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UPDATE 2-Higher demand, prices point to strong Q3 for Russia's steelmakers
October 18, 2016 / 12:56 PM / a year ago

UPDATE 2-Higher demand, prices point to strong Q3 for Russia's steelmakers

* Russian steelmakers hit by weak demand, low prices in 2015

* Market recovery, output levels point to stonger Q3 earnings

* But steelmakers also face increased coal prices, costs (Adds quotes from Evraz official)

By Jack Stubbs and Svetlana Burmistrova

MOSCOW, Oct 18 (Reuters) - Russia’s steelmakers are expected to post higher earnings when they report third-quarter results in coming weeks due to a recovery in prices and stronger demand.

The companies, including Russia’s largest NLMK and second-biggest Evraz, suffered in 2015 as world steel prices plumbed 10-year lows and as the country’s economic downturn sapped domestic demand. NLMK and Evraz full-year core earnings fell 18 and 39 percent respectively.

But steady or higher output levels in the third quarter coupled with a recovering global market outlook point to stronger earnings for the three months.

“We are increasingly positive on the sector outlook with strong third-quarter earnings expected,” VTB analysts wrote in a note. “With seasonally stronger demand ahead in the fourth quarter ... we expect further gains ahead.”

Steel prices fell to their lowest level since 2004 last year due to oversupply from China, the world’s largest producer and consumer of steel, and slack demand.

They have since recovered by around 30 percent and the World Steel Association said last week it now sees global demand growing 0.5 percent year-on-year in 2016, compared with a 0.8 percent fall forecast in April.

Russia’s Evraz said on Tuesday its third-quarter crude steel output rose 6 percent quarter-on-quarter to 3.4 million tonnes after the completion of blast furnace repairs.

Severstal’s production rose 6 percent in the third quarter while MMK, Russia’s third-largest producer, said output was flat at 3.2 million tonnes.

Only NLMK recorded a fall in output, down 4 percent quarter-on-quarter, due to planned repairs at its plant in Lipetsk.

But the steelmakers will have to contend with higher coking coal prices - a key component of steel production - which have doubled since July to more than $200 per tonne on expectations of lower supply. This will increase the steelmakers costs and potentially squeeze profit margins.

While Severstal and Evraz are partially shielded from the higher production costs by their in-house coal facilities, NLMK and MMK are particularly vulnerable, VTB analysts said.

Sergei Stepanov, head of Evraz’s coal division, said: “We see that supply ... is at its limit, it all depends on China, whether it increases production.”

“But I do not think prices will fall below $150 per tonne.”

Evraz said on Tuesday its capital spending would total $450 million in 2016 and around $500 million in 2017-2018, having said in August it would be in the range of $375-400 million.

Reporting by Jack Stubbs and Svetlana Burmistrova; Editing by Maria Kiselyova and Jane Merriman

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