North America Equity Research

26 July 2010

North America Metals & Mining

Steel (Stock) Momentum Turning Positive
Macro headwinds show signs of abating. Concerns surrounding a
stronger dollar and a slowing Chinese economy sent investors into a
steel stock selling frenzy over the last two months. In addition, investors
pointed toward declining Chinese prices of iron ore and steel to support
their bearish views on U.S. steel stocks. On July 6th, the Wall Street
Journal published a front page story about steel prices declining that
appeared to top-tick the market's bearish concerns. In our view, the
market momentum is turning from ultra-bearish to bullish and recently
hit an inflection point. Fears about a strengthening U.S.-dollar, a major
headwind for steel and material stocks, has faded as the dollar actually
declined 8% against the Euro to $1.29 after many had proclaimed that
the dollar was headed to parity just six weeks ago. Recently, the market
appears to be anticipating that Chinas government is actually moving
closer to easing and re-stimulating growth instead of continuing its
tightening policies. As a result, we think the two biggest macro
headwinds for steel (and materials) stocks appear to be fading.

North America Metals & Mining

Michael F. Gambardella

AC

(1-212) 622-6446
michael.gambardella@jpmorgan.com

Tyler J. Langton
(1-212) 622-5234
tyler.j.langton@jpmorgan.com

Brian P. Ossenbeck, CFA

(1-212) 622-1023
brian.p.ossenbeck@jpmorgan.com
J.P. Morgan Securities Inc.

Key steel leading indicators recently turn positive. In the past week,
Chinese iron ore prices have risen 8% while Chinese steel prices have
increased for the first time in two months. Scrap prices in Turkey, a
major global buyer, have also been moving up recently. In our opinion,
the macro and industry-specific pressures dragging steel stocks down
over the past two months are now turning positive.
X remains the best way to participate in higher steel and iron ore
prices. We see the recent activity in Chinas steel prices, Turkeys scrap
imports, and spot iron ore prices as early indicators for what will likely
be a 4Q recovery for the industry. U.S. Steel (X/OW rated) offers
investors leverage to participate in these themes via its early cycle end
markets and insulation against rising raw material costs at an attractive
valuation. Cliffs Natural Resources (CLF/OW rated) also provides
exposure to this trend, although we would exercise caution heading into
the 2Q conference call on July 29th since CLF is still in arbitration with
some of its North American Iron Ore customers. We also believe
ArcelorMittal (MT/OW rated), with its global reach and captive iron
ore assets, should also benefit in this environment even though we
believe they will have to reduce 3Q guidance on the upcoming call.

See page 13 for analyst certification and important disclosures.

J.P. Morgan 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.

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Investment Thesis
Notwithstanding temporary dislocations, we believe iron ore prices are ultimately the
key driver of steel, scrap, and steel stock prices as iron ore sits atop the steel cost
pyramid since steel and scrap are basically iron ore derivatives. As a result, we think
higher Q3 iron ore contract prices, supply discipline, and continued economic
improvement will ultimately push steel prices higher as concerns over summer
seasonality, excess blast furnace capacity, and macro risks abate.
In the past week, we have seen Chinese steel and spot iron ore prices post their first
increases since early May. Spot iron ore prices are up 8% while Chinese steel prices
have increased 6%. Scrap prices in Turkey, a major scrap buyer in the world, have
been trending up as well. In addition to the first positive steel industry datapoints, we
are seeing a big shift in the markets perceptions of two key macro drivers of steel
(and materials) stocks the dollar and China. It was only 5-6 weeks ago that the
dollar had rallied against the Euro to 1.19 and many industry observers thought the
dollar was heading to parity with the Euro - a strong dollar is viewed as a major
headwind for steel stocks (and prices), especially U.S.-based steels. Furthermore,
market fears about Chinas credit tightening and slowing demand put additional
downward pressure on steel and other material stocks. Recently, the market appears
to be anticipating that Chinas government is actually getting closer to easing and restimulating growth. As a result, we think the two biggest macro concerns the market
had appear to be fading.
Finally, steel stocks tend to trade around the markets perceptions of inflection points
for future earnings newsflow. Usually these inflection points occur just as the market
consensus appears to be unusually negative or positive. On July 6th, the Wall Street
Journal published a front page story about declining steel prices. In our opinion, the
WSJ story marked a bottom in investor sentiment on the group. In fact, most steel
stocks have outperformed the S&P 500 since the July 6th WSJ story (see Figure 1).
Figure 1: The majority of steel stocks outperformed the S&P since July 6th
135

