In a new report, Fitch Ratings says that Russian steel companies would have better flexibility in the event of economic downturns compared with their international peers.
The relatively strong credit metrics of Russian steel companies are explained by their self sufficiency in key raw materials and access to cheap energy, natural gas and labour.
As a result, the cash cost of upstream operations of Russian major vertically integrated companies, according to Fitch, is 25% to 35% lower compared with the global average. Cost competitiveness contributes to higher utilization rate of companies' production capacities, more than 90% compared with 75% to 80% globally.
Mr Alexei Fadyushin director in Fitch's European Industrials team said “Fitch considers the high self-sufficiency of Russian steel companies in key raw materials as one of their main competitive advantages compared with international peers. This allows Russian steel producers to be less exposed to volatile iron ore and coking coal prices. Although domestic prices for natural gas and electrical power are 4.0 and 2.4 times lower than the average in the European Union, the agency notes the rising energy costs for Russian corporates, which could negatively affect profitability in the medium term.”
The major Russian steel companies have improved their operational profiles in 2011. OJSC Novolipetsk Steel increased its crude steel production capacity by 40% by launching a new blast furnace and converter. New upstream operations capacity was balanced by acquiring rolling facilities of Steel Invest and Finance S.A. As a result, the company decreased its excessive exposure to semi finished steel products and improved product mix in favor of high value added products.
OJSC Magnitogorsk Iron & Steel Works launched a new rolling mill in July 2011 with production capacity up to 1.5 million tonnes, which produces flat steel for automotive manufacturers. This strengthened MMK's position as a supplier of HVA products in a segment with good growth prospects. The launching and further acquiring of 50% of Turkey based steel mill MMK Metalurji improves the geographical diversification of assets and revenues.
OAO Severstal has sold three of its five underperforming facilities in North America in 2011, which contributed to an improvement in the company's credit metrics. In addition, Severstal benefits from better product diversification compared with its Russian peers: the gold segment provided 24% of company's total H111 EBITDA, according to company reports, and supports the company's margins. Uncertainty about the company's majority-shareholder strategy for Lucchini SpA.is a constraint on Severstal's ratings.
Evraz Group SA's key strengths include scale, geographical diversification of assets and self-sufficiency in raw material inputs. During 2010-H111, Evraz's management has been focused on improving the company's liquidity position and deleveraging. Fitch views positively the direct listing of the company's shares on London Stock Exchange from November 2011, which confirms that the company complies with its admission and disclosure standards.
(Sourced from Reuters)
