Analyst Actions: Credit Suisse Upgrades U.S. Steel and Olympic Steel; Cites Reliance Steel, Nucor, AK Steel, Metals USA

Time to Add Some Risk: Upgrading Steels; UPGRADING US Steel and Olympic Steel; Revising Estimates and Raising TPs

We are upgrading and increasing target prices and estimates for a number of U.S. steel stocks under coverage, as we believe 1) the resolution of the Fiscal Cliff, coupled with 2) attractive steel industry fundamentals and 3) upside risk to China, suggest the sector is poised for a bounce.

Steel Fundamentals Support a U.S. Bounce: With the Fiscal Cliff close to resolution, we now focus attention on near-term industry fundamentals, which we believe are positive for the U.S. steel sector in 2013. Recent proprietary channel checks support our view that improving U.S. demand (e.g. autos, industrial production), disciplined supply (i.e. muted imports), and low inventories should support higher prices. We also see a number of upside risks which could surprise investors in 2013, including 1) a potential non-residential construction recovery (non-residential typically lags housing by 9-12 months and 2) cost containment, as 2013 should see lower overall raw material costs (met coal, iron ore) vs. 2012.

China Provides a Floor: We believe an improving Chinese economy will provide a floor for global steel prices, as it 1) supports raw material prices, thereby raising the cash cost floor of production, and 2) limits the widening of the price spread between domestic and Chinese material, translating into benign import levels through at least 1H'13.

In a Risk On Trade Environment, Both Steel Mills and Service Centers to Benefit: We believe investors who have been staying cautious through the end of 2012 will revisit "Risk On" trades in 2013, with steel stocks near the top of the list. Looking at returns from Jan. to April over the past 10 years we believe all steel stocks can be "winners" in this scenario, but service centers have outperformed historically.

Key Risks: 1) Reversal in Chinese Growth, 2) falling raw material prices, 3) rising imports and 4) US economic slowdown

Rating Changes:

US Steel ($23.85 TP $30, Upgrade to Outperform from Neutral)

Olympic Steel ($22.14 TP $27, Upgrade to Neutral from Underperform).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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