c8% in Q We would expect the import quota to land close to 1%. Korea has been the largest importer of plate (c35% of all imports in 216) despite a 12% tariff already in place. Other importing nations of relevant size have been Canada, Germany, France, and Japan. With many tariffs in place, import volumes clearly down from peaks and domestic plate prices USD26/t (or 58%) higher than in November 216, upside potential for US plate prices could be limited. Section 232 should raise domestic scrap prices, due to higher output in mostly EAF-based domestic steel mills, putting pressure on further price increases. If US demand has positive momentum, further price increases would be easier to push through. Consolidation in European steel industry There are two significant milestones (one confirmed and one likely in our view) in the consolidation of the European steel industry. We do not expect major capacity reductions following the tie-ins, but see improved pricing discipline leading to more stable steel spot prices. Ilva Taranto Ilva Taranto is the largest steel mill in Europe with annual production capacity of c1mt. It had long been linked to the environmental problems in the Taranto area including contamination of soil and air, and high cancer rates among the local population. In 213, its hot working area was placed in special administration, and in 215 the Italian government took control of the troubled plant. Last year Ilva Group announced it would divest the mill, attracting bids from two investor groups: AM Investco consortium (including ArcelorMittal, Marcegaglia and Banca Intensa Sanpaolo) and a consortium of JSW Steel and Cassa Depositi e Prestiti. In June 217, Italy s economic development minister approved the bid by the ArcelorMittal-led group. ArcelorMittal-led consortium acquired Ilva earlier this year In addition to the EUR1.8bn transaction price, the acquiring group is committing an additional EUR2.4bn of investment. Just under half will be used to improve the mill s environmental standards, and the other half for a major capex programme including relining of blast furnace 5 and completing delayed maintenance. Additionally, the group has committed to building an R&D centre in Taranto and shifting towards new low-carbon steel-making technologies. 17

18 Tata Steel and ThyssenKrupp Tata Steel and ThyssenKrupp have been engaged in merger talks since July 216. The potential merger would include the European Steel operations. Tata Steel has two integrated steel-making facilities in the UK and the Netherlands, while ThyssenKrupp's 12mt per annum melting facility and four finishing facilities are in Germany. ThyssenKrupp- Tata JV looks likely to happen Discussions about a merger have been going on for a year, and the main hurdle has been Tata Steel's underfunded GBP15bn UK pension scheme. ThyssenKrupp has been opposed to including Tata Steel's pension liabilities in the deal, forcing Tata Steel to find a way to spin off the pension fund as a standalone entity. UK labour unions have been opposing the plan, anticipating the pension fund would likely be taken over by the Pension Protection Fund (PPF), which would cut benefits by 1%. Tata offered unions a deal guaranteeing jobs and investment in return for pension cutbacks. The offer is to keep production at the Port Talbot plant going for at least five years, and a GBP1.bn investment programme in the UK steel operations over the next 1 years. Meanwhile, ThyssenKrupp is getting pushback from investors and unions alike. The German labour union IG Metall was concerned that the merger would lead to the loss of German jobs, given the assurances UK unions received from Tata Steel. Some ThyssenKrupp investors were also concerned about the merger plans, and management has received criticism for not fully exploring all alternatives, such as spinning off the company s European steel operations. In May 217, Tata Steel said it had reached an agreement on the key commercial terms of the arrangement over the restructuring of its UK pension scheme. Tata offered GBP55m for the British Steel pension scheme, and a 33% equity stake in Tata's UK business. While the exact details are unknown, Tata Steel would be separated from the current pension scheme and sponsor a new modified pension scheme for members and pensioners of BSPS with lower future annual increases. On 11 August Tata Steel UK announced it had signed the necessary documentation with the trustee of the British Steel Pension Scheme, allowing it to separate itself from the pension scheme, in our view clearing the biggest hurdle for the ThyssenKrupp JV. 18

19 Divisional breakdown SSAB has five divisions: three steel-making (Special Steels, Europe and Americas), a Nordic steel distributor (Tibnor), and a building systems and components provider (Ruukki Construction). Production assets are distributed among the divisions, Special Steels consisting of Oxelosud facility, Lulea, Raahe, Borlange and Hameenlinna belonging to Europe and Mobile and Montpellier to Americas. Special steel products are partly manufactured and marketed by other divisions, but deliveries and earnings are booked in Special Steels. SSAB Special Steels (23% of 216 sales) Special Steels focuses on producing structural, wear, protection and tool steel and aftermarket business with wear parts and shape services. Products are branded based on the features and application for which the steel is used. Five divisions: Three steel-making (Special Steels, Europe and Americas) Nordic steel distributor (Tibnor) Building systems and components provider (Ruukki Construction) Focused on structural, wear, protection and tool steel and after-market business with wear parts and shape services Figure 44: Deliveries by product type 216 Figure 45: Share of branded products 216 Strip Heavy plate Strenx and Other Hardox and Raex Figure 46: SSAB brands Special steels are manufactured mainly in Oxelosund with melting capacity of 1.5m tonnes, with one active blast furnace (other idled with no plans to ramp up) and plate mill and nine quenching and tempering lines in Oxelosund, Raahe, Borlange and Mobile. The Oxelosund site is dedicated to Q&T products with the most advanced metallurgy. SSAB s competitive advantage is in its production assets (which can produce demanding applications with superior consistency) and its small scale (which means it can dedicate the Oxelosund site fully to products that larger competitors do not find economically viable, due to the small size of the total market). The share of Q&T of total plate market is only 4 8% in Manufactured mainly in Oxelosund Production assets are its competitive advantage 19

