Posted on 22 Dec 2021
Steel prices should moderate throughout 2022, returning the earnings of Russian and Ukrainian steel mills to mid-cycle levels by 2023, Fitch Ratings says. Such mills will remain competitive due to their low cost base, which enables high utilisation rates during downturns and windfall profits during cyclical peaks. However, the transition to carbon-neutral steelmaking and the risk of rising taxes on Russian mills in the longer term could affect their cost positions, Fitch Ratings says in a new report, “Russian and Ukrainian Steel – Peer Review”.
The unprecedented detachment of steel prices from costs caused steelmakers’ profits to soar in 2021, creating large leverage headroom. Russian flat producers’ free cash flow will remain negative due to large dividends and a capex peak, but we expect leverage to remain within sensitivities. We anticipate EVRAZ plc (BB+/Positive) to reduce leverage following divestment of its coal assets and due to robust performance and lower earnings volatility. We project Metinvest B.V. (BB-/Stable) and Interpipe Holdings Plc (B/Stable) to maintain comfortable rating headroom.
Russian steel mills maintain cost leadership despite the recent increase in taxes on steel and raw materials. However, frequent revision of taxes or a further increase could put pressure on the sector. A medium-term risk for steel producers is the EU’s Carbon Border Adjustment Mechanism (CBAM) and domestic carbon taxation, which will affect most regional steel producers as they are carbon-intensive.
Russian steel producers are incorporating emission-reduction targets in their strategies, which could keep investment levels high even after the current investment cycle. The growing focus on decarbonisation has encouraged EVRAZ and PAO Severstal (BBB/Stable) to divest their coal assets, which, once completed, will reduce their raw-material self-sufficiency. Metinvest increased its stake in coal assets to a controlling share.
Source:Fitch Ratings
