Page 114 - RusRPTNov22

Shaskolsky, head of the agency. The Russian anti-trust watchdog may adjust the already issued orders to steelmakers that demand a price peg to foreign exchanges in contracts and transactions, if the antimonopoly legislation is amended. Nevertheless, this revision will not cover the orders issued to Severstal, NLMK or MMK within cases of antimonopoly legislation violation in the rolled metal market.
Overall, M&M sector still has substantially high M2M valuations vs historical levels, current weighted average P/E reaches 8x vs 4-5x normal level.
Ongoing strong ruble coupled with the export restrictions (in particular, in the steel segment) result in loss in export in this environment. The consequences of increased geopolitical tensions are adding even more uncertainty to the M&M space. Russian steelmakers’ export margins hit an unprecedentedly low level of minus 15-20%.
On the demand side, the prospects look hazy as global inflation and transaction cost pressures is a key risk for consumer activity. Moreover, the strengthening of the US dollar and economic uncertainty in China (mainly due to problems in the real estate sector) have not yet allowed the overall demand for key commodities to recover.
Thus, our view on the sector as a whole is neutral. That being said, we like only Mechel, a high-risk name, but with a potential to bring a nice return – deleveraging is on the way. The company has a relatively stable coal business with a bet on Asia, which can compensate for losses in the steel segment.
EU included Russian semi-finished steel in the 8th package of sanctions,
per EU’s Official Journal. European Union has imposed a ban on slabs and square billets produced in Russia. The embargo will come into force for a square billets on April 1st, 2024, for a slab — on October 1st, 2024. Meanwhile, there will be 7.5mt quota between 7 October’22 and 30 September’24 and c621kt between 7 October 2022 and 31 March 2024 for Russian slabs and square billets, respectively. To remind, NLMK exported 2.4mt of slab to European re-rollers last year.
The embargo is more of a symbolic gesture. NLMK could fully export its own slab to the EU in the next 2 years primarily as usual as established quota exceeds NLMK supply volumes by 56% (the quota is divided into 2 equal parts). Although, the immediate ban could have resulted in severe issues for both Russian and foreign business with M2M EBITDA losing at least 9% (if the European business continued to operate at all). Meanwhile, a lot of things may happen during these two years – if the European community does not find alternatives to Russian semi-finished products (more than 80% of the EU's semi-finished steel products come from Russia and Ukraine, European steel re-rollers estimated earlier), we don’t rule out the ban may be replaced by
114 RUSSIA Country Report November 2022 www.intellinews.com