Page 99 - RPTRusFeb17

GDP growth in Russia in 2017, says rating agency said in a report in February. "Domestic Russian steel demand will stabilise or even grow slightly in 2017 as the recent PMI uptick suggests confidence is growing among producers and consumers," says Artem Frolov, Vice President -- Senior Analyst at Moody's. "Forecasts for a return to GDP growth in Russia after a two-year decline will also buoy steel demand." The Markit Russia manufacturing purchasing managers' index (PMI) has risen every month in the last six months from 50.8 in August 2016 to 54.7 in January 2017. A PMI between 50 and 55 is one of Moody's two quantitative metrics for a stable outlook. Steel capacity utilisation, Moody's second outlook metric, has been resilient to the decline in domestic demand for steel in 2014-16, remaining above 80%, mainly due to Russian steelmakers' competitiveness in export markets and reduced imports. Ruble weakness will maintain Russian steelmakers competitive edge in export markets. Steelmakers' profitability will stay high even with a stronger ruble because of increased steel prices; sustainable domestic price premiums compared with export prices; and continuing operating enhancements, which reduce their production costs. Excellence amongst the leading companies will also contribute. The Novolipetsk Meatllurgical Kombinat (NLMK) is one of Russia’s most modern steel mills and already had the lowest costs in Europe before the latest ruble devaluation in 2014.
Russian steelmakers were generally better off m/m in January, as the seaborne steelmaking margin expanded 5% m/m to $290/t (above the 2012-14 level) and the Russian domestic price premium reached $111/t at the end of January (vs. $40/t in our model). Analysts see MMK benefiting the most from these trends, as it is the least vertically integrated, and has high exposure to the domestic market. The key steel and bulks market trends in January were as follows.
● Raw materials basket lost 10% MoM. That was primarily driven by the 28% fall in hard coking coal spot prices (we expected a smoother decline), while the price of iron ore stayed relatively flat, at $81/t, still above the fundamentally justified level, in our view.
● Scrap prices fell 10-20% by the end of January. Prices for scrap in Turkey and Europe lost 20% by the end of the month, and are now trading below the io+cc basket, while they were historically at a $80-120/t premium. The Turkish EAF spread is now near TRY 1,200/t (vs. TRY 410/t in 2012-14), which favours MMK’s plant there.
● Raw materials in Russia grew 20-22% MoM. Iron ore and coking coal prices grew 20-22% in Russia in January, catching up with global benchmarks. Hard coking coal is above the Australian benchmark, $179/t at the end of January, but we expect it to correct in several months.
● Seaborne steel prices performed relatively flat; steelmaking margin expanded. HRC FOB China fell slightly (down 2% MoM) in January. However, due to the further deterioration in raw materials prices, the conversion margin gained to $292/t, above the 2012-14 average. This is in line with our view that prices might stay at high levels in 1Q17.
● Russian domestic market premium back above $100/t. In January, the domestic price premium stayed above $100/t and, in our view, might continue growing to $110-130/t this month, as we expect further single-digit prices increase in February.
● Russian domestic volumes continue to grow. Domestic apparent consumption for most steel products in Russia showed 10-15% growth y/y in December. In FY16, total steel consumption showed a 4% y/y decline, mostly due to the fall of 12% on rebar volumes. This year, we
99 RUSSIA Country Report February 2017 www.intellinews.com