Veles Capital presents Russian steel industry review:

- Ferrous metallurgy has actually sensed the breath of the global financial crisis. Metallurgy enterprises’ capacity loads dropped significantly, realization prices reduced, the companies began reducing salary funds, liability-related problems (especially currency ones) appeared. This is how the year started for the ferrous metallurgists.

- Steel market conjuncture of the current months is gradually recovering; there appears an uncertain demand of the products. But it should always be kept in mind that growing is far from dropping: for instance, 50% growth is a lot less than the previous 50% drop, if considering absolute expression. More to that, growth rates are not even close to the drop rates’ levels. We do not see any optimistic prospects of steel market conjuncture recovering. So the steel products’ prices will likely be climbing in proportion to inflation rates and, ceteris paribus, last summer’s highs will not be reached again soon.

- Besides the unfavorable conjuncture, the liquidity deficit at the credit markets appears to be another headache for the metallurgists. Companies with large short-term liabilities have to be loaned up by state banks at rather high interest rates and strict security deposit requirements. The most financiallydependent companies are Mechel and Evraz. But at the same time Mechel even managed to buy Bluestone Coal right after obtaining credit in Gazprombank (for debt refinancing), which might worsen the financial state of the steel group.

- We reduced fair prices of almost all companies of the “top five”. The reduction was due forecasts’ revision of production and prices of steel-smelters’ products. We have also updated the global interest rates’ levels, exchange rates and inflation levels. Public comparables research has also provided lower estimations than earlier, which was due to analogues’ value decrease.

- We do not indicate any overestimated companies among the domestic top five metallurgists – they vary only be underestimation degree. Due to that we confirm the recommendation “BUY” for the shares of the companies, indicated in the research.

Download full version of Russian steel industry review by Veles Capital (March 2009)