Metinvest steel production falls 21% m/m in June

The subsidiaries of Ukraine’s largest steel maker Metinvest (METINV) produced in June 785 kt of steel (attributable, including the 49.9% portion of Zaporizhstal as a JV), a decline of 21% m/m and 12% yoy, according to Concorde Capital’s analysis of separate news reports released by Interfax-Ukraine.

The decline was largely owing to Yenakiyeve Steel (ENMZ), which is located on the occupied territory in Donbas and had to reduce its steel output sharply during the first two weeks of June due to a halted railway connection. The enterprise produced 71 kt of steel (-64% m/m, -62% yoy). The Ilyich Mariupol Metallurgical Plant also demonstrated sharply lower production as its steel output fell by 18% m/m and 4% yoy to 205 kt.

Roman Topolyuk: The main cause of Yenakiyeve Steel’s sharp reduction output has been already neutralized as state railway operator Ukrzaliznytsia (UZ, RAILUA) announced last week it has lifted its ban on cargo shipments to and from the occupied territories. This occurred quicker than we expected. We now expect Yenakiyeve Steel to recover its steel production to 140 kt in July (+97% m/m) and to return to the currently normal volumes of 180-190 kt of steel per month going forward.

It’s not clear what caused the production decrease at Azovstal, though we think it’s temporary and the enterprise may produce 230-240 kt of steel per month in 2H16.

Steel capacity load in June was as low as 26% for Yenakiyeve Steel and 64% for Ilyich Steel, while it was solid at Azovstal and Zaporizhstal (77% and 90%, respectively). We project the utilization rate to recover to 50% at Yenakiyeve Steel in July and to be in the range of 72-83% for the other steelmaking subsidiaries, which would be quite decent under the current logistical constraints in Donbas.

We project Metinvest’s total attributable steel output at 10.4 mmt for 2016 (+7% yoy) and we affirm our positive stance on Metinvest’s Eurobonds.