20 Europe and the US and less than 2% in emerging markets, according to SSAB. Its main competitors are ArcelorMittal, ThyssenKrupp, Tata, Voestalpine, Dillinger Hutte and Nucor. Figure 47: Q&T plate as a % of total plate demand, Western Europe Figure 48: Q&T plate as a % of total plate demand, North America Figure 49: Q&T plate as a % of total plate demand, emerging markets 7-8% 4-5% < 2% Q&T Other plate Q&T Other plate Q&T Other plate Source: Assessment of current market, SSAB 217 CMD material Source: Assessment of current market, SSAB 217 CMD material Source: Assessment of current market, SSAB 217 CMD material Special Steels is a global business with demand coming from heavy transport, construction machinery and mining industries. In 216 roughly half of special steels were delivered to Europe and a third to North America. Construction machinery was the largest single end-user segment, followed by trailer and commercial vehicle body builders, and lifting. Due to the premium pricing products travel better, and SSAB s remote location in the Nordics is not a disadvantage. A global business Figure 5: Sales split by end-user segment 216 Figure 51: Sales split by region 216 Lifting Western Europe 23% Trailers and body builders Recycling North America 33% Steel Service Centers Agri, forestry and fishing Raw material handling Construction machinery South America 9% Other 7% APAC 8% North & East Europe 2% SSAB targets 1,35kt of deliveries in 22, suggesting a e CAGR of 7.6%. Volume growth in Special Steels has been disappointing in the past five years, but we see a more supportive market environment for the strategy period. We expect the mining industry s next upcycle to be a strong tailwind for SSAB, due not only to increasing spending but also a changed mind-set in the industry. The last mining boom was very much about expansion and large green-field projects, and mining equipment operators were focused mostly on fleet expansion to meet demand from growth in mining volumes. The consensus now is that the industry is determined to focus on productivity and cash generation. SSAB s offering requires larger opex spending initially, with a lower lifetime cost due to lower operating and maintenance costs from better durability and lower product weight. Targets 1,35kt of deliveries in 22, implying e CAGR of 7.6% 2

21 Figure 52: Manufacturing PMI Europe Figure 53: Manufacturing PMI NAFTA Figure 54: Manufacturing PMI China Manufacturing PMIs - Europe Source: Bloomberg (underlying data), DNB Markets (further calculations) Manufacturing PMIs - NAFTA Source: Bloomberg (underlying data), DNB Markets (further calculations) Manufacturing PMIs - BRICs - China Source: Bloomberg (underlying data), DNB Markets (further calculations) Figure 55: Caterpillar retail sales of resource industry machinery (monthly YOY growth) -1% -2% -3% -4% -5% -6% Source: Caterpillar Figure 57: Komatsu demand for seven major products (monthly YOY growth) % 1% % World Resource Industries -.4 Apr-16 Oct-16 Apr-17 Japan North America Europe Source: Komatsu Note: Seven major products: hydraulic excavators, bulldozers, wheel loaders, dump trucks, motor graders Figure 56: Caterpillar retail sales of construction industry machinery (monthly YOY growth) 15% 1% 5% % -5% -1% -15% -2% Source: Caterpillar World Construction Industries Figure 58: Komatsu demand for seven major products (monthly YOY growth) 3% 25% 2% 15% 1% 5% % Apr-16 Oct-16 Apr-17-5% -1% China Source: Komatsu Note: Seven major products: hydraulic excavators, bulldozers, wheel loaders, dump trucks, motor graders 21

22 Services SSAB Services is part of the strategy to expand downstream into value-added products and services. It consists of design support and pre-fabrication of SSAB s premium steel products. The vision is to integrate itself into the early stages of customers product development process, advising how they can best utilise high-strength steels in their products. Services acts as a platform to support growth of the premium steel segment, while improving downstream profitability. Services has two segments: A platform to support growth of the premium steel segment SSAB Shape combines SSAB s premium steel offering with customised product development, prefabrication and engineering support. SSAB s service centres are equipped to deliver premium steel products tailored to customer specifications, so they can be used directly in customers production without additional welding, cutting, or finishing. Typical customers are OEMs of applications in lifting, heavy transports, and material handling. Hardox Wearparts is a partner network of 3+ Hardox-certified repair shops that offer custom finishing services for Hardox products. The product portfolio includes wear plate, parts, and kits together with complementary products, advisory wear services, installation, and wear monitoring. Customers are end-users in abrasion-intensive industries such as mining, quarrying, construction, and recycling. SSAB aims to expand its distribution network to 5 Hardox Wearparts repair shops by 22. Figure 59: Services roadmap Figure 6: Targeted growth Selling 'uptime' SSAB Shape Hardox Wearparts Install/repair/fabricate Advisory wear service Complementary wear material Portfolio of wear plate, parts and kits Double volumes by 22 Expand industrial platforms Team up projects 5 Hardox Wearparts shops Increase volume Complementary products Applications of SSAB high-strength steel Figure 61: Truck chassis Figure 62: Trailers Figure 63: Tipper bodies Figure 64: Mobile cranes Figure 65: Truck-mounted cranes Figure 66: Loader cranes 22

