Prospects brighten for Russian steelmakers as economy improves

MOSCOW: Russia´s biggest steelmakers are expecting 2017 to be a better year for the industry as the national economy improves, thanks to firmer oil prices, and higher steel prices support profits.

The companies have suffered over the last two years as world steel prices hit 11-year lows and the country´s economic crisis sapped domestic demand.

Net profits at the Russia´s biggest steel producer, NLMK , fell 6 percent year-on-year in the third quarter of 2016 and analysts expect weaker earnings in the fourth quarter.

Profits at Evraz, the country´s second-biggest producer, plunged 63 percent in the first half of the year. But after two years of recession due to a collapse in oil prices and the imposition of Western sanctions over Moscow´s actions in Ukraine, Russia´s economic prospects are brightening.

Officials now see growth in gross domestic production of up to 2 percent this year. "We believe that there are grounds for a recovery in the economy and steel demand in 2017," Pavel Vorobyev, head economist for Severstal´s corporate strategy department, said.

"In 2015 and 2016 some genuine, deferred demand has built up in the Russian economy, which could now appear in the next year," Vorobyev said, adding that he saw Russian steel demand increasing by around 1.5 percent this year.

Efforts to raise money also point to increased confidence in the sector. NLMK is currently drawing up a new expansion strategy and said in December it could issue Eurobonds this year.

Evraz is also considering a convertible bond issue while TMK , Russia´s largest maker of steel pipes for the oil and gas industry, is talking to banks about holding a secondary share offering, according to financial market sources.

"Metal producers will carefully follow the situation in the construction sector and infrastructure, which accounts for about 80 percent of total demand in the country," NLMK said in a statement given to Reuters.

Construction work in Russia is seen increasing by 1 percent quarter-on-quarter in the first three months of 2017, according to state statistics service Rosstat, compared to a 10 percent fall in previous quarter.

Coupled with higher domestic demand, a recovery in steel prices will further support profitability for Russian steelmakers, VTB analysts said.  The Russian rouble is also expected to weaken after the central bank announced it would start buying foreign currency next month, supporting steelmakers´ export revenues.

World steel prices fell to their lowest level since 2004 in 2015, due to an oversupply from China, the world´s largest producer and consumer of steel, and slack global demand. But rebar prices in China recovered 63 percent last year, ending a six-year losing streak, spurred on by Beijing´s efforts to tackle a chronic glut.

The World Steel Association sees global steel demand growing 0.5 percent year-on-year to 1.510 billion tonnes in 2017. Announcing a 2.5 percent increase in production for 2016 on Thursday, steelmaker MMK said demand would remain under pressure from seasonal weakness in the first quarter of this year but higher prices would be maintained.

"Signs of improvement in a number of sectors mean we can expect the beginning of a recovery in domestic demand and the preservation of price premiums in 2017," the company said in a statement.