Metinvest production volumes depressed by coronavirus situation

Metinvest (METINV), Ukraine’s largest steelmaker, will
keep its Italian rerolling plants, Ferriera Valsider and Trametal, shut until
Apr. 3 to counteract the spreading of the coronavirus, according to Metinvest’s
Mar. 31 press release. The holding does not rule out that the Italian
government will extend restrictions on the functioning of these metallurgical
plants, the press release said. However, the slab inventories at these plants
will allow for a prompt resumption of operations once the quarantine
restrictions are lifted, provided there is demand for the plants’ products,
according to the press release.

 

Furthermore, if the restrictions on Metinvest’s
Italian plants are extended, the holding expects also a decrease in production
volumes at its Ukrainian plants, first of all at Azovstal, where the production
of merchant slabs might be completely suspended, Metinvest’s press release
said.

 

Metinvest is also considering shutting down Azovstal’s
blast furnace (BF) No. 3 and delaying the launches (after maintenance) of BF
No. 4 at Azovstal and BF No. 4 at Ilyich Steel to May (from April), according
to the press release. Metinvest’s joint venture Zaporizhstal also does not
exclude a delay in launching its BF No. 5 after maintenance, Metinvest said in
its release, adding that it will make the final decisions on launching the
blast furnaces depending on its order book in April and on the global
situation.

 

The possible reductions in hot iron production in
Ukraine will result in Metinvest redirecting its iron ore products to its other
traditional markets, in particular to China, according to the press release.

 

Dmytro Khoroshun: The actual,
and likely future, decreases in available running capacities, production
volumes, demand and prices all bode ill
for Metinvest’s finances.

 

It is likely that Metinvest will see drops in the
production and sales volumes not only due to the suspension of the Italian
plants’ operations, but also because of drops in demand for its products worldwide.
In particular, we note that Zaporizhstal does not produce merchant slabs that
can be rerolled in Italy. Rather, Zaporizhstal’s delay in launching its BF No.
5 will be indicative of declining demand at the export markets for the plant’s
products, which are pig iron, as well as hot- and cold-rolled coils.

 

Importantly, Metinvest’s mining segment will also
suffer because of the holding’s drops in hot iron and steel production in
Ukraine. This is because Metinvest will earn USD 25-30 less per each ton of
iron ore products redirected from Ukraine to the distant market of China due to
the costly logistics. We also think that demand for iron ore at closer export
markets such as Europe will also be depressed because of the coronavirus
hurting their economies.

 

We do not rule out that Metinvest might face
challenges with servicing its debt already in 2020. For this year, Metinvest’s
payments amount to about USD 205 mln in interest and USD 155 mln in principal
repayments. The latter figure excludes about USD 400 mln in trade finance
loans, which Metinvest plans to roll over. However, under adverse export market
conditions, Metinvest might need to repay a substantial part of its trade
finance loans in a short period of time (up to three months), which might prove
a cash flow shock.

 

We maintain
our negative view on METINV bonds.