Rising rouble casts shadow over upbeat Russia steel makers
A rise in the value of the rouble could knock Russia’s steel makers, increasing costs in dollar terms and eating into export earnings at a time when the sector is seen benefiting from a nascent economic recovery.
Companies including market leader Novolipetsk and its closest competitor Evraz have struggled over the past two years as world steel prices plumbed 11-year lows and Russia’s economic crisis sapped domestic demand.
The sector’s prospects are seen brightening in 2017 as the Russian economy returns to growth, with officials forecasting a rise in GDP of up to 2% in 2017, partly thanks to higher oil prices. But higher oil prices combined with the Russian central bank’s policy of high interest rates, have pushed the rouble up 7% versus the dollar so far in 2017.
For Russia’s steel makers, whose export sales are priced in dollars, that means higher output costs at home in dollar terms, which analysts say could hit earnings and cut profitability.
“The benefits from the better economy are by far compensated by negatives coming from the stronger rouble,” said Kirill Chuyko, head of metals and mining research at BCS Investment Bank. “We estimate that a 10% rouble appreciation might eat up to 15% of profits for Russian steel companies.”
Novolipetsk, Evraz and Severstal said the rouble’s strengthening would decrease the profitability of export sales, but this would not affect wider earnings due to an uptick in global steel prices and their focus on the improving domestic market. Magnitogorsk did not respond to a request for comment.
“Usually, if we lose on one market, we earn on the other. The question of prices is much more important,” a Severstal spokeswoman said.
Novolipetsk and Magnitogorsk reported 2016 core earnings that were flat or almost flat at $1.9bn and $1.6bn respectively. Evraz’s rose 7.2% to $1.5bn.
CURRENCY APPRECIATION
Societe Generale analyst Sergey Donskoy said firms that produced more of the raw materials needed in steel production, and thus had more costs in roubles, would be harder hit by the currency appreciation.
“Those who have low integration, naturally have more of an advantage. Magnitogorsk perhaps looks more resilient. Those who have strong integration, Severstal, Novolipetsk, Evraz, look more vulnerable.”
Severstal and Evraz produced 110% and 81% of the iron ore needed for their steel production respectively in 2016, as well as 70% and 195% of coking coal, corporate filings show. The two companies sell any surplus on both domestic and export markets.
Novolipetsk produced 95% of its iron ore but no coking coal, which has prices pegged to the dollar despite being quoted in roubles. Magnitogorsk produced 19% of its iron ore and 39% of its coking coal in 2015.
David Herne, MD at asset manager Spring, said companies that focused on the domestic market would be partly shielded from the stronger rouble.
“With regards to the rouble, probably Magnitogorsk benefits from strength because it sells 80% domestically. Novolipetsk exports quite a lot so is certainly not benefited,” he said.
“But Novolipetsk claims to be the most efficient and has the numbers to prove it. Year after year it has been eking out a percent or two gain and it adds up.”
Donskoy said he did not expect any immediate effect on the firms’ earnings, but the situation left them more vulnerable to possible future problems.
“The stronger rouble is a drag,” he said. “Right now I wouldn’t say it’s a big drag, but the question is what happens if international steel prices and export steel prices begin to decline and at the same time the rouble stays resilient.
“This could be a headwind as we go into the second half of the year,” he said.
WE ESTIMATE THAT A 10% ROUBLE APPRECIATION MIGHT EAT UP TO 15% OF PROFITS FOR RUSSIAN STEEL FIRMS