Fitch: CIS steel industry to see slow rebound in 2010

The leading global ratings agency Fitch Ratings has stated that it expects the CIS steel producing sector to show a slow rebound in 2010, based on the recovery of global steel demand anticipated for the first half of the year in question and on higher prices.
 
According to Fitch's expectations, in 2010 the CIS steel producers will increase their revenues by 10-15 percent year on year, and raise their capacity utilization levels to an average of 90 percent in Russia and 75-80 percent in Ukraine, benefiting from higher demand, as consumer spending and investments strengthen and as destocking runs its course. Currently, the Russian steelmakers have improved their capacity utilization to an average of 75-80 percent, with their Ukrainian counterparts up to an average of 60-70 percent. Capacity utilization rates for most CIS steel producers fell to 50-60 percent in Q4 2008 from around 90-95 percent at the beginning of 2008 due to the fall in demand from end markets.
 
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. 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, Fitch notes.
 
Due to domestic economic growth, most Russian steel companies were selling 60-70 percent of their output to the domestic market by the summer of 2008. However, Russia's domestic demand for steel products dropped by 30-50 percent during Q4 2008-Q1 2009, forcing companies to shift sales to export markets such as China, the Middle East and Asia. Export sales currently account for up to 50-70 percent of the companies' production volumes. Fitch believes that this is an appropriate short-term strategy to boost operational and financial performance; however, this export-oriented strategy could lead to lower margins, higher demand volatility, potential tariff countermeasures and a fall in demand from key markets, Fitch states.
 
In addition, Fitch notes that the geographical diversification of some CIS producers such as Russia's Severstal and Evraz Group 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 asset integration. According to Fitch, the most affected CIS producer is Severstal, whose 2009 EBITDA margin is likely to decline below ten percent, due to underperformance of its US assets.
 
Fitch believes that the movement in exchange rates of CIS currencies could also affect the steelmakers' exports. So far in 2009, CIS steel producers have benefited substantially from local currency devaluation as export sales are in $/ € and the majority of costs are denominated in local currencies. However, this situation could be reversed, for example, if the Russian ruble were to appreciate due to increasing oil prices, Fitch says.
 
In 2009, Fitch expects a decline of 15-35 percent year on year in CIS steel producers' outputs, and a drop of 45-65 percent in their revenues.