Azernews.Az

By Bloomberg

Russian steelmakers are falling out of investors’ favor as slack demand and a strengthening ruble dim the profit outlook for some of the companies that had skirted a broader selloff amid the country’s financial crisis.

PAO Severstal, which rallied 57 percent last year as the dollar-denominated RTS Index plunged the most since 