23 Figure 67: Loader buckets Figure 68: Dumper bodies Figure 69: Grab buckets Figure 7: Agricultural equipment Figure 71: Ore extraction equipment Figure 72: Containers Estimates We do not consider Special Steels profitability an entirely useful reference point for the future. Special Steels has been hampered by low production volumes and extra maintenance costs in the past three quarters. Its main production facility Oxelosund experienced a break-down at the rolling mill in December 216, resulting in major production disturbances in Q4 216 and Q The company flagged 7kt of lost production in the two quarters and a total impact of SEK3m in additional direct costs. In Q2 there was additional unplanned maintenance that disturbed production and resulted in direct expenses of SEK1m. In 215 SSAB Europe s main blast furnace in Lulea was shut for planned relining for c15 weeks from June to mid-september. To replace lost volumes Special Steels production assets were utilised, both the costs booked at Europe divisions P&L, resulting in abnormally good fixed-cost coverage for Special Steels. As a result, EBITDA/t has fluctuated between SEK1,6 and SEK2,37 per tonne, even excluding direct maintenance costs. We expect a clear margin improvement in the division in as we assume: 7.5% p.a. volume growth results in higher fixed-cost coverage. We expect a clear margin improvement in Demand from the mining industry improves the mix, as Hardox plates have above-average margins. Expansion of the wear parts network results in higher service sales. No similar production disturbances as in

24 Figure 73: DNB estimates SSAB Special Steels (SEKm) Q1 217 Q2 217 Q3 217e Q4 217e Q1 218e Q2 218e Q3 218e Q4 218e Q1 219e Q2 219e Q3 219e Q4 219e e 218e 219e Net sales (SEKm) 3,925 4,133 3,496 3,593 4,298 4,612 3,774 3,821 4,631 5,12 4,96 4,153 12,582 15,147 16,55 17,891 EBITDA adj. (SEKm) ,48 1,697 2,432 2,87 EBITDA adj. margin 1% 12% 12% 11% 15% 15% 14% 14% 15% 17% 15% 16% 12% 11% 15% 16% EBIT adj ,164 1,9 2,275 EBIT adj. % 6% 9% 8% 8% 12% 13% 11% 11% 12% 14% 12% 12% 7% 8% 12% 13% Assumptions Deliveries (kt) ,8 1,91 1,174 1,263 ASP (SEK/t) 14,17 13,595 13,76 14,19 14,15 14,47 14,13 14,63 14,71 14,135 14,212 14,286 12,482 13,879 14,58 14,171 Cost (SEK/t) 12,89 11,967 12,121 12,426 12,15 11,873 12,35 12,45 11,934 11,789 12,39 12,66 11,14 12,324 11,987 11,948 EBITDA adj. (SEK/t) 1,361 1,628 1,639 1,593 2,9 2,175 1,978 2,18 2,138 2,345 2,173 2,22 1,468 1,555 2,71 2,223 Source: DNB Markets (forecasts), company (historical data) Figure 74: Average selling price and deliveries Figure 75: EBITDA 1,4 16, 3, 18% 1,2 1, , 12, 1, 8, 6, 4, 2, 2,5 2, 1,5 1, 5 16% 14% 12% 1% 8% 6% 4% 2% % Deliveries (kt) ASP (SEK/t) EBITDA adj. (SEKm) EBITDA adj margin Source: DNB Markets (forecasts), company (historical data) Source: DNB Markets (forecasts), company (historical data) SSAB Europe (47% of 216 sales) SSAB is the market leader in flat commodity steel in the Nordics standard hot-rolled and cold-rolled coils, cut-to-length plates and tubular products. These grades accounted for 7% of SSAB s European deliveries in 216, and on our estimates c7% of these deliveries are to the Nordics where SSAB has its own distribution network, reported under Tibnor. Since the merger with Finnish Rautaruukki in 214 SSAB has had a 4 5% market share in the Nordics. Market leader in flat commodity steel in the Nordics Figure 76: Product offering Key products Hot-rolled plate products Hot-rolled strip products Cold-rolled strip products Metal-coated strip products Colour-coated strip products Tubes and sections Infra products Key end-user segments Construction & infrastructure Automotive Industrial applications Heavy transportation Energy Construction machinery Service centres Demand in Europe is now supporting the steel industry, as illustrated by projected growth in European construction and improved sentiment in manufacturing industries. 24

25 Figure 77: Infra and construction growth (YOY) in Europe 6% 5% 4% 3% 2% 1% % -1% -2% -3% Residential construction (EURm) Non-residential construction (EURm) Road and rail infra investments (EURm) Civil engineering (EURm) Source: EUROCONSTRUCT, June 217 (underlying data), DNB Markets (further calculations) Figure 78: Manufacturing PMI Europe Manufacturing PMIs - Europe Source: Bloomberg (underlying data), DNB Markets (further calculations) Figure 79: New passenger car registrations in EU (12-month rolling units) 16,, 15,, 14,, 13,, 12,, 11,, 1,, Figure 8: New heavy truck registrations in EU (12-month rolling units) 35, 3, 25, 2, 15, 1, 5, Source: Bloomberg (underlying data), DNB Markets (further calculations) Source: Bloomberg (underlying data), DNB Markets (further calculations) SSAB s Europe production facilities are in Sweden and Finland. It has three blast furnaces, the largest with capacity of 2.3mt in Lulea (Sweden) and two with combined capacity of 2.6mt in Raahe (Finland). SSAB produces steel from iron ore, which is sourced from LKAB (Sweden) and Severstal (Russia). It has coke plants that use metallurgical coal bought from various sources in Australia, Canada etc. On our calculations, SSAB s consumption per tonne of steel in EMEA is 1.55t of iron ore and.9t of coal. Other material, such as alloys, additives and limestone are also used. Blast furnaces emitted 9,315tkt of CO2 in 216. Also, SSAB has two downstream facilities in Hameenlinna (Finland) and Borlange (Sweden). Production facilities in Sweden and Finland SSAB competes with larger European steel mills, such as ArcelorMittal, ThyssenKrupp and Tata Steel, with its close proximity to Nordic clients giving it the lowest landed cost. Due to its smaller scale, SSAB s cost of production per tonne is not competitive, limiting the ability to compete with standard steel in Central or Southern Europe. This caps the structural growth opportunities, as SSAB is restricted by industrial activity in the Nordics. SSAB s pricing is dependent on its larger competitors prices in Central and Southern Europe. There has been persistent overcapacity in Europe since 28, resulting in low pricing power and as a result European steel prices have been driven by changes in key raw material prices, iron ore and metallurgical coal, and the volume of imports. Various anti-dumping duties are in place in the EU, and the recent acquisition of large Italian steel mill Ilva by ArcelorMittal, and potential coming together of ThyssenKrupp and Tata Steel Europe should ease pricing pressure mid-term. Pricing dependent on competitors prices in Central and Southern Europe 25

