Steel rout means Russian mills can't rely on weaker ruble

23 October 2015

The lowest steel prices in more than a decade mean Russian producers can no longer rely on a weaker ruble for protection.

The country's largest mills earlier in 2015 were the most profitable in about seven years because they pay wages and other production costs in rubles while earning dollars or euros for exported steel. A slide of about 40 percent in steel prices this year means Russian companies are "barely" breaking even with exports, according to BCS Financial Group.

The Russian currency's collapse following international sanctions over the Ukrainian conflict and a plunge in oil prices benefited steel producers including Severstal and Novolipetsk Steel. Now, they're feeling the pinch from an accelerating drop in steel prices as China, which accounts for about half of global output, floods the market with cheap exports amid a slowdown in its economy.

"The magic effect of ruble devaluation on the steel companies' earnings, which we saw at the start of the year has vanished," said Kirill Chuyko, chief of equity research at BCS. Domestic prices need to fall to prevent an influx of cheaper imports, he said.

Prices for hot-rolled coil exported by former Soviet Union nations are at the lowest since 2003, according to Metal Bulletin. They've slumped every month since September 2014.

The lower steel price has eradicated the benefits of a weaker ruble, according to the press service of Novolipetsk Steel, Russia's largest steel producer.

The ruble has dropped 50 percent against the dollar in the past two years and about 40 percent versus the euro in the period. That helped Russian mills earlier this year to undercut rivals such as ArcelorMittal, the world's largest steelmaker, while maintaining profitability.

Output last year reached the highest since the global financial crisis as demand remained buoyant in Russia and started to recover in European export markets. The country's steelmakers have invested billions in upgrading Soviet-era mills and building new facilities, and the nation produces more than any other country in Europe, one of its main export markets.

Domestic sales are still profitable and prices within the country are about 26 percent higher than if customers bought steel from abroad, Chuyko said. The premium may lead to increased imports into the nation if prices don't drop toward export levels, he said. Imports declined by 40 percent in the first eight months of 2015 from a year earlier, Novolipetsk Steel said.

Russian steel demand will fall 10 percent this year, compared with a 1.7 percent decline globally, according to the World Steel Association.

Russian customers often prefer to buy from local companies because of additional service opportunities and also due to risks associated with import deliveries, said Dmitry Goroshkov, a marketing director at Severstal's Russian steel division. Still, from time to time there's been high imports of some steel products sold at "dumping" prices, he said.

China has shipped unprecedented volumes this year. The surge of cheap imports from the nation, which is contending with its slowest economic growth in a quarter of century, has drawn complaints from Europe and the United States that the exports are unfair.

Tata Steel, Britain's biggest producer, announced 1,200 job cuts on Tuesday and said it plans to stop producing steel plate at plants. The day before that, 16 companies that comprise Caparo Industries were placed into administration.

The plunge in steel prices means Russian producers' profit margins domestically are moving in line with companies from other countries, including in India, Brazil and the U.S., according to Dmitry Popov, an analyst at CRU Group, an industry consultant.

"Despite the weak ruble, Russian exporters are not getting profits on the export market anymore," Popov said by email. "They only export to have an opportunity to keep their capacities working. On the other hand, domestic demand is falling."

BCS on Thursday cut its price estimateson all Russian steelmakers by a range of 19 percent to 79 percent. It downgraded the recommendation on Magnitogorsk Iron & Steel OJSC to sell from hold and maintained sell ratings on the others.