Russia Steelmaker Profit Margins Seen Threatened by Rising Ruble

24 April 2015

Russian steelmakers may find the benefits of a weaker ruble short-lived as lower prices coupled with a rebound in the currency weigh on profit margins, analysts and producers of the metal said.

“The situation in the market remains tough and we understand that margin levels will fall during the year,” Alexey Kulichenko, chief financial officer of PAO Severstal, said in an interview on Thursday. “A lot depends on how strong the ruble will be.”

The ruble depreciated 46 percent against the dollar last year. That helped Russian steelmakers become the most profitable in the industry as they paid wages and other costs in rubles while earning dollars or euros for exports. With the ruble rebounding 18 percent this year to be the best performer globally, combined with falling prices, that’s set to change.

Severstal, the producer controlled by billionaire Alexey Mordashov, reported a record-high margin for earnings before interest, taxes, depreciation and amortization of 38.5 percent when it released first-quarter results on Thursday. That makes it the most profitable steelmaker globally, according to data compiled by Bloomberg.

The company attributed its high margin not only to the ruble but to more-profitable exports and increased “business effectiveness,” according to Kulichenko. Ebitda declined 2 percent to $590 million from the previous three months, while revenue fell 19 percent to $1.53 billion.

Affect Profits

Most of the benefits currently enjoyed by Russia’s steelmakers won’t last for long, according to BCS Financial Group.

“The ruble has strengthened and export-steel prices fell about 20 percent this year,” Kirill Chuyko, chief of equity research at BCS, said in a report this week. “Given that domestic prices are seen to be deteriorating, the combination of those factors may significantly affect the profits.”

The price of hot-rolled coil exported from the former Soviet republics, a benchmark steel product, has declined more than 17 percent to $372.50 a metric ton this year.

Before the ruble strengthened, domestic steel prices rose last quarter to match the dollar export price. As a result, Russian prices are 20 percent above those in Europe and at a premium of more than 50 percent to export parity, BCS said. That can’t last long and is a risk to profits, Chuyko said.

Export Share

Exports comprised 38 percent of Severstal’s sales in the first quarter, up from 29 percent three months earlier. For OAO Novolipetsk Steel, or NLMK, foreign sales made up 59 percent of the total in the fourth quarter. The company has plants in Europe, to which it sells steel for rolling.

At home, steel consumption is set to fall, Severstal’s Kulichenko said.

“The decline in demand in the domestic market will be significant, but not dramatic,” he said. “Export prices remain weak, but I don’t think they will go further below the current level.”

OAO Magnitogorsk Iron & Steel also expects some weakening in Russian demand in the second quarter, it said this week. The decline will be primarily from the construction industry, which has felt the effects of a slowing economy.

Russian steel prices will drop about 17 percent this year, Deutsche Bank AG said in an April 1 report. Even so, the country’s steelmakers will remain profitable and most have low debt, George Buzhenitsa, an analyst at the bank, said by phone.

The price decline will cut steelmakers’ Ebitda by 30 percent to 50 percent in one to 1 1/2 years, according to BCS.