Steel, ore rebounds promise minor profits to Ukraine producers

Prices for iron ore fines with 62% grade in Chinese ports advanced 13% to USD 51.5/t on Feb.22, after the Chinese New Year holidays ended. The prices have recovered to the level seen last October. Fresh orders from Chinese steelmakers for iron ore have driven up its price, according to Metal Bulletin. Seeing such an increase, certain suppliers of iron ore have taken a wait-and-see approach, betting on even higher prices in March. The recovery may be short-lived, traders commented to Reuters, as the fundamental factors of oversupply and lack of final demand continue to pressure the market.

Pellet prices (65% grade) were more stable at USD 59.6/t as of Feb. 19, having increased USD 4-5/t from the bottom reached in mid-December and maintained through mid-February.

Steel products prices experienced steady revival across the board after the Chinese holidays, as Chinese steelmakers led the market with price increases. Steel exporters from the CIS region participated in this price hike too. Offers prices for steel slab in the Black Sea region, FOB, ranged around USD 225-240/t, according to Metal Courier, up USD 10-20/t from the level seen in December-January, and reached November 2015 levels. HRC prices added 10/t to USD 255-265/t compared to beginning of the year, though being USD 5-20/t lower than November’s range. Rebar prices also advanced USD 10/t to USD 280-295/t, and also have yet to rebound to the USD 290-300/t seen in November. The price-increase mood is driven by suppliers, who aim to continue the trend in March, according to Metal-Courier.

Roman Topolyuk: The slight price recovery is a positive development for Ukrainian steel and iron ore producers, including Metinvest (METINV) and Ferrexpo (FXPOLN, FXPO LN). Metinvest generated a negative EBITDA of USD 4 mln in November, and might have gone deeper into the red in December-January (Metinvest’s monthly report for December, expected this week, might confirm our expectations).

Price hikes, which may continue in March, combined with the hryvnia devaluation to 27 UAH/USD, should have allowed Metinvest to break even or generate a little profit in February, we estimate. Iron ore prices at the current level allow Metivest to operate its iron ore mines and not consider their immediate closure.

Pellet prices may follow the brisk path of iron ore fines with some time lag, we think. This will benefit Ferrexpo, which has been very close to break-even at recent pellet prices of USD 59/t in Chinese ports. The company might have generated a positive EBITDA only through a higher pellet premium in the EU market, which we assume could be higher than the USD 14/t premiums seen in China.

Our only concern is that this rebound in prices is temporary, and might stabilize or even reverse in May, when seasonal revival subsides.