According to the leading global ratings agency Fitch Ratings, the Russian steel industry will continue to face challenges for the reminder of 2009, such as soft domestic demand and depressed prices, although their impact will vary across companies.
Fitch notes that the operating and financial performance of Russian steel companies in Q1 2009 generally remained weak despite some revival of steel sales and demand in this quarter compared to Q4 2008. For Q2 2009, the agency expects steel output and prices to remain at Q1 2009 levels. Although domestic sales may continue their recovery, particularly in Q3-Q4 2009, as the government stimulus kicks in and restocking intensifies, there are still risks that Russian steel producers may be affected by protectionist measures and/or weak demand from major markets such as China or Europe.
While average utilization of Russian steel production capacities increased to 70-72 percent in March 2009 from 55-60 percent in January 2009, Fitch attributed the increase in production to restocking and rising exports as domestic demand fundamentals remained weak. According to World Steel Association figures, in Q1 2009 Russian steel companies produced 12.862 million mt of steel - down 33 percent year on year, but up 11 percent quarter on quarter. The share of export sales increased to more than 50 percent year on year from 39 percent. Q1 2009, the average steel prices observed by Russian steel producers decreased 40-46 percent from Q4 2008. Export prices are consistently 10-20 percent lower than domestic prices. Russian producers have announced significant production cutbacks and cost reduction programs and, despite a decrease in input prices, these measures were not enough to offset the decline in sales prices. As a result, Fitch observed a sharp drop in the EBITDAR margin of Russian steel companies. For example, in Q1 2009 NLMK's EBITDAR margin decreased to 15 percent from 25 percent in Q4 2008 and Severstal's EBITDAR margin decreased to -5.7 percent from 7.4 percent in Q4 2008.
Nevertheless, Fitch notes that the outlook for Russian steel producers as NLMK and MMK remains stable. Fitch estimates that both companies will be able to sustain their EBITDA margin at 15-20 percent, due to low cost advantage and modest operating leverage. The agency also expects both companies to continue to have adequate liquidity positions due to historically conservative financial policies and significant cash balances.
The credit profiles of Evraz Group and Severstal will continue to be under pressure, as these companies have higher leverage than other Fitch-rated Russian steel peers and significant near-term maturities. Fitch expects to resolve the Rating Watch Negative on both issuers by mid-July 2009, when it has assessed the adequacy of anti-crisis measures announced by management of both companies to reduce financial and operational risks.