Metinvest boosts steel output 10% qoq in 2Q16

Ukraine’s largest steelmaker Metinvest (METINV) reported a 10% qoq increase to 2.2 mmt in steel production at its subsidiaries in 2Q16, according to an operating results report published on July 29. Azovstal contributed the most with a 31% qoq surge to 1.0 mmt, while Yenakiyeve Steel endured a 10% qoq decline in production to 450 kt after being hit by temporary railway cargo transportation constraints in June.

Steel production in 1H16 grew 8% yoy to 4.2 mmt. Production of square billets fell 47% yoy in 1H16 to 188 kt, while output of long steel products grew 53% yoy during the same period to 909 kt. This indicates Metinvest’s preference to manufacture long products with higher added value, as price spreads between semi-products and finished products justify such a switch. With regards to flat products, output of semi-products (slabs) and finished steel grew 15% and 3% yoy respectively in 1H16, following revived demand in both sub-segments of the market.

Total iron ore concentrate production at Metinvest’s subsidiaries remained basically flat yoy at 7.9 mmt in 2Q16 and 15.8 mmt in 1H16.

Roman Topolyuk: The operating performance of Metinvest’s subsidiaries is line with what we have preliminarily observed in separate news reports of Interfax. Its metallurgical division benefitted from surging steel prices, which justified higher capacity loads. The result could have been even better without the logistical constraints experienced by Yenakiyeve Steel, but that was a one-off event and Metinvest is set to report another strong (flat qoq) amount of steel production in 3Q16.

We see Metinvest’s total attributable steel production (including JV’s not disclosed in the production report) in 2016 at 10.5 mmt (+9% yoy) and attributable output of iron ore merchant products at 35.2 mmt (+1% yoy). Our view on Metinvest’s Eurobonds, trading at the level of 68-70 cents per dollar, is positive, while we estimate their target price at least 10 cents higher.