AKS

130

125

X
120

MT

115

110

STLD
NUE

105

S&P 500

100

95
7/6/2010

Source: Bloomberg
2

7/8/2010

7/10/2010

7/12/2010

7/14/2010

7/16/2010

7/18/2010

7/20/2010

7/22/2010

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Iron ore prices spiked on strong production surge

As shown in Figure 2 below, spot iron ore prices rallied from late 2009 and reached a
peak of roughly $185/tonne CFR on April 23 before sliding back to $118/tonne in
mid-July and recently showing a modest increase to $127/tonne. At the peak, spot
prices were roughly 53% above the Q2 contract price, which was 90% above the
2009 annual contract price. While spot iron ore prices are now 13% below the Q3
contract price, (see Figure 3 below) they still command a 1% premium to the Q2
contract price.
Figure 2: Spot prices currently trade at a 1% premium to Q2 freight adjusted contract prices
Contract Price (Vale SSF)

Brazil-China Freight

Spot Price

250

$/Tonne

200
150
100
50
0
Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul05 05 05 06 06 06 07 07 07 08 08 08 09 09
09 10 10
Source: Company reports, J.P. Morgan estimates, and Bloomberg.

Figure 3: Spot iron ore prices are currently at a 13% discount to the Q3 contract price
120%
Iron Ore Spot Premium/(Discount)

Spot iron ore prices peaked at a

53% premium to the Q2 contract
price, but now trade at a 1%
premium to Q2 and a 13%
discount to Q3 contract prices.

100%
80%
60%
40%
20%
0%
-20%
-40%
Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul- Nov- Mar- Jul05 05 05 06 06 06 07 07
07 08 08 08 09 09 09 10 10

Source: Bloomberg.

We think the surge in spot prices through the spring of this year was driven by a
confluence of factors. On the demand side, Chinese monthly steel production
climbed from the high 40 million tonne range in the last two months of 2009 and hit
55 million tonnes in both March and April of this year, topping out at 56 million
tones in May (or an annualized rate of 672mm tonnes vs. 2009 production levels of
566 million tonnes). At the same time, global monthly production ex-China also
started to rebound, increasing from the high 50/low 60 million tonne range in the
October 2009-February 2010 time frame to 66-68mm tonnes in March, April and

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

May of 2010. This ramping production forced buyers into the spot market, supply
issues in India kept the spot market tight, and prices spiked.
Moderating Chinese steel production in June, in part from the central governments
policy actions to control the overheated property market, was the primary contributor
to the decline from peak iron ore prices. Specifically, Chinese monthly steel
production declined to 53.8 million tonnes in June. Combined concerns over China
slowing, excess blast furnace capacity, sovereign debt risks in Europe, and seasonally
slower summer months for steel buying sent spot iron ore prices sliding from the
April peak.

Based on the quarterly contract

mechanism, Q3 iron ore contract
prices should be approximately
25% above the 90% hike in Q2.

We dont think the major

Chinese steel mills will abandon
higher-priced quarterly contracts
in favor of the recently lowerpriced spot market given the
importance that they place on
security of supply and as such a
move would likely only force
spot prices higher.

Quarterly contract mechanism has forced Q3 contract prices above Q2 levels

In 2010, the Big 3 iron ore producers basically ended the annual benchmark pricing
system that had existed for 40+ years and announced that a majority of their iron ore
sales would be priced on quarterly contracts. For the quarterly contracts, it now
appears that the current quarter price will be based on the prior quarter's price with a
one month lag (i.e. the price for the Jul-Sep quarter will be based on the average spot
price over the Mar-May timeframe). Using this formula, Mar-May prices for 62% Fe
content iron ore fines CFR averaged $158/tonne, or about 25% higher than the Q2
reference price of $127/tonne CFR for Vale. If this formula holds, (and we ultimately
think it will given the power of the Big 3 producers), iron ore prices should increase
by roughly 25% in Q3 over Q2 levels. The question however, which we address
below, is whether elevated iron ore prices and thus steel prices can retake prior peak
levels in 2H10 after sliding on the aforementioned concerns, including Chinas new
growth profile.
China unlikely to abandon its contracts
Even though current spot iron ore prices ($127/tonne CFR) are below the Q3 contract
price ($158/tonne), we dont think major steel mills in China will abandon the
quarterly contract framework and look to purchase iron ore in the spot market. The
first reason is that it would likely just push spot prices up, given the lower levels of
liquidity in the spot market. Additionally, we believe that the Big 3 producers have
made it very clear to the steel mills that once they leave the quarterly contract
system, they will not be allowed back in and forced to source their requirements
going forward from the spot market. Given China's 70% reliance on imported ore, we
don't think this is a risk that the mills ultimately want to take. Additionally, large
producers such as Baosteel place a high intrinsic value on securing stable volumes of
high quality supply to address logistical concerns such as blending. It is not
unreasonable, however, to see the current system of quarterly contracts ultimately
shortened, perhaps to a pricing system based on a one-month lag to spot rather than
the current formula of a quarter plus one month, so that steel selling prices can be
more aligned with iron ore costs for the mills.
Met coal up 12.5% for Q3 contract
Besides iron ore, met coal should also provide support for steel prices. Bloomberg
recently reported that BHP and the Japanese steel companies have agreed to Q3 met
coal prices of $225/tonne vs. the $200/tonne that was reached for the Q2 contract.
While this price is below the current spot price of roughly $250/tonne, the met coal
spot market is even more illiquid than the spot iron ore market and we still view this
increase as a positive sign for steel demand.

