Metinvest boosts iron ore sales to Europe in 1Q18

Metinvest (METINV),
Ukraine’s largest steelmaker, released its 1Q18 trading update with select
financial results on May 30.

The holding
confirmed that its 1Q18 EBITDA amounted to USD 649 mln (a 61% yoy surge), the
value inferable from its monthly reports. Revenue advanced 63% yoy to USD 3,019
mln, and the EBITDA margin decreased 1pp yoy to 21%. Its metallurgical
segment’s EBITDA jumped 4.5x yoy to USD 377 mln, and EBITDA margin rose by 8pp
to 14%. Its mining segment’s EBITDA slid 20% yoy to USD 347 mln, and EBITDA
margin dropped 4pp to 40%.

CapEx more than
doubled yoy to USD 216 mln. The share of expansion CapEx amounted to 39% (11% a
year ago), and the share of its metallurgical segment CapEx amounted to 73%
(28% a year ago), according to the company’s 1Q18 results presentation, also released on May 30.

In the metallurgical
segment, Ukraine’s share in revenue increased yoy to 25% from 21%, which
Metinvest attributed to greater demand amid economic recovery. Europe’s share
decreased to 33% from 38%, which Metinvest attributed to reduced resales of
flat products. The share of CIS share also decreased to 8% from 11%. Sales
volume of semi-finished products jumped by 989 kt yoy, including 298 kt of own
products and 691 kt of resales. Sales volume of finished products increased by
294 kt, including 316 kt of resales, which was offset by a yoy drop in sales of
own products by 22 kt.

In the mining
segment, despite the 14% yoy drop in the benchmark 62% Fe CFR China fines price
index in 1Q18, Metinvest’s realized concentrate price decreased by only 2%,
whereas pellet price even increased by 3%, according to our calculations. Sales
volume of pellets jumped 41% yoy to 1,653 kt, whereas sales volume of
concentrate decreased 8% yoy to 1,990 kt. The volume of sales to Europe
increased yoy by 874 kt to 2,024 kt, whereas sales to Southeast Asia (which
includes China) plunged yoy 855 kt yoy to 144 kt.

Dmytro Khoroshun: Metinvest’s profitability continues
to be strong and will likely persist well into 2018. We especially like the redirection of iron ore sales from the more-distant Chinese market
(its share in the mining segment’s revenue declined to 4% from 27% a year ago)
to the more-marginal European market (revenue share up to 49% from 32%, which
Metinvest attributed to the signing of long-term
agreements with customers). This redirection was likely one of the reasons behind iron
ore product prices not dropping as much yoy as the benchmark did.

On the other hand,
the metallurgical segment is apparently struggling to maintain the sales volume
of own finished products (a 22 kt yoy drop), and is traditionally resorting to
sales of semi-finished products (the sales volume of own products increased by
298 kt). One of the likely factors behind this product mix is the worldwide
steel trade protectionism.

It is encouraging that expansion CapEx’s share in total CapEx increased
to 39% (it was less than 30% during the last few years), provided that this
does not include major overhauls, because it means that Metinvest has started
to modernize its capacities, which is particularly needed in the metallurgical
segment. However, the metallurgical segment’s total USD 158 mln CapEx
apparently includes USD 29 mln invested by Metinvest Shipping into purchasing
up to 800 railcars during 1Q18.