May 2 0 0 5
A Fixed Income (Bond Investor’s) Perspective on the North American Steel Industry
David Common david.common@jpmorgan.com
212-270-5260

G:\Business Sectors\Metals & Mining\Admin\2005
Outlook Metals and Mining.ppt
 We try to “outperform” Treasuries: 10-year Treasury currently ~ 4.25%
 “High-grade” investors try to make 50-150 basis points > Treasuries: 4.75-5.75%
 “High-yield” investors try to make 200-600 basis points > Treasuries: 6.25-10.25%
 More caution given a different risk/reward ratio and different job description
Equity investors
Return on capital
P/E
EV/EBITDA
Price/book
Analyst ratings
Bond investors
Return of capital
Yield
Spread to treasury
Percent of par value
Bond ratings

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Outlook Metals and Mining.ppt
Majority of the steel companies have high-yield ratings.
Ba
B
Caa
Ca
C
Moody's S&P
Aaa AAA
Aa
A
Baa
AA
A
BBB
BB
B
CCC
CC
C
Steel manufacturers
Nucor
Arcelor, Commercial Metals, ISPAT Inland*, Thyssenkrupp
Carpenter Technology
Gerdau Ameristeel, California Steel, IPSCO, ISG,
Steel Dynamics, Texas Industries, US Steel
AK Steel, Allegheny Technologies, Corus Group, OAO Severstal
Oregon Steel, Sheffield Steel, Texas Industries
Schuff Steel
* Split rated by Moody's (Ba1) and S&P (BBB+)
Steel distributors
Russel Metals
Earle M. Jorgensen, Ryerson Tull
High
Grade
High
Yield
Source: Moody’s and S&P.

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Outlook Metals and Mining.ppt
Ratings Issue Price Yield Ratings Issue Price Yield
BBB
Baa2/BBBThyssenkrupp Finance BV 5.000%
Ba1/BBB+ Ispat Inland 9.750%
BB
Ba2/BB
Ba2/BB-
Ba2/BB
Ba2/BB
Ba2/BB
Ba3/BB-
Ba3/BB-
105.0 4.0%
114.3 6.3%
International Steel Group 6.500%
California Steel Industries 6.125%
IPSCO 8.750%
Steel Dynamics 9.500%
United States Steel 9.750%
Gerdau Ameristeel 10.375%
Russel Metals 6.375%
99.3 6.7%
91.0 7.2%
111.0 5.9%
107.0 6.1%
110.0 6.9%
109.0 7.8%
95.0 7.1%
B
B1/BB-
B1/B+
B1/B+
B2/B+
B2/B
B2/B
B3/B+
B3/B-
Texas Industries 10.250%
AK Steel 7.750%
Oregon Steel Mills 10.000%
OAO Severstal 9.250%
Earle M. Jorgensen 9.750%
Ryerson Tull 8.250%
Allegheny Technologies Inc 8.375%
Sheffield Steel 11.375%
Corus Group 7.500% B3/B-
CCC
Caa2/CCC Schuff Steel 10.500%
112.3
89.8
107.3
103.0
106.0
85.0
104.5
102.0
101.8
99.3
6.1%
9.4%
7.5%
8.7%
8.3%
10.6%
7.6%
11.8%
7.6%
10.8%
Source: Moody’s and S&P.

G:\Business Sectors\Metals & Mining\Admin\2005
Outlook Metals and Mining.ppt
 Rating agencies say they try to “look across the cycle”
 Investors do not; they try to time it. Degree of success? ….. Low!
 Forecast ingredients: can anybody predict all this?
Steel Demand
Currencies
Shipping Rates
Trade Flows
Capacity Utilization Sentiment
Capacity Reductions/De-Bottlenecking
Raw Material Costs
Inventory Stocking/De-Stocking

US Steel Historical Data
Revenue/ton Cash costs/ton
$1,000
$900
$800
$700
$600
$500
$400
$300
EBITDA/ton
$100
$75
$50
$25
$0
($25)
($50)
1Q
1997
Average $62/ton
4Q
1997
3Q
1998
2Q
1999
1Q
2000
4Q
2000
3Q
2001
2Q
2002
1Q
2003
4Q
2003
3Q
2004
Source: JP Morgan and company reports.
G:\Business Sectors\Metals & Mining\Admin\2005
Outlook Metals and Mining.ppt

G:\Business Sectors\Metals & Mining\Admin\2005
Outlook Metals and Mining.ppt
2004 profits were 2~3x historical average
Historical EBITDA/ton ($)
Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Average Shipments
(mm ton)
US Steel
ISG
AK Steel 64
79
92
68
78
92
78
81
86
43
84
41
88
(4)
62
27
57
19
8
(10)
90
60
73
$
$
$
54
34
68
22
16
6
ISPAT Inland
Nucor
Gerdau Amer.
IPSCO
Oregon Steel
Steel Dynamics
Average
75
39
76
44
67
37
67
1
69
38
122
75
21
68
44
79
65
68
43
62
39
76
68
69
28
66
39
55
29
79
1
39
22
43
44
37
34
44
32
37
59
91
29
27
16
37
(0)
59
116
82
83
206
117
172
$
$
$
$
$
$
$
39
61
39
80
55
72
56
19
6
6
4
2
3
Source: JP Morgan and company reports.

G:\Business Sectors\Metals & Mining\Admin\2005
Outlook Metals and Mining.ppt
 Standard corporate finance:
 Above-average business risk should be paired with below-average financial risk
 But it’s not just the amount of debt. It’s the source and terms of the debt
 Optimal capital structure:
 Working capital supported by asset-based borrowings, backed by accounts receivable and inventories
 P,P&E supported by long-term, “loan value” type debt, preferably
“callable” (pre-payable, to some extent)
 It’s better to ‘pay-up” for long-term and no/few financial covenants
 Pay-up and live to fight another day

G:\Business Sectors\Metals & Mining\Admin\2005
Outlook Metals and Mining.ppt
 Automakers with “legacy costs” face the same issues as similarly situated steel companies: uncompetitive cost structure
 Something that can’t go on…probably won’t
 “The market” expects management to go toe-to-toe with labor on legacy costs
 Bankruptcy may be required to effect the magnitude of reductions thought necessary
 Detroit vs. the transplants: as long as the cars get made/sold
 Mix is obviously an issue
 Longer term: Korea and China as a source of auto imports

G:\Business Sectors\Metals & Mining\Admin\2005
Outlook Metals and Mining.ppt
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