26 Figure 81: North European steel prices (EUR/t) /5/213 31/5/214 31/5/215 31/5/216 31/5/217 North Europe HRC (EUR/t) North Europe CRC (EUR/t) North Europe Plate (EUR/t) Source: Bloomberg (underlying data), DNB Markets (further calculations) Figure 82: Raw material prices (USD/t) /5/213 31/5/214 31/5/215 31/5/216 31/5/217 Iron ore (USD/t) Coking coal (USD/t) Source: Bloomberg (underlying data), DNB Markets (further calculations) Figure 83: Prices of HRC and key raw materials (EUR/t) Figure 84: Spread, HRC raw materials % 6% 5% 4% 3% 2% 1% 31/5/213 31/5/214 31/5/215 31/5/216 31/5/217 % 31/5/213 31/5/214 31/5/215 31/5/216 31/5/217 North Europe HRC (EUR/t) Raw materials (EUR/t) Raw material spread (EUR/t) Raw material spread (%) Source: Bloomberg (underlying data), DNB Markets (further calculations) Note: Raw materials = Iron ore x coking coal x.8 Source: Bloomberg (underlying data), DNB Markets (further calculations) Note: Raw materials = Iron ore x coking coal x.8 Figure 85: HCR and SSAB Europe EBITDA/t Figure 86: HCR raw materials spread and SSAB Europe EBITDA/t 7 1,6 35 1,6 6 1,4 3 1, ,2 1, ,2 1, Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 North European HRC, 3m trailing average SSAB EBITDA/t Spread HCR - Raw materials SSAB EBITDA/t, Bloomberg (underlying data), DNB Markets (further calculations), Bloomberg (underlying data), DNB Markets (further calculations) Note: Raw materials = Iron ore x coking coal x.8 According to Eurofer, demand from steel-using sectors increased by 6% YOY in the EU in Q However, steel inventories declined, resulting in apparent steel consumption growth of only 3% YOY. Eurofer forecasts growth of 1.9% YOY for 217, and moderate growth in 218 as end-user demand slows down slightly. Eurofer also commented that initial data for April and May showed a substantial rise in imports from third-country suppliers. 26

27 Chinese steel prices fell by a quarter between January and May. Inventory destocking in Q1 followed by a rise in imports in April May highlighted that despite steel consumption being in full recovery mode, the global balance between capacity and demand was still affecting European pricing. With underlying demand up 6% YOY in Q1, European HRC prices rose by c4%, a substantial rise but still in line with key cost components, iron ore and coking coal. The Chinese steel price recovery since late June combined with recovering demand in European construction and manufacturing industries and introduction of further trade restrictions has improved the outlook for H According to MetalBulletin North European mills are pushing for price increases from the current EUR52/t. Figure 87: SSAB outlook Segment Outlook comments Outlook Automotive Fundamentals expected to remain overall positive in 217 and 218, albeit at a slower pace than in 216 Flat Construction Healthy outlook (+2.1% in 217 and 2.7% in 218 Eurofer) Positive Energy Continued positive outlook for wind energy sector Positive Improving non-residential construction Solar power projects continue to be funded Marine and Offshore Good situation in the shipbuilding sector, offshore dependent on oil prices Positive Heavy transport and agri Heavy transport continue strong growth Agriculture showing clear signs of improvement starting in 218 Positive Automotive steel in SSAB Europe SSAB s strategy is based on growth in premium products, and the main over-the-cycle margin expansion driver in EMEA looks set to come from a better mix, replacing commodity steel with higher value steel. Aiming for better mix, replacing commodity steel with higher value steel Premium products accounted for 3% of the segment s total deliveries in 216 and SSAB targets to expand that to 4% by 22 while maintaining flat total delivery volumes. Roughly half of its premium products go to the global automotive segment. Automotive deliveries increased by c25% p.a. in to c55k tonnes, and the company s target is to grow to 75k tonnes by 22. Figure 88: SSAB Europe deliveries by product type 1% Figure 89: SSAB Automotive deliveries (kt) 1,2 8% 6% 4% 1, 8 75 kt 2% % e kt 442 kt Automotive premium Other premium products 2 Tubular products Other standard products Processed products Standard HRC e 218e 219e 22e 225e SSAB s automotive offering consists of advanced high-strength steels for the internal, or nonexposed, parts of vehicles such as impact beams, bumpers, seats and structural details. 27