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Global production should not see a sharp drop-off

As shown in Figure 4 & Figure 6 below, both Chinese and global (ex China) steel
production have seen a steady increase since the lows of late 2008/early 2009 before
peaking in May and declining 4% MoM in June. The risk for iron ore prices,
however, is that China materially slows its production rates (including the impact
from removing export tax rebates), the rebound in global production ex-China stalls,
or a combination of the two. While China will likely see a slowdown in the property
and fixed asset investment areas due to government tightening efforts, we don't think
production rates should see a sharp decline and that any slowing in China should be
at least partially cushioned by rebounding steel production rates in the rest of the
world, which are still climbing back from depressed levels. Additionally, from an
iron ore supply perspective, we don't think the Big 3 producers will oversupply the
market given the past discipline that they have demonstrated. As a result, we dont
think spot iron ore prices have much further to fall.
Figure 4: China monthly steel production
Chinese steel production hit a
record monthly level of 56mm
tonnes in May before declining
to 53.8mm in June.

60.0

Tonnes in Millions

50.0
40.0
30.0
20.0

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

2002

2003

2004

2005

2006

2007

2008

Mar-10

Jul-07

2001

Nov-09

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

10.0

Source: Bloomberg.

Figure 5: China annual steel production

700

600

Tonnes in millions

500

400

300

200

100

(100)
1995

1996

1997

1998

1999

2000

Steel Production

2009 2010E

Steel Net Exports

Source: CEIC, J.P. Morgan. 2010 estimates represent January-June actual data plus 2H10 estimate

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Figure 6: Global steel monthly production, ex China

80.0
70.0
Tonnes in Millions

Global production ex China

remains in the mid 60mm range
in June, despite Chinas recent
production moderation, versus a
high 50mm/low 60mm tonne
range in late 2009 and early
2010.

60.0
50.0
40.0

Mar-10

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

30.0

Source: Bloomberg.

Announced idlings not a concern but a sign of supply discipline

Despite our view that steel production rates should remain firm, investors have been
concerned by weakening steel prices (U.S. HRC peaked at $703/ton and has recently
fallen to $583/ton). In the U.S., ArcelorMittal announced in late May that it would
idle two furnaces (Indiana Harbor East #5 and #6) which each have capacity of about
5,000 tons/day and replace them with lower cost capacity by restarting its Burns
Harbor D furnace (capacity of about 7,400 tons/day). Rebuild and construction work
at the #3 furnace at Indiana Harbor West, however, was stopped with contractors
being transferred to the D furnace at Burns Harbor. Separately, on June 2, the
company commented it could potentially shut three furnaces in Europe as Q3 is
typically characterized by lower demand due to summer shutdowns. No decision,
however, had been made on whether the furnaces would be idled or which plants
would be affected. While MT will see a net loss of production in the U.S. and could
see some in Europe, we view these actions more as a response to seasonality and to
optimize production and not as a sign that demand will take a significant step down.
Additionally, Severstal announced plans to idle the high-cost, geographically
disadvantaged Sparrows Point plant in the U.S. while U.S. Steel will cut back
production in Europe in response to declining demand. However, not all production
adjustments have been negative as Saltzgitter recently brought Flachstahl C online to
meet improving demand in Germany.

