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Made of Steel In Russia

Kalim Aziz
April 23, 2015
  • Sharp decline (akin to 2008/9 in % terms) in Steel prices in the last 6 months was driven more by input cost than demand dynamics
  • Decline in Steel price in the recent past has ‘eaten’ in Value-Added margin available to Steel companies to cover costs other than inputs. However, rouble devaluation has taken the brunt of decline in Steel prices, and has allowed the Russian Steel makers to protect a large part of Value-Added margin.
  • In the current, input cost environment, MMK offers the most attractive return as an ‘unintegrated player’ followed by NLMK which is also exceptional value for money. Severstal’s attractiveness is muted compared to these two names, but can be considered better value in the global context.

Global steel prices dropped sharply...

Global steel prices are facing one of the sharpest drops that we had witnessed in the recent memory driven both on the demand and the supply side economics. In the input cost to this sector has collapsed (Iron Ore and Coal) allowing the steel mills to operate at lower prices.

With Chinese demand growth stalling, Chinese steel mills started exporting part of its production, putting further pressure on global prices in as much that the metallic charge has declined to a level unseen in this decade ( large proportionate drop is compressed within the last 4-5 months):

Rouble devaluation serves Russian players

For large Russian players (listed), devaluation of Rouble against the US$ is the greatest boon that has accrued to the sector as a large proportion of costs are rouble denominated and as such a significant part of decline in the price of steel is absorbed by the decline in the cost of production in US$ terms, keeping the sector competitive and robust.

Even setting aside the ‘shock-absorbing-function’ that the Rouble devaluation has performed for the sector and near elimination of domestic price premia, Russia proudly boasts the most cost efficient steel mills in the world (in the top 10% of global capacity).

Chart 1.: Cost Curve - Crude/Slab Steel

Source: Companies, Helgi Analytics

The sector offers a great value now...

The sector has passed the peak of capex and is more than 80% through deleveraging, the sector is attractively valued with equity free-cash flow yield ranging between 12-26%.

...with MMK being the most attractive stock

Most attractively valued steel company is MMK which has no backward integration allowing it to benefit the most from drop in input costs (iron ore and coal price decline).

...followed by NLMK...

The second most attractively valued company is NLMK with equity free cash flow yield of 18% and with significant backward integration and world class beating cost efficiency.

...and Severstal

Severstal is less attractive compared to the other two within the Russian context. However, in the global context, it ranks high in terms of attractiveness.

Kalim Aziz
Kalim Aziz
Senior Analyst at Duet Asset Management LLP, London
Mr. Kalim Aziz spent more than 20 years analysing companies in the global emerging markets. Kalim served as a Head of EMEA Research managing over 30 analysts at ING Groep in London and later headed Equity Research of the EMEA Region at UniCredit Banca Mobiliare in London together with Centralny Dom Maklerski Pekao in Warsaw and Koc Yatirim in Turkey, altogether covering more than 100 companies in the region. In 2006, he moved to the buyside as a Co-fund Manager of Kairos Eurasian Fund with Guido Brera. Kalim now helps managing equity fund at Duet Asset Management in London. Besides, he owns a consultuancy company Kiradvisory Limited, an affiliate of Helgi Library on various analytical work.