28 Figure 9: SSAB's Automotive offering Figure 91: Automotive customer references The majority of SSAB s automotive steel today is delivered to Europe, with a growing presence in the US. Deliveries to APAC are not significant, but the company is targeting to accelerate growth in the area. We expect a slowdown in global light vehicle production to a low single-digit rate in , with the bulk of the growth coming from emerging markets. Registrations at SSAB s main markets (Europe and the US) are above historical levels, but decelerating. Following growth since 29 the US selling rate peaked in December 216 and has since fallen by c1%. EU registrations are still growing, supported by improving employment figures and overall stronger economies, but growth is slowing to low single-digit rates. As Europe is the largest market for SSAB, we estimate that European growth will compensate for the expected decline in the US. 28

29 Figure 92: EU passenger car registrations (12-month rolling million units) 16 Figure 93: EU passenger car registrations, YOY (12-month rolling units) 15% 15 1% 14 5% 13 % 12-5% 11-1% % Source: Bloomberg (underlying data), DNB Markets (further calculations) Figure 94: US seasonally adjusted annualised selling rate (m units) 25 Source: Bloomberg (underlying data), DNB Markets (further calculations) Figure 95: US seasonally adjusted annualised selling rate, YOY (m units) 25% 2% 2 15% 1% 15 5% % 1-5% -1% 5-15% -2% Source: Bloomberg (underlying data), DNB Markets (further calculations) -25% Source: Bloomberg (underlying data), DNB Markets (further calculations) China is the world s largest passenger car market, but its penetration rates are still far behind those in developed markets so we see still plenty of long-term growth potential. The shortterm fight against pollution and congestion could lead to a removal of tax incentives for small engine vehicles, and consequently hurt demand in We see plenty of upside potential in China s passenger car market We expected strong growth for SSAB s automotive deliveries, even if the total market is not growing at a high rate. The main growth drivers look set to be passive safety and weight saving needs, combined with automotive industry s faster model renewal pace. AHHS products are stronger, allowing thinner applications than old carbon grades, resulting in increased impact protection per weight. Compared to aluminium, AHHS has superior formability, its less costly to scrap and recycle, and is considerably cheaper, which is particularly important for non-premium car models. When the industry moves towards electric cars, the introduction of batteries is likely to further highlight the need for weight saving solutions, which should benefit aluminium and AHHS over mild steels. According to material SSAB presented at its CMD, the use of AHHS per passenger car is 148kg, compared with 41kg of mild steel and 5kg of other materials, and is expected to grow to 157kg in 22 (CAGR 2%). We calculate that total use of AHHS should grow from 11.6mt in 217 to 15.7mt in 22, implying vehicle production growth of 8% p.a. from 78m to 1m. 29

30 The company targets deliveries of 75kt in 22, implying growth of 14% p.a. and c3% above-market growth for Contracts in the automotive industry are typically longer than in SSAB s business as a whole, as the lifetime of a car model is 5 7 years on average, meaning SSAB should have visibility on its market share gains from contracts that are rolling into production in 218 onwards. However, the underlying assumption of 8% p.a. production expansion seems optimistic to us. Targets deliveries of 75kt in 22, implying growth of 14% p.a. and c3% above-market growth for Figure 96: Automotive steel market SSAB s forecasts (Mt) AHSS Other Mild steel Source: SSAB CMD 217 material Figure 97: Automotive growth Total use (Mt) 217e 22e CAGR e 225e CAGR e Mild steel % % Others % % AHHS % 2.5 7% per vehicle (kg) Mild steel % 195-9% Others 5 6 6% 8 6% AHHS % 187 3% Implied vehicle production % 11 4% SSAB AHHS delivery target % SSAB market share 4.3% 4.8% Vehicle growth 8% AHHS per vehicle growth 2% Implied above- market growth 3% Source: SSAB CMD 217 material (underlying data), DNB Markets (further calculations) 3

31 Figure 98: Use of steel per car (kg) 217e Figure 99: Use of steel per car (kg) 22e Figure 1: Use of steel per car (kg) 225e AHSS AHSS 187 AHSS Mild Mild Mild Other Other Other Source: SSAB CMD 217 material Source: SSAB CMD 217 material Source: SSAB CMD 217 material We expect competition in automotive AHHS to intensify. All major competitors have AHHS in their portfolios, on top of the existing mild steel products they offer. The automotive industry uses roughly 81m tonnes of steel per year, accounting for 5% of global crude steel production. According to Eurofer, 18% of steel produced in Europe goes to the automotive industry, making it a key end-user segment. Recently ArcelorMittal announced a new 6,t per year line for advanced high-strength steels for the automotive industry, which it aims to be operational by mid-219, while Tata Europe cited significant orders for new car models and is targeting to diversify its product mix to light-weighting solutions for commercial vehicle body-makers. In SSAB s strategy, growing volumes of AHHS are unlikely to lead to overall volume growth, instead they replace the lowest-margin standard products. Even if more intense competition results in slight price erosion in , we expect SSAB s margins to benefit from increased AHHS deliveries. The main risk for the 75kt target is market volume growth. If we assume a 2.5% annual increase in vehicle production, to reach the target SSAB would have to expand its market share from 4.3% to 5.7%, beating market growth by 1% p.a. In terms of profitability, AHHS steels stand between commodity products and steel sold in the Special Steels division, as shown by Figure 11. If we look at the margin expansion in SSAB Europe during the past 12 months, this is driven mostly by a wider spread between hot rolled coil and raw materials, as the division s ASP trends have not greatly deviated from those of the competition or market prices. Figure 11: Profitability by product type, index Standard HRC and plate CTL/slit Tubular Automotive premium Q&T Source: SSAB CMD 217 material 31

