Metinvest decreases steel output 18% qoq in 4Q15

Ukraine’s largest steelmaker and iron ore miner Metinvest (METINV) reported an 18% qoq decrease in 4Q15 steel production to 1.7 mmt at its three steel mills, Azovstal (AZST UK), Ilyich Steel and Yenakievo Steel (ENMZ UK), according to its Feb. 8 trading update.

 

The holding’s ability to sell finished steel products (with higher added value) subsided which caused an abrupt fall in their production (14-35% qoq). At the same time, Metinvest was able to find additional demand for its semi-finished products, steel slabs and billets, and, as a result, increased their production 24-36% qoq in 4Q15. In total, production of merchant pig iron and steel products (rolled and semi-finished) fell 11% qoq to 1.994 mmt. In the year 2015, steel production at Metinvest’s three mills decreased 17% yoy to 7.7 mmt.

 

The company cited weak demand as the main reason for the decline in output, though occasional interruptions of natural gas or raw materials supplies due to continuing warfare and disrupted logistics also contributed to the weak result. A lack of orders forced Metinvest to halt its two blast furnaces – one at Azovstal and one at Ilyich Steel – beginning November 2015.

 

Output of iron ore products, sold to third parties, increased 18% qoq in 4Q15 to 5.5 mmt, as the holding’s own demand for ore decreased along with steel production. The product mix of iron ore shifted towards more iron ore concentrate which the holding called a higher-margin product (as compared to iron ore pellets). Metinvest‘s 2015 output of iron ore products for third parties fell 8% yoy to 20.4 mmt.

 

Roman Topolyuk: Metinvest’s steel production at its three steel mills of 7.7 mmt in 2015 is 5.0% lower than our projections, and the company’s merchant ore output is by 1.7% lower. Operationally, the company remained in the “conflict-zone” environment, where disruptions to logistics and other hurdles continue to prevent Metinvest from fully loading its production capacities. Decade-low steel and iron ore prices have left only a few points of profit generation in Metinvest. Yenakievo Steel remains among the few profit centers, as steel billet prices allow certain margins.

 

As a result Metinvest reported previously just USD 2 mln of EBITDA in October 2015 and minus USD 4 mln in November. We expect larger losses at the EBITDA level in December, and believe the holding will break even no earlier than February, if the current attempts of steelmakers to raise prices prove to be successful. For example, suppliers of steel slabs have increased offers from USD 218/t to USD 230/t (FOB, Black Sea) beginning February. It’s still not clear whether consumers support such a price increase, and whether Chinese producers wouldn’t dump this hike with fresh excessive supplies, after they return from holidays next week. 

 

Another encouraging factor for Metinvest’s EBITDA is an ongoing hryvnia devaluation: today’s hryvnia rate is 11% weaker than it was in 4Q15, and roughly half of the holding’s production costs are hryvnia-denominated.

 

In the mid-term, we expect the holding to regain its ability to generate EBITDA of at least around USD 500 mln on an annual basis, due to combination of some modest steel prices recovery and hryvnia devaluation. Though, in the short-term, Metinvest will have to face minimal profitability margins.

 

What is positive in this trading update is that Metinvest was able to sell more iron ore to third parties in late 2015, when internal consumption fell. This might indicate that Metinvest’s iron ore segment continues to break even and suggests that the holding won’t suspend iron ore mines in the short-term.

 

A further shift to iron ore concentrate at the expense of pellet production was quite logical, we think, as the pellet premium in China squeezed to just USD 12/t, at the end of 2015 and remains at USD 14/t currently. Earlier, the premium of pellets to concentrate was in the range of USD 30-40/t, compared to the production cost difference of pellets of around USD 12/t. We think this market development with pellet premiums is temporary, and the spread might widen soon, making pellet production attractive again.