Elevated iron ore = elevated scrap = elevated steel prices

Given our view that iron ore prices should not fall much further and remain elevated,
steel prices should also start to move up to cover rising raw material costs. As shown
in Figure 7 below, most steel producers in the world do not have their own iron ore
supplies, and we estimate that only roughly 165 million tonnes of iron ore is owned
and captively used (i.e. excluding iron ore that is sold externally by steel companies
or acquired through strategic contracts) by steel companies globally, or just 15% of
the iron ore that steel companies require. Given this relatively low percentage, we
don't think these producers could cause steel prices to drop lower if they chose (and
we don't think they will) to pursue volumes (market share) at the expense of pricing.

North America Equity Research

26 July 2010

Figure 7: Captive iron ore production from global steel companies is rare

40.0
30.0
20.0
10.0

Gerdau SA

Ternium

Ahmsa

Usiminas

CSN

Tata

NLMK

Severstal

Evraz

SAIL

U.S. Steel

0.0
ArcelorMittal

Iron Ore Usage (MM Tonnes)

50.0

Source: J.P. Morgan estimates.

We would also note, as shown in Figure 8 below, that the producers with the highest
levels of raw material self-sufficiency should fare the best from an earnings
perspective in an environment of escalating raw material prices. U.S. Steel remains
our top pick in the U.S. given its iron ore self-sufficiency and favorable met coal
contracts in its North American Flat-rolled operations. We would also point out that
these producers, besides the U.S., are largely in Brazil, Russia and India and don't
export significant quantities of steel to the U.S., thus further reducing the risk of
imports from low cost regions.
Figure 8: Global steel producers with the greatest levels of iron ore self-sufficiency
100%
80%
60%
40%
20%

ArcelorMittal

Gerdau SA

Severstal

Ternium

Usiminas

U.S. Steel

Evraz

Ahmsa

Tata

SAIL

NLMK

0%
CSN

Iron Ore Self-Sufficiency

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

Source: Company reports and J.P. Morgan estimates.

Rising Chinese costs should set a floor for global pricing...

If average global iron ore and met coal prices for 2010 end up equaling the current
spot prices, we would expect to see (as shown in Figure 9 below) a significant
increase in the cash costs for China and the other raw material-short foreign
producers as they are, to varying degrees, largely reliant on the global market for iron
ore and met coal. China in particular remains heavily exposed to imported iron ore
given the low grade of domestic supplies; see Figure 10 for more details. Since 2000,
Chinese steelmaker dependence on imported iron ore has surged to nearly 70% from
38%.

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

This would stand in contrast to 2009 when the global cost curve was much flatter due
to steep declines in global raw material costs or in 2002 when China was a low cost
producer before rising material costs negated its labor advantage (see Figure 11 &
Figure 12).
In the model below, we have assumed a global seaborne iron ore fines price of
$158/tonne CFR (or the Q3 contract price with pellet prices maintaining a $50/tonne
premium over fines prices), a global met coal price of $225/tonne, and scrap prices
flat with their current levels. Under such a scenario, Chinese integrated steel cash
costs for hot-rolled sheet would jump $268/ton to $593/ton (or an increase of $32/ton
vs. Q2 levels), Japanese integrated costs to $661/ton, and Korea/Taiwan integrated
costs to $611/ton. However, in contrast, cash costs for U.S. integrated steel producers
would only increase to $557/ton while costs for U.S. minimills would move to
$441/ton.
Figure 9: Global Cash Cost Model
We estimate that Chinese cash
costs should increase from
roughly $561/ton in 2Q10 to
$593/ton in 3Q10, mainly based
on higher iron ore prices.

Hot-rolled sheet cash costs $/ton

$700

Raw materials

Labor

$661
$611

$593

$600
$500

Energy

$557
$455

$441

$417

$405
$400

$374
$338

$300
$200
$100
$0
2009E

2010E

Japan Integrated

2009E

2010E

Korea/Taiwan
Integrated

2009E

2010E

China Integrated

2009E

2010E

US Integrated

2009E

Source: AMM, Bloomberg, CRU and J.P. Morgan estimates. Note: Estimated cash costs operating at 85% of capacity.

2010E

US Minimill

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Figure 10: Chinese steelmakers are dependent on iron ore imports

1,000
900
800

Tonnes in millions

700
600
500
400
300
200
100
1995

1996

1997

1998

1999

2000

2001

2002

Iron Ore Imports

2003

2004

2005

2006

2007

2008

2009 2010E

Iron Ore Production

Source: CEIC. 2010 estimates represent January-May annualized numbers. Calculated production is equal to total iron ore
consumption required for total integrated steel production rates less iron ore imports.

