Research Notes
Magnitogorsk Steel: low raw material self-sufficiency is not so crucial
| 13.05.09 |
Magnitogorsk Steel ranks among the world’s top-20 steel makers. At a time of low domestic prices for raw materials, the company stands a chance of turning its Achilles heel, low raw material self-sufficiency, into a competitive advantage, enabling it to cut production costs in the most effective manner.
Growth drivers:- Weak domestic raw materials market: Amid sluggish demand from metal makers, the ability to dictate prices on the raw materials market has passed to customers, and Magnitogorsk Steel is now in a position to buy raw materials at prices on a par with production costs of the most efficient producers. At the same time, the company’s rivals often have to buy in-house raw materials on worse-than-market terms.
- Plant capacity concentrated in Russia: This allows the company to cash in on the positive impact of ruble devaluation and to implement its cost-cutting program without hindrance, thus raising the competitiveness of its products.
- Resurgent domestic demand: Since December 2008, domestic consumption of steel products has been steadily on the rise, in stark contrast to the preceding six months in which demand in the sector slackened. So far this year, consumption levels have nearly doubled. Even accounting for seasonal factors, this is undoubtedly a positive trend, enabling Russian steel makers to boost capacity utilization.
- Stable financial standing: Despite the fact that short-term debts made up 75% of a total debt of USD 1.7 billion in late 2008, the steelmaker’s financial position gives no cause for alarm. Of the total debt, more than 90% is covered with the company’s USD 1.2 billion in cash and cash equivalents.
- Unstable demand on domestic markets: Despite the revival of demand on the domestic market, it is still premature to speak about any firm upward trend. As consumers opt in favor of short-term contracts, steelmakers cannot project their capacity load ratios for terms longer than one or two months.
- Potential decline in the competitive advantage of production costs: The effect of the ruble devaluation has weakened since February. After hitting bottom, the ruble has already strengthened by 11% against the US dollar and 9% against the EUR-USD currency basket, which has adversely impacted the company’s production costs in dollar terms. As global companies renew their contracts for raw material supplies, the competitive advantage of Russian companies in terms of production costs may also decrease.
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Sector: Metals