Sector target price revisions
We have incorporated new steel and raw material price forecasts as well as the
recent M&A activity in our steel companies’ models. As a result, we raise all
steel companies’ target prices (see details below in Figure 1) and earnings. We
remain positive on a sector that should continue to benefit from the strong steel
and bulk commodity price environment and its vertical integrated nature. Our
sector top picks are NLMK, MMK and Evraz.
We retain our BUY recommendations on the flat steel producers, Novolipetsk,
Severstal and Magnitogorsk. We upgrade the long steel producer, Evraz Group, from
HOLD to BUY, but leave Mechel as a HOLD following its healthy price appreciation.
Our new target prices imply 12-month returns of 5-47% and reflect a strong steel
pricing environment both globally and in Russia, and the benefits of vertical integration,
as well as solid exposure to the mining business for most of the companies. Our sector
top picks remain NLMK and MMK, companies that are pursuing organic growth
strategies and targeting high value-added product niches. We also like Evraz, which in
our view offers good value thanks to its strong position on the domestic market and
value-accretive acquisitions.
Mechel remains a mixed blessing, in our opinion, as the recent coal and steel price
spike appears to be mostly priced in, while an anticipated mining IPO, a domestic
focus on long products (especially in light of possible export duties) and not yet fully
recognised positive implications from the Oriel acquisition might be supportive of the
stock. We also believe that current strong spot coking coal market conditions may
have positive implications for Mechel’s valuation.
Although we reiterate our BUY on Severstal, a weak financial performance and
questionable acquisitions make us less positive on the stock.

Contents
Sector target price revisions 3
Comparative valuation...............................................................................................6
Risks to our valuation ................................................................................................6
Steel export duties 8
Impact on DCF and target prices ............................................................................10
Earnings and commodity revisions 11
Big earnings upgrades ............................................................................................11
ING versus consensus ............................................................................................11
Steel price revisions ................................................................................................12
Raw material price revisions ...................................................................................14
Steel industry update 16
Global demand is strong .........................................................................................16
Russian growth story to continue ............................................................................16
China: production and exports are slowing .............................................................18
Companies 19
Novolipetsk Steel.....................................................................................................21
Magnitogorsk Steel..................................................................................................29
Evraz Group ............................................................................................................39
Severstal .................................................................................................................51
Mechel.....................................................................................................................59
Disclosures Appendix.................................................................................72