Raw material inputs now

account for 84% of Chinas steel
costslabor costs are no longer
the key to being a low cost
steelmaker in the world.

Figure 11: China is no longer a low cost producer of steel

Raw materials

Hot-rolled sheet cash costs $/ton

Energy

Labor

$700
$593

$600

$557

$500
$400
$269

$300
$200

$178

$100
$0
2002

2010E
China
Integrated

2002

2010E
US
Integrated

Source: AMM, Bloomberg, CRU and J.P. Morgan estimates. Estimated cash costs operating at 85% of capacity.

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Figure 12: Global iron ore contract prices have increased 750% since 2000

Global Seabore Iron Ore Contract Price ($/tonne)

140

120

100

80

60

40

20

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2Q10

3Q10

Source: Vale SSF contract prices, FOB

. . . and would likely push global steel prices higher

We also note that current Chinese steel prices of $610/tonne (or $554/ton) are below
our estimated cash costs for Chinese producers in 2010 of $653/tonne (or $593/ton).
As a result, we would expect Chinese steel prices to start to slowly move up at least
toward their cash costs and/or see supply cuts force prices higher. Such increases
would also enable domestic producers to raise their prices given the tight supply
constraints here in the U.S. Chinese prices for HRC and rebar have begun to trend
upwards recently, up 6% and 5% respectively in the last week. See Figure 13 for
further details below.
Figure 13: China domestic HRC & rebar spot prices are rebounding
$650

US$/short ton

$600

$550

$500

$450

$400
Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10
China HRC
Source: Bloomberg

10

China Rebar

North America Equity Research

26 July 2010

Longer term we expect China to consolidate its steel industry and rationalize capacity
as a means to limit adverse environmental impacts as well as increase its focus on
higher value exports. The country recently took modest steps toward this goal
through a small amount of blast furnace rationalization in Hebei, removal of export
tax rebates on commodity steel products, and steel producer consolidation.
Scrap prices should move up as well
In the U.S., scrap prices had risen steadily since mid-November through April, with
the increases driven by higher iron ore pricing, seasonal supply constraints, and
strong exports to scrap-short, developing markets. In May through July, however,
prices fell by roughly $50-60/ton from the April peak on a combination of increased
flows and imports, broader macro concerns, and buyer uncertainty. While scrap
prices through seasonally slower months could trade sideways or be slightly down
depending on the region, we believe domestic scrap prices will begin to move up in
early September on higher iron ore prices and increased scrap purchases by
integrated steelmakers as they operate at the high end of their scrap feed to offset
some of their increased iron ore costs. Underscoring this point, we have recently seen
Turkish scrap prices rise 9% over the last month as the mills re-enter the import
market after the European sovereign debt crisis disrupted their ability to attain trade
financing. While some of this activity likely represents buying ahead of the Ramadan
holiday, we view increased activity in this key export market as a positive sign
nonetheless.
Figure 14: U.S. scrap prices should start to rebound as seasonality, macro concerns ease
$700
$600
$500
$400
$300
$200
$100

No. 1 Heav y Melt Composite

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

$0
Jan-08

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

Shredded Scrap Composite

Source: AMM.

11

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Figure 15: Turkey heavy melt mix scrap index moving up in July
$/tonne

$500
$450
$400
$350
$300
$250
$200

Turkey scrap import prices (CFR)

Source: Bloomberg, Steel Business Briefing

12

7/15/2010

6/21/2010

5/28/2010

5/4/2010

4/10/2010

3/17/2010

2/21/2010

1/28/2010

1/4/2010

12/11/2009

11/17/2009

10/24/2009

9/30/2009

9/6/2009

8/13/2009

7/20/2009

6/26/2009

6/2/2009

$150

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Companies Recommended in This Report (all prices in this report as of market close on 23 July 2010)
Arcelor Mittal (MT/$32.95/Overweight), Cliffs Natural Resources (CLF/$55.90/Overweight), U.S. Steel Corp
(X/$48.90/Overweight)
Analyst Certification:
The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.

Important Disclosures

Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Arcelor Mittal.
Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for
Arcelor Mittal, Cliffs Natural Resources, U.S. Steel Corp within the past 12 months.
Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of
U.S. Steel Corp.
Client of the Firm: Arcelor Mittal is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company investment banking services, non-investment banking securities-related services and non-securities-related services.
Cliffs Natural Resources is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company investment banking services, non-investment banking securities-related services and non-securities-related services. U.S.
Steel Corp is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment
banking services.
Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking
services from Arcelor Mittal, Cliffs Natural Resources, U.S. Steel Corp.
Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from Arcelor Mittal, Cliffs Natural Resources, U.S. Steel Corp.
Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Arcelor Mittal, Cliffs Natural Resources. An affiliate of JPMSI has received compensation in the past
12 months for products or services other than investment banking from Arcelor Mittal, Cliffs Natural Resources.

