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Optimism Amid Weak Steel Fundamentals

Current activity in steel is still weak, but we hope that with improved optimism spending will revive.

Disconnects Between Expectations and Reality.

The January Institute of Supply Management survey reflects a profound disconnect between expectations and reality. For instance, while it appears that steel inventories are in better shape because the number of buyers planning on reducing their inventories dropped from 43% last month to 33% in January, the actual inventory-to-shipment ratio, which we believe reflects fundamentals rather than expectations, worsened.

The number of respondents reporting inventory levels of more than two months on hand increased to 34% from 21% for the highest level since the summer. Likewise, current receipts relative to shipments rose for only 17% of respondents compared with 21% last month, but some 25% said they expected greater receipts in the next three months, compared with 21% last month.

Expectations for Green Shoots in the Spring.

There is equal optimism in anticipated orders, with only 8% expecting to see a decline in the next three months, down from 21% last month. Similarly, the jobs outlook has perked up, with some 25% planning to hire more workers, up from 8% last month, the strongest showing since September 2008.

Expectations for the general economy also have improved meaningfully, with some 50% expecting an uptick in general economic activity in the next six months, for the highest level since last July.

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Outlook.

Current activity is still weak, but we hope that with improved optimism spending will revive, and these green shoots will become self-fulfilling prophecies. We continue to see tightness in the domestic flat-rolled market despite restarts, until we hit the commencement of production of the new

Thyssen

mill in Alabama.

With the exception of beams, we expect all long products to remain in good supply and demand balance at least through the summer, and plate markets should remain firm as well.

Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.