04/03/2015 06:56 AST
The collapse of the rouble, which has pushed up prices for millions of Russians as the economy slides into recession, hasn’t been bad for everyone. The country’s steel mills are suddenly world beaters.
Producers including PAO Severstal and OAO Novolipetsk Steel pay wages and other costs, including transportation, in roubles while earning dollars or euros for exported steel. That’s allowing them to undercut rivals like ArcelorMittal, the world’s largest steelmaker, while maintaining profitability.
“This is fantastic time for the Russian steel industry,” said Kirill Chuyko, head of equity research as BCS Financial Group. “Most of the companies are enjoying the best profitability since the 2007 and 2008 pre-crisis commodity boom due to the rouble’s decline.”
Even before the rouble’s 47% decline last year, the industry was in good health.
Output in 2014 reached the highest since the global financial crisis as demand at home was high and started to recover in European export markets. Russia’s steelmakers have invested billions in upgrading Soviet-era mills, and the nation produces more than any other country in Europe, one of its main export markets.
Now, the rouble’s slide has cut costs for Russian mills by almost half in dollar terms.
Making hot rolled coil, a benchmark product, now costs $244 to $250 a metric ton in Russia compared with $405 per ton in Brazil and $434 per ton in China, according to CRU Group, an industry consultant.
Russia’s economy may contract 4% in 2015 after the US and Europe imposed sanctions on the economy and oil prices fell to about $60 a barrel. That has yet to feed through to the steel industry, which isn’t affected by the measures designed to punish Russian actions in the Ukraine.
Russia produced 70.65mn tons of steel last year, the second highest output since the collapse of the Soviet Union in the early 1990s, World Steel Association data show. Even as demand shrinks at home, exports are likely to jump.
Steel prices have softened in the past year, exports of hot-rolled coil from Russia have dropped more than 27% in the last 12 months to $382.50 per ton, according to Metal Bulletin data. Nonetheless, currency devaluation means producers have never been more profitable since at least 2008.
The profit margin for Severstal or Novolipetsk Steel is near 30%, according to Morgan Stanley, which bases its estimates on earnings before interest, tax, depreciation and amortization.
Severstal’s Ebitda margin climbed to 32% in the fourth quarter, the highest since 2002, when the company started to report financial results.
“In the condition of falling prices at export markets, Russian steelmakers are benefiting due to rouble weakening,” NLMK CFO Grigory Fedorishin said in an interview.
That’s been reflected in the share prices of steelmakers. Severstal and OAO Magnitogorsk have more than doubled in the last 12 months. NLMK added 63%. BCS recommended to buy all Russian steel names last month because domestic prices in Russia are yet to catch up with exports.
The competitive position of Russian steelmakers has been noticed by such rivals as ArcelorMittal, the world’s largest producer, based in Luxembourg.
“Russian steel exports are very competitive, the rouble has depreciated a lot,” Aditya Mittal, chief financial officer at ArcelorMittal, said on a conference call this month. “The Russian economy has fallen into recession, which means lower domestic consumption, which means more tons to exports.
Gulf Times
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