New blast furnace makes NLMK biggest steel producer in Russia

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New blast furnace makes NLMK biggest steel producer in Russia
Published 31-01-2013, 08:34
At a tough time for global steel markets, Novolipetsk Steel (NLMK) has established itself as Russia’s largest steel producer after bringing on stream the country’s first new blast furnace since Soviet times.


But, with steel prices weak, the extra output isn’t generating as much cash as NLMK might have hoped. The group warned of an 8 per cent drop in fourth quarter revenues and a flat Q1 2013.

NLMK, controlled by billionaire Vladimir Lisin, on Wednesday reported steel output of 14.9m tonnes, with 95 per cent of it produced in Russia, or about 14.1m tonnes.

That puts it comfortably ahead of its rivals in terms of production in Russia. Severstal last week reported a 1 per cent drop in 2012 output to 15.1m tonnes. But with around a third of its capacity outside the country, it produced only 10.6m tonnes in Russia, a decline of 7 per cent.

Evraz, Russia’s biggest steel company in terms of global output, last week reported last a 5 per cent drop in crude steel to 15.9m tonnes in 2012. Russian crude output was 11.7m tonnes, down 3.7 per cent.

Evraz said its output decline in 2012 had been driven by the disabling of Russian mills during an overhaul and the temporary closure of a plant in the Czech Republic stricken by weak steel demand in Europe.

In 2011, Evraz produced 12.1m tonnes of crude in Russia, just ahead of NLMK’s 11.9m tonnes. Severstal was on 11.3m tonnes.

[Update] On Thursday, MMK, the last of the big four Russian steel companies, reported group 2012 crude output of 13.0m tonnes, up 6.9 per cent, including 12.2m tonnes in Russia, a gain of 4.5 per cent [update ends].

However, for producers – and their shareholders – the value of the product is more important than the volumes. And it won’t be possible to make those comparisons until March or April, when Russian steel companies usually report annual financial results, later than their global peers.

But if the forecasts NLMK made on Wednesday are anything to go by, investors should be brace for disappointment.

In its statement NLMK said revenue for the last three months of 2012 was expected to decline by about 8 per cent as a result of weaker market conditions and a seasonal decline in sales at the end of the year. The company warned that Q1 2013 steel output would remain "sequentially flat” signalling the risk of more problems ahead.

Steel production and sales are usually strong in the first quarter of the year as consumers restock after a seasonal lull in the closing months of the year, said Dinnur Galikhanov, metals analyst at Aton, the Moscow-based investment bank, "NLMK is not expecting this to happen in 1Q 2013. Either the restocking is not happening or it’s taking longer to materialize than usual.”

Russian steel producers endured a tough year in 2012 and 2013 could be even worse, said Galikhanov. Steel demand in Russia, their core market, has fallen on the back of the economic decline, and prices are lower than a year ago. At the same time prices for iron ore, the main raw material in steel production, have risen sharply in the last few
months eating into steel makers’ margins.

"Unless we see a meaningful improvement we have to prepare for a visible decline in the Russian steel market’s performance in the first quarter of this year.”

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