>GLOBAL STEEL PERSPECTIVES (CITI)

Moving away from the Abyss

■ The Outlook Improves — Although cautious in select markets, Citi steel analysts are generally bullish on the outlook for equities in 2H09. The outlook for prices and margins is positive in the short-term, as demand recovers, destocking ends and raw material costs fall, but the strength of a recovery, and resultant operating rates will be critical to determine sector profitability.

■ Steel Demand Growth — The World Steel Association (WSA) forecasts a 14.9% global decline in apparent steel consumption in 2009; a -28.8% decline in the EU- 27, -32.2% in NAFTA, -23.1% in the CIS and -8.1% in Asia and Oceania. Citi forecasts an 11% YoY decline in global crude steel production in 2009.

■ Stay Selective and Defensive — We remain selective on specific equities given the weak demand environment in Developed markets, weakness of producer currencies against US$ compression (which could linger into mid-year) and valuation multiples that have moved up closer to Mid-Cycle values.

■ Stock Recommendations. — Our preferred stocks by region include Steel Dynamics in the US, Usiminas in Brazil, Salzgitter and voestalpine in Europe, POSCO and Dongkuk Steel in Korea, JFE Holdings and Nippon Steel in Japan, JSW Steel in India. We prefer NLMK, MMK and Severstal in Russia.

■ US Perspective — While credit issues, auto troubles and a decline in construction spending have hit steel demand hard, we see little evidence to suggest that end demand for steel has fallen as hard as production, especially in construction. We anticipate higher utilization rates in 2H09, as production normalizes.

■ Europe Perspective — Construction activity is expected to reduce seasonally in the summer, partly offset by an end to de-stocking and a slow recovery in manufacturing. The outlook remains poor, despite the improvement from low levels.

■ Asia Perspective — Price declines in Japan have matched the decline in input costs, maintaining metal spreads; a unique position globally. After the summer, we expect a gradual recovery in margins in Korea, and solid domestic demand in India and China. We are more cautious on Australian producers.

■ Developing Markets Perspective — We prefer the low-beta names in Russia, and low-cost exports in Brazil, with specific preference for the flat product producers. We are cautious on South Africa due to the strength of the Rand against the US$.

To see full report: GLOBAL STEEL PERSPECTIVES