Metinvest steel mills report on production decline due to blockade

Metinvest’s (METINV) subsidiaries Azovstal and Illich Steel had to decrease their capacity load over the last few days, Azovstal CEO Enver Tskitishvili said in an interview cited by Interfax-Ukraine on Feb. 23. Azovstal is working at 55% of capacity load and Ilyich Steel at less than 50%, he said. This was a result of the termination of metallurgical coke supply from Avdiyivka Coke Plant due to the blockade of railway connections in Donbas. In the year 2016, the average capacity load of both Azovstal and Illich Steel was 71%.

Earlier this week, Metinvest reported that it had to stop work at Yenakiyeve Steel Plant and Krasnodon Coal, both located on the occupied territory of Donbas. Yenakiyeve operated at 60% of capacity last year.

Andriy Perederey: What has been described by Tskitishvili is in line with our worst-case scenario for Metinvest, as we described it in Feb. 22 note. Namely, the idling of Yenakiyeve and decreased production at Azovstal and Illich Steel has lead to about 44% decrease of output of steel by the three mentioned steel mills, as compared to the average level of 2016.

As we wrote in the note, this scenario may result in a 22% decrease of Metinvest’s annualized revenue, and a 24% decrease in its annualized EBITDA. This impact will take place if the railway blockade will continue throughout the year, but we expect that the blockade won’t last so long. Moreover, we estimate that even if the worst-case scenario continues for an indefinite time, Metinvest will be able to generate enough cash this year to smoothly service all its debt obligations, and even to start deleverage. While we recognize that the current situation poses a price risk for Metinvest bonds, we remain bullish about their mid-term prospect.