Russian steel majors slash output,capex

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31 Oct 2008

Steel majors in Russia, the world's No. 4 producer, are slashing output and scaling back new investments as they conserve precious cash to refinance debt during a global liquidity crunch, executives said on Thursday. Evraz Group, part-owned by billionaire Roman Abramovich, will cut output at its Russian mills by a quarter from next month, while Severstal called a temporary halt to a multi-billion dollar acquisition spree. "In the challenging market environment, those who can control costs and keep them below the average market level will be the winners," said Stanislav Ploshchenko, chief financial officer at steel and coal firm Mechel.
Russia's steel giants have lost over 80 percent of their value since peaking earlier this year, slashing the net worth of their billionaire owners, as demand for commodities has fallen sharply in line with the global financial crisis.
Pavel Tatyanin, Evraz Group Senior Vice-President for Finance, told the UBS investment conference the firm's Russian and Ukrainian mills would be worst hit by any production cuts, while its North American and European plants were not affected.
In announcing the cuts, Evraz joins rivals Severstal and Magnitogorsk Iron and Steel Works, which this month slashed production by 25-30 percent and 15 percent respectively.
"Demand is weak, profit margins are shrinking and it's difficult to move product. The prudent thing to do is focus on matching production to levels of demand," said Michael Kavanagh, metals analyst at UralSib Financial Corp. Sergei Kuznetsov, Severstal's chief financial officer, told the conference Russia's largest steel maker would cut capital expenditure "substantially" in the fourth quarter of 2008 and in 2009 and would postpone new acquisitions.
Russian steel demand had weakened, he said, and inventories were now large enough to cover four to five months' demand.
The effects are also being felt upstream. Chelyabinsk Zinc Plant, which supplies the anti-corrosive metal to the steel sector, on Thursday cut its 2009 output forecast to 150,000 tonnes, the company's chairman, Sergei Moiseyev, said.
REFINANCING DEBT
TMK, Russia's largest steel pipe maker, will cut its 2009 capital expenditure programme fivefold to just over $150 million, the company's deputy chief executive for strategy, Vladimir Shmatovich, told the UBS conference. Investment would be cut to free up cash to refinance debt, he said. TMK had total debt of $3.1 million as of June 30, 2008.
"The debt markets and capital markets are more or less closed," UralSib's Kavanagh said.
Mechel, which must repay or refinance a $1.5 billion bridge loan at the start of next year's second quarter, will also make significant cuts to a $5.5 billion, five-year investment programme unveiled this year, Ploshchenko said.
Mechel is Russia's sixth-largest steel maker and the largest producer of coking coal used by the industry.
"It's a difficult time. The way to proceed is to cut production, reduce capex and reduce costs," said Olga Okuneva, metals analyst at Deutsche Bank in Moscow.
As production slows sharply, Russian steel exports are set to decline significantly toward the end of the year.
Sergei Maltsev, chief executive of Globaltrans Investment, Russia's largest private freight operator, told Reuters the country's metals exports could drop by between 50 percent and 60 percent in November from the previous month.
Job cuts are also possible at the Soviet-era steel mills that spread east from European Russia into the Ural mountains and Siberia.
Kommersant business daily, citing analysts, reported staff cuts in the metallurgical sector could average 30 percent by the end of the year and wages will drop by 30-40 percent.
Alternative measures are also being sought as Russia, like many other countries, is short of skilled mining and metals engineers. Mechel, for example, has cut its working hours.
"Companies will try not just to lay off people, but to reduce the working week and send people on vacation," said Deutsche Bank's Okuneva.

Source: Reuters