The firm's most recent report says robust steel margins are driven by Chinese supply-side reform & EU trade protections. Euro carbon steelmakers are enjoying the highest margins since 2009 with HRC spreads of $362/t an impressive 46% above historical ave. In addition, premiums for high grade products such as galvanised steel have widened buoyed by trade protections that are now gaining steam. The extended lead time between spot margins and P&L impact means Q3 results may be held back by previously surging raw materials. But, the set-up is bullish into Q4 as spot margin strength hits P&L and into 2018 as steelmakers secure solid annual contracts (rumoured +€120/t). With increased confidence, Chinese supply-side reform and EU trade protections are re-setting steel margins higher, we are now 4% ahead of cons for carbon steel and 8% above cons for top pick MT (please see exhibit 1).

Stainless market past the trough, but headwinds remain

Stainless steelmakers are gradually finding their footing after a painful Q2 destock that knocked Euro base prices back to levels not seen since 1H15. While Euro prices have drifted higher as discounting subsides, profitability may remain pressured for the near term. The US, conversely, has seen a rapid recovery following two successful price hikes, driving our preference for ACX. The strong bounce in nickel/chrome provides a healthy set-up into 2018, but Q3 EBITDA 53% below robust Q1 may still be a shocker despite already low buy-side expectations.

Capital allocation in focus: Build vs buy vs return

While rising steel and raw materials prices forced steelmakers to invest heavily in working capital during 2017, the alleviation of this headwind should drive a meaningful uptick in FCF yield from 5.9% in '17 to 9.3% in '18, and as such attention turns to capital allocation. While "growth" capex is anathema to the steel cycle, recent announcements (MT-Mexico, SZG-galv, ACX-US/Spain) have focused principally on downstream mix optimisation rather than dangerous upstream capacity growth. We are more positive on M&A (MT-Ilva should be a big win for MT and peers), and would like to see more co's turn into cash generation machines akin to APAM.

Detailed Q3 previews p3-8

Into earnings, Jefferies is most bullish on MT as in-line results may be superseded by guidance driving cons upgrades (JEFe CY18 EBITDA $8.8b, +8% vs cons). At TKA, healthy FY18 guidance should assuage bearish concerns that have emerged post-Tata JV announcement (JEFe FY18 EBIT €2.1b, FCF €758m). Lastly, while SSAB may be held back by US plate (JEFe Q3 -13% vs cons) Euro leverage remains best-in-class.