32 Estimates Figure 12: DNB estimates SSAB Europe (SEKm) Q1 217 Q2 217 Q3 217e Q4 217e Q1 218e Q2 218e Q3 218e Q4 218e Q1 219e Q2 219e Q3 219e Q4 219e e 218e 219e Net sales (SEKm) 7,657 8,378 7,294 8,24 8,73 7,99 7,241 7,626 7,747 7,794 7,121 7,551 25,831 31,353 3,93 3,214 EBITDA adj. (SEKm) 1,182 1, ,13 1,245 1, ,57 4,639 4,161 3,44 EBITDA adj. margin 15% 16% 13% 14% 15% 14% 13% 12% 13% 11% 11% 11% 1% 15% 13% 11% EBIT adj , ,5 3,26 2,725 2,4 EBIT adj. % 11% 12% 8% 9% 11% 9% 8% 7% 8% 7% 6% 6% 4% 1% 9% 7% Assumptions Deliveries (kt) ,72 3,797 3,84 3,84 ASP (SEK/t) 7,797 8,454 8,452 8,351 8,221 8,63 7,991 7,937 7,889 7,865 7,859 7,859 6,944 8,258 8,55 7,868 Cost (SEK/t) -6,594-7,61-7,323-7,23-6,953-6,956-6,974-7,3-6,894-6,981-7,3-7,15-6,27-7,36-6,971-6,972 EBITDA adj. (SEK/t) 1,24 1,394 1,128 1,148 1,268 1,17 1, ,222 1, Source: DNB Markets (forecasts), company (historical data) Figure 13: Average selling price and deliveries Figure 14: EBITDA 4,5 9, 5, 18% 4, 8, 4,5 16% 3,5 7, 4, 14% 3, 2,5 2, 1,5 6, 5, 4, 3, 3,5 3, 2,5 2, 1,5 12% 1% 8% 6% 1, 2, 1, 4% 5 1, 5 2% % Deliveries (kt) ASP (SEK/t) EBITDA adj. (SEKm) EBITDA adj margin Source: DNB Markets (forecasts), company (historical data) Source: DNB Markets (forecasts), company (historical data) SSAB Americas (19% of 216 sales) SSAB acquired US-based plate and tube manufacturer IPSCO in 27. The tube business was divested in 28 and SSAB now has two plate mills in the US (one in Mobile, Alabama and one in Montpellier, Iowa) with combined capacity of 2.5mt. Both are electric arc furnace based mills, producing steel mainly from recycled material using electricity. The Mobile site also has a quenching and tempering line with 3k tonnes capacity. Two plate mills in the US SSAB has had 25 3% plate market share in the US, making it the market leader, ahead of Nucor (c2 25%) and other domestic mills (c35%) and imports (c1 15%). 32

33 Figure 15: SSAB market share Figure 16: Apparent demand of plate, Mt 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% 14% 61% 25% 9% 8% 59% 62% 32% 3% % Q1/216 Q4/216 Q1/ e 22e SSAB Americas Other domestic supply Imports USA Canada Mexico SSAB is the lowest-cost plate producer in the US, enabling the production of commodity products with above industry-average margins. In the long term we expect SSAB to continue to expand its Q&T capacity and potentially targeting acquisitions in the plate market. We believe that Nucor s plate mills would business-wise be the most logical target, as they account for only a minor part of Nucor s total deliveries and are lagging behind in terms of profitability. This could give SSAB a 4 5% market share, potentially too much for customers and the regulator, but not more than in the Nordics following the Rautaruukki merger. SSAB is the lowest-cost plate producer in the US The main customer segments are energy, heavy transport, construction, infrastructure and heavy equipment. Roughly 5% of SSAB s plate is sold through service centres. Figure 17: SSAB Americas selected customer references In the energy sector the most positive trends concern wind, where the Production Tax Credit should support investment in The PCT was 1% in 216, gradually decreasing by 2%-points annually until 22s. The US commissioned 1.7GW of capacity in Q1 217, the highest level since 212. Bloomberg New Energy Finance forecasts 36GW of new onshore wind to be built in in the US, implying 9GW p.a. versus 7GW p.a. on average in SSAB exposure is to wind and transmission towers, and according to the company deliveries to alternative energy markets were c15% of Americas deliveries in early 217. US oil and gas investment turned to growth in late 216, and a recovery in rig count is expected to support demand, according to the company. The US rig count has risen every week bar two in 217 and is up 44% YTD and 8% from the lows of mid-216. Trends here are highly sensitive to the oil price. The Trump administration approved the construction of the controversial Keystone XXL, a 1,9km pipeline from Alberta (Canada) to Nebraska (US), but the project is facing headwinds as customer interest is low at current oil prices. If construction begins, it would require c82k tonnes of steel according to pipeline builder TransCanada, equalling c.8% of 216 US steel consumption. SSAB is also exposed to energy through its steel deliveries to the railcar industry, as transport of shale-field product to refineries is a major end-user segment. The Railcar business has been very weak, with volumes 8% below their peak and build rates appear to remain low in 217 (as evident by key customer s Trinity s order intake and revenue, Figure 18). 33

