Metinvest prepares for prolonged industry downturn

Ukraine’s largest steel producer Metinvest (METINV) is
planning to cut its CapEx and fixed costs, including some administrative
personnel and staff at its management company, the Interfax-Ukraine news agency
reported on Nov. 21, citing the holding as its source.

 

Metinvest sees the global steel industry entering the
worst crisis in ten years and has a dismal outlook for steel prices, which
prompted the holding to develop an action plan for the difficult economic
situation, Interfax-Ukraine said.

 

In particular, Metinvest will cut its 2019 investment
program, maintaining only its critical strategic investments and projects with
significant ecological effects. The holding will also pause non-critical hiring
and cut up to 30% of its administrative staff in 2020.

 

Metinvest underlined that the steel industry is
cyclical and therefore the holding views the current crisis as temporary,
Interfax-Ukraine reported.

 

Dmytro Khoroshun: Metinvest’s
preemptive measures are adequate and commendable. After the recent refinancing
of its 2023 notes, which brought in about USD 350 mln in net cash, Metinvest
should be able to service its debt (USD 3 bln gross) and stay within its 3.0x
net debt to EBITDA covenant, provided it does not pay large dividends and earns
at least USD 85 mln in monthly EBITDA on average.

 

Recall, in August Metinvest’s monthly EBITDA amounted to USD 119 mln.
However, Metinvest’s realized iron ore prices in its August revenue did not
reflect the world iron ore price slump that occurred during the same month, and
we expect Metinvest’s monthly EBITDA to drop to USD 70-100 mln in the next few
months.

 

In the last few weeks, Ukraine’s FOB export prices for
steel products seem to have stabilized after a prolonged slump, according to
Concorde Capital’s analysis of data by Metal Expert, an industry consultancy.
The most recent spot slab price stands at USD 353/t, a 5% increase from the
recent one-year low of USD 335/t two weeks ago but 32% below the 2018 average
of USD 517/t. The HRC price stands at USD 385/t, also up 5% from the recent
one-year low and 30% below the 2018 average of USD 550/t.

 

The June-July averages (which were likely factored
into Metinvest’s August steel revenue) were USD 424/t for slabs (20% higher
than the current spot levels) and USD 480/t for HRC (25% above the current
spot).

 

We are revising to neutral our outlook on METINV
bonds.