Arcelor Mittal (MT) Price Chart

N $28
160
OW $40

OW $37

128
OW $46

Date

Rating Share Price Price Target

($)
($)

23-Oct-08

OW

24.18

06-Nov-08

OW

24.88

40.00

19-Dec-08

25.04

28.00

12-Mar-09

20.27

27.00

OW $45

N $27

OW $55 OW $57

Price($) 96

64

46.00

13-May-09 OW

24.41

37.00

25-Jun-09

OW

33.31

45.00

08-Jan-10

OW

48.05

55.00

27-Apr-10

OW

42.91

57.00

32

0
Oct
06

Jul
07

Apr
08

Jan
09

Oct
09

Jul
10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

13

North America Equity Research

26 July 2010

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

Cliffs Natural Resources (CLF) Price Chart

Date
OW $26.5

OW $38

OW $60 OW $81

185
OW $41.5

OW $33.5 OW $53

OW $90

148
OW

OW $54 OW $30OW $26OW $44 OW $83

Price($) 111
74

37

0
Oct
06

Jul
07

Apr
08

Jan
09

Oct
09

Jul
10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Dec 04, 2007. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Rating Share Price

($)

Price Target
($)

04-Dec-07 OW

45.08

19-Nov-08 OW

18.63

54.00

11-Dec-08 OW

27.29

41.50

26-Feb-09 OW

16.14

26.50

03-Apr-09 OW

20.47

30.00

15-Jul-09

OW

23.20

26.00

03-Aug-09 OW

27.39

33.50

01-Oct-09 OW

32.36

38.00

30-Oct-09 OW

34.87

44.00

10-Dec-09 OW

43.14

53.00

18-Feb-10 OW

47.40

60.00

12-Mar-10 OW

60.31

83.00

29-Apr-10 OW

64.33

90.00

14-Jul-10

OW

48.90

81.00

Date

Rating Share Price

($)

U.S. Steel Corp (X) Price Chart

OW

OW $49

OW $86

290
OW $134

OW $56

OW $70

232
OW $115

OW $80 OW $42.5 OW $55

OW $75

Price($) 174

116

58

0
Oct
06

Jul
07

Apr
08

Jan
09

Oct
09

Price Target
($)

25-Apr-07 OW

103.04

115.00

06-Jun-07 OW

118.66

134.00

03-Aug-07 OW

91.53

--

28-Oct-08 OW

35.20

80.00

19-Dec-08 OW

37.34

56.00

28-Jan-09 OW

34.80

49.00

12-Mar-09 OW

19.10

42.50

28-Jul-09

OW

41.27

55.00

08-Jan-10 OW

60.91

75.00

26-Jan-10 OW

49.61

70.00

28-Apr-10 OW

58.44

86.00

Jul
10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research
analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE
All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams
coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying
analyst(s) coverage universe.

Coverage Universe: Michael F. Gambardella: AK Steel (AKS), Alcoa (AA), Allegheny Technologies (ATI), Arcelor
Mittal (MT), Carpenter Technology (CRS), Century Aluminum Company (CENX), Cliffs Natural Resources (CLF),
14

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

Commercial Metals (CMC), Dynamic Materials (BOOM), Freeport-McMoRan Copper & Gold (FCX), Gerdau Ameristeel
(GNA), Globe Specialty Metals (GSM), GrafTech International (GTI), Haynes International (HAYN), Metals USA
(MUSA), Nucor Corp. (NUE), Reliance Steel & Aluminum (RS), Steel Dynamics, Inc. (STLD), Teck Resources
(TCKb.TO), Thompson Creek Metals (TC), U.S. Steel Corp (X), Worthington Industries (WOR)
J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2010

JPM Global Equity Research Coverage

IB clients*
JPMSI Equity Research Coverage
IB clients*

Overweight
(buy)
46%
49%
44%
68%

Neutral
(hold)
42%
46%
48%
61%

Underweight
(sell)
12%
31%
9%
53%

*Percentage of investment banking clients in each rating category.

For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.
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15

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

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16

Michael F. Gambardella
(1-212) 622-6446
michael.gambardella@jpmorgan.com

North America Equity Research

26 July 2010

17