34 Figure 18: Trinity rail, 12-month rolling order intake (units) 45, 4, 35, 3, 25, 2, 15, 1, 5, Figure 19: US rig count Figure 11: Forecast wind turbine installations (MW) 16, 14, 12, 1, 8, 6, 4, 2, e 22e Canada United States Source: Bloomberg (underlying data Source: Bloomberg (underlying data), Source: Bloomberg (underlying data), Figure 111: SSAB Energy end-use solutions, Trinity Rail Heavy equipment looks positive on the mining and construction side. US construction spending and housing starts remain robust. Caterpillar retail sales have picked up significantly of late, supported by higher raw material prices and increased opex in the mining sector. We expect mining capex to increase in 219, and together with the replacement in mobile mining equipment should support demand. On the agricultural machinery side, we see US farm cash recipients on the decline, debt having risen, and grain production levelling off. Figure 112: Yellow goods demand in North America (YOY) 25% 2% 15% 1% 5% % -5% -1% -15% -2% -25% -3% Komatsu - Demand for 7 major products North America Caterpillar - NAFTA Retail sales Source: Caterpillar, Komatsu US infrastructure needs investment, and the FAST Act targets to boost federal surface transportation spending. During his presidential campaign, President Trump promised a trillion dollar infrastructure plan to upgrade roads, bridges, railroads and airports. To put that into context, in 214 the federal, state and local governments spent a combined USD416bn on transportation and water infrastructure, of which about a quarter came from the federal 34

35 government. According to SSAB s main competitor, Nucor, a USD1trn spend over a decade would have increased steel demand by 5m tonnes p.a., 5% of c1m tonnes of US apparent steel consumption in 216. However, in May the Trump administration laid out its infrastructure plan along with a proposed 218 budget. It included USD2bn direct federal spending over the coming decade with only USD5bn earmarked for 218. The long-term demand outlook (217 22), according to SSAB, is flat for heavy transport and positive for all other key segments. Figure 113: SSAB outlook Segment Short- to medium-term drivers Outlook (217 22) Energy Wind Energy remains positive for 217 due to production tax credit incentives Positive Oil and gas investment turned into growth in late 216 Rig count continues to grow and supportive equipment demand is recovering Heavy transport Railcar build will remain slow in 217, 8% below the peak Flat Demand for barge has softened Construction and infra Public infrastructure spend is set to increase with the new FAST Act Positive Improving non-residential construction Overall construction seen to grow 3 4% p.a. Heavy equipment Modest recovery and increasing volume requirements for H2 217 and 218 Positive Section 232 affecting short-term apparent demand and prices The US plate market has been quiet this summer ahead of the Section 232 resolution. Producers initially tried to push through a USD3/t price increase in mid-may, despite a lack of demand from service centres. The move was seen largely as precautionary to Section 232, with mills getting ahead of the curve so they are not seen to be raising prices immediately after potential import restrictions. The market has been slow with normal seasonality, and after a lot of imports (73k tons in June) service centres have been reluctant to take in material at higher prices. As a result, prices have remained around USD7/t. With less import availability for H2, service centres are expecting prices to rise for Q4. Section 232 uncertainties make distributors reluctant to increase inventories On the demand side, service centres are pointing to pent-up demand in building projects. MetalBulletin also published an unconfirmed story of a major line-pipe deal awarded to SSAB in May, as it started to push lead times further into June. In our view there is a clear discrepancy between service centres and financial markets on the likelihood of strict import duties. We expect extensive re-stocking of inventories ahead of the Section 232 ruling if service centres expect plate prices to rally following the decision. On the contrary, the market has been more subdued than normal. Figure 114: US plate and scrap prices /2/212 28/2/213 28/2/214 28/2/215 29/2/216 28/2/217 US Domestic carbon steel plate (USD/t) US Domestic scrap (USD/t) Source: Bloomberg (underlying data), DNB Markets (further calculations) Figure 115: US plate scrap spread /2/212 28/2/213 28/2/214 28/2/215 29/2/216 28/2/217 Plate - scrap spread (USD/t) Plate premium to scrap (%) Source: Bloomberg (underlying data), DNB Markets (further calculations) 7% 6% 5% 4% 3% 2% 1% % 35

36 Estimates Our estimates are based on historical plate scrap spreads and our scrap estimates are derived from iron ore. We expect the spread to widen to USD475/t, the highest since 214. However, the estimate includes some uncertainty as the Trump administration seems to have failed to achieve its goals so far. If the Section 232 outcome is robust, then we could see panic buying from distributors and prices could well rise sharply. We expect scrap prices to deviate from iron ore, but plate mills should be able to more than cover their costs short-term. Figure 116: DNB estimates SSAB Americas (SEKm) Q1 217 Q2 217 Q3 217e Q4 217e Q1 218e Q2 218e Q3 218e Q4 218e Q1 219e Q2 219e Q3 219e Q4 219e e 218e 219e Net sales (SEKm) 3,19 3,138 3,179 3,578 3,677 3,374 3,284 3,623 3,418 3,161 3,151 3,511 1,639 12,914 13,958 13,241 EBITDA adj. (SEKm) ,63 1,649 1,519 EBITDA adj margin % 6% 13% 13% 12% 12% 12% 11% 12% 11% 11% 12% 7% 8% 12% 11% EBIT adj ,1 871 EBIT adj. % -5% 1% 7% 8% 8% 7% 7% 7% 7% 6% 6% 7% 1% 3% 7% 7% Assumptions Deliveries (kt) ,924 1,89 1,966 1,927 ASP (SEK/t) 6,212 6,942 7,56 7,128 7,275 7,177 7,9 6,94 6,91 6,862 6,862 6,862 5,53 6,831 7,99 6,872 Cost (SEK/t) -6,195-6,498-6,168-6,224-6,391-6,38-6,2-6,146-6,13-6,81-6,81-6,7-5,147-6,269-6,261-6,84 EBITDA adj. (SEK/t) Source: DNB Markets (forecasts), company (historical data) Figure 117: Average selling price and deliveries Figure 118: EBITDA 2,5 8, 1,8 14% 2, 1,5 1, 5 7, 6, 5, 4, 3, 2, 1, 1,6 1,4 1,2 1, % 1% 8% 6% 4% 2% % Deliveries (kt) ASP (SEK/t) EBITDA adj. (SEKm) EBITDA adj margin Source: DNB Markets (forecasts), company (historical data) Source: DNB Markets (forecasts), company (historical data) Tibnor (12% of 216 sales) Tibnor supplies steel and non-ferrous metals to the manufacturing industry in the Nordics and Baltics. In 214 the distribution assets of Rautaruukki were combined with Tibnor, with minor remedies from competition authorities, to expand its geographical footprint outside Sweden. Supplies steel and non-ferrous metals to the manufacturing industry in Nordics and Baltics Tibnor s revenue comes from stock sales and processing (combined c85% of 216 revenue) and direct mill-to-customer deliveries (c15%). Processing includes functions such as cutting, machining, short blasting and straightening of steel to manufacturing clients. We estimate that roughly half of Tibnor s product range is made by SSAB, with the rest coming from other Nordic and European suppliers, such as Outokumpu, Ovako, Tata and ArcelorMittal. 36

