Research Notes
Novolipetsk Steel: the Least Leveraged Russian Steel Company
| 01.04.09 |
- Drivers:
- Low production costs. Over the last few years, NLMK has been the most profitable company on the Russian steel market. This fact has become even more important amid the ongoing harsh market conditions. As prices for end-products decrease, low production costs should help NLMK reduce an absolute scale of earnings contraction compared with other less-profitable peers.
- Sound financial position. Despite its large USD 3.0 bln of debt, NLMK’s financial health does not give rise to worries at the moment. Most of the company short-term debts are fully covered by cash assets. Currency deposits stand for about 80% of the company’s overall cash asset structure, while a significant portion of the company’s debt liabilities is denominated in Russian rubles.
- Steel prices have limited downside potential. According to our estimates, more than 50% of steelmakers currently operate below the breakeven line. In our opinion, this limits significantly any further drop in steel prices.
- Risks:
- Worsening conditions in the steel industry. Global financial downturn has undermined the purchasing power of key steel consumers. The main problem has been the destabilization of the global financial sector, which is unlikely to resolve in the near future. At least this year we expect utilization rates of steel plants capacities to stay at an average level of 75-80%.
- NLMK’s electrical steel segment has been hardest hit by the financial crisis. In January-February 2009, NLMK plants produced 77% less transformer steel than in the first two months of 2008, which was quite an unpleasant surprise given the segment’s contribution to overall financial efficiency.
- Possible drop in exports to China. In the first months of 2009, NLMK actively exported semi-finished steel products to China where they were subsequently processed into end-products. The renegotiation of contracts with China on the supply of raw materials may cause a drop in domestic production costs, which, in turn, could lead to a fall in demand for imported semi-finished products.
- Weak 1Q09 results. NLMK management predicts the company’s 1Q09 revenue to drop almost 65% QoQ to USD 1.1 bln. The steelmaker’s EBITDA is expected at USD 200 mln. If management projections come true, NLMK’s 1Q09 net profit may turn out to be negative.
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Sectors: Metals, Ferrous MetalsCompany: Novolipetsk Steel