Metinvest reduces its steelmaking capacity by 19%

Ukraine’s largest steelmaker and iron ore miner Metinvest (METINV) decommissioned all six open hearth furnaces at Ilyich Steel (MMKI UK), its second largest steel mill, the company reported on May 26.

Ilyich Steel had 2.5 mmt in steelmaking capacities from the furnaces, while the remaining 3.1 mmt in capacity involve oxygen converters. Metinvest stated it plans to compensate the decreased open hearth furnace capacities by more intense loads at the converters, but didn’t specify to what extent.

Roman Topolyuk: We are disappointed with this decision, which caps Metinvest’s ability to increase steel production. We doubt that Ilyich Steel could produce 5.0 mmt of steel (as it did in 2013) at its current converters. The company halted its furnaces in July 2014, after warfare broke out in Donbas, and recommissioning them now could have enhanced Metinvest’s cash flows, when iron ore prices are at historical lows.

Timing of decommissioning of the open hearth furnaces, which are widely perceived as less efficient, looks inappropriate to us. For instance, Zaporizhstal, which is owned 49.9% by Metinvest and fully operates on open hearth furnaces, reported an EBITDA margin of 20% in 2014, which is set to improve significantly in 2015 on hryvnia devaluation and further decreases in raw material prices.

Considering the decommissioning decision at Illich Steel, we are keeping our forecast of Metinvest’s steel production unchanged at 7.6 mmt (-17% yoy). However, the potential ceiling for steel production by the holding declines to around 10 mmt per year from 12.5 mmt as a result.