37 Figure 119: Tibnor network Roughly 55% of steel delivered in the Nordics goes through distributors, of which Tibnor has a c2% market share. Its main competitors are BE Group, Stena, Norsk Stål and Kontino. Half of Tibnor s revenue comes from Sweden, and c2% from each of Finland and Norway. Metal Bulletin recently reported that ThyssenKrupp was considering closing its Swedish distribution arm by the end of 217. In our view, this would support Tibnor s market share in the region. Figure 12: Sales split by product type 214* Figure 121: Sales split by country 214* Finland Baltics Sweden Denmark Norway Long products Flat products Engineering Stainless Non-ferrous materials Reinforcing bars Note: *From 214 CMD, no more recent data is available Note: *From 214 CMD, no more recent data is available SSAB defines steel-making as core business, with distribution and construction being noncore. However, recent commentary has indicated that having strong distribution as part of the group is considered beneficial for the Nordic standard steel business. Our base case is that SSAB maintains a 1% stake in Tibnor, but selling a minority stake is not out of the question. SSAB defines steel-making as core, and distribution/construction as noncore Figure 122: DNB estimates Tibnor (SEKm) Q1 217 Q2 217 Q3 217e Q4 217e Q1 218e Q2 218e Q3 218e Q4 218e Q1 219e Q2 219e Q3 219e Q4 219e e 218e 219e Net sales 2,19 2,57 1,716 1,972 2,85 2, 1,78 1,913 2,34 1,97 1,691 1,92 6,879 7,764 7,76 7,598 EBITDA adj EBITDA adj margin 6% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 3% 5% 4% 4% EBIT adj EBIT adj. % 5% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 2% 4% 3% 3% Source: DNB Markets (forecasts), company (historical data) 37

38 Ruukki Construction (1% of 216 sales) Ruukki Construction was initially a division of Rautaruukki that SSAB acquired in 214. The product offering of Ruukki Construction (RC) includes building frames, envelope structures and roofs, which the company designs, manufactures and installs. The Nordics accounted for c6% of group revenue in 216 with the rest coming from the Baltics, Eastern Europe and Russia. Products include building frames, envelope structures and roofs RC is exposed to residential (roofs and rainwater systems) and non-residential (steel structures and components) construction. Its main competitors include Kingspan, Paroc, Trimo, Lindab, Weckman Steel, Metall Profil, Balex Metal and Blachy Pruszynski and numerous local construction companies. Figure 123: Ruukki Construction sales split 214* Figure 124: Ruukki Construction footprint 214* Note: *From 214 CMD, no more recent data is available Note: *From 214 CMD, no more recent data is available Residential construction growth is expected to slow down from 216 in in Nordic region, while Eastern Europe should pick up, according to EUROCONSTRUCT, June 217 estimate. Non-residential construction has a more varied regional outlook, with slower growth in Sweden and a pick-up in Eastern Europe. Figure 125: Infra and construction growth (YOY) in Nordics 9% 8% 7% 6% 5% 4% 3% 2% 1% % e 218e 219e Residential construction (EURm) Non-residential construction (EURm) Road and rail infra investments (EURm) Civil engineering (EURm) Source: EUROCONSTRUCT, June 217 (underlying data), DNB Markets (further calculations) Figure 126: Infra and construction growth (YOY) in Eastern Europe 2% 15% 1% 5% % -5% -1% -15% -2% -25% e 218e 219e Residential construction (EURm) Road and rail infra investments (EURm) Non-residential construction (EURm) Civil engineering (EURm) Source: EUROCONSTRUCT, June 217 (underlying data), DNB Markets (further calculations) Since the Rautaruukki merger, SSAB has considered RC its most non-core segment, and it is widely expected in the market that it will be divested. SSAB management has continued to emphasise that RC could divested, partly or completely, if the valuation makes sense, and the group net debt reduction is not dependent on the deal. However, in June Finnish news media Kauppalehti ran a story that SSAB was seeking a buyer for the production assets In Finland and Baltics or the entire business unit. 38