Fitch: Slow Rebound in CIS Steel Output Likely in 2010
21.08.09 09:48
/Fitch Ratings, Moscow-London, August 20, 09/ - Fitch Ratings says today that
it expects the Commonwealth of Independent States (CIS) steel-producing sector
to show a slow rebound in 2010. The agency will continue to monitor six key
industry drivers which are likely to influence its ratings for CIS steel
producers in 2010, namely the split of export and domestic sales, capacity
utilisation, changes in product mix, the efficiency of non-CIS operations,
the level and speed of deleveraging and exchange rate impacts.
Due to domestic economic growth, most Russian steel companies were selling
60%-70% of their output to the domestic market by the summer of 2008.
However, domestic demand for steel products dropped by 30%-50% during
Q408-Q109, forcing companies to shift sales to export markets such as China,
the Middle East and Asia. Export sales currently make up to 50%-70% of
companies' production volumes. While Fitch believes this is an appropriate
short-term strategy to boost operational and financial performance, the
downsides to being an export-focused producer include lower margins, higher
demand volatility, potential tariff countermeasures and a potential weakening
of demand from key export markets.
Capacity utilisation rates for most CIS steel producers fell to 50%-60% in Q408
from around 90%-95% at the beginning of 2008 due to the fall in demand from
end markets. At these levels, some producers may generate negative operating
cash flows due to the significant share of fixed costs in their cost structures.
Fitch has noted a gradual improvement of capacity utilization in the past three
months which now averages 75%-80% in Russia and 60%-70% in Ukraine. The agency
expects capacity utilisation could grow to an average of 90% in Russia and 75%-
80% in Ukraine by 2010.
The recovery rate in end markets for long versus flat products represents
another factor to watch. Fitch expects that the recovery rate in long product
prices and volumes is likely to be slower than for flat products, reflecting the
lack of new projects and the difficult financial positions of real
estate/development companies. This expectation has been reflected in the actual
steel price evolution to date, however the longer term price development into
2010 remains uncertain with governmental stimulus package spending for
infrastructure likely to result in higher demand for long products. Within
Fitch's rating universe, Evraz Group ('BB-'/'B'/Rating Watch Negative(RWN)) is
more exposed to long products, while Severstal ('B+'/'B'/RWN), NLMK
('BB+'/'B'/Stable), Metinvest B.V. ('B'/B'/Negative) and MMK ('BB'/Stable) are
more focused on flat products.
Evraz Group and Severstal have engaged in an M&A-type expansion strategy in
recent years which has resulted in a substantial share of overseas operations.
Fitch notes that geographical diversification is an appropriate strategy to
expand sales and diversify regional risks, but the downsides include the high
cost base of some overseas assets and difficulties with assets integration.
The most affected CIS producer is Severstal, whose 2009 EBITDA margin is likely
to decline below 10% (FY08: 24%), due to underperformance of its US assets.
Unlike producers with more conservative financial policies, the Evraz Group,
Severstal and Interpipe ('CCC'/'C'/RWN) entered the industry recession with
higher debt burdens due to the financing of M&A activity and/or technical
modernization and are exposed to risks of non-complying to financial covenants,
pressure on liquidity and debt refinancing challenges. For 2009 net leverage for
Evraz is expected at 2.7x-2.9x (FY08: 1.6x), for Severstal at 6x-7x
(FY08: 0.9x), and for Interpipe at 3.4x-3.5x (estimated FY08: 2.8x).
Fitch believes it will also be important to continue monitoring the movement in
exchange rates of CIS currencies. So far in 2009 CIS steel producers have
benefited substantially from local currency devaluation as export sales are in
USD/EUR and the majority of costs are denominated in local currencies.
However, this could not be considered a sustainable benefit, and could reverse,
for example, if the Russian rouble were to appreciate due to increasing oil
prices (noting the strong positive correlation between the two).
Fitch's overall modelling assumptions are for CIS steel producers' 2009 output
to decline 15%-35% and for revenues to decline 45%-65% y-o-y, with an average
EBITDA margin of 19% (FY08: 30%). Looking ahead to 2010, Fitch expects
global steel demand to rebound in the first half of the year, as consumer
spending and investments strengthen and destocking runs its course. Prices
should strengthen from the current low levels, albeit at a slow pace. For 2010,
Fitch, on average, expects revenue increases for CIS steel producers of 10%-
15% y-o-y and the EBITDA margin is forecast to rise to 22%-24%.
For further information on the global economy and steel industry, please see
the 30 June 2009 'Global Economic Outlook', and the 'Worldwide Steel Outlook
Excess Capacity Expected into the Medium Terms' published on 23 June 2009
which are available at www.fitchratings.com.
Contacts:
Sergei Grishunin, Moscow, Tel: +7 495 956 9901;
Peter Archbold, London, Tel: +44 (0) 207 417 6334,
Eldar Aghayev, +44 (0) 20 7682 7336.
Media Relations:
Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364,
Email: peter.fitzpatrick@fitchratings.com;
Marina Moshkina, Moscow, Tel: +7 495 956 9901,
Email: marina.moshkina@fitchratings.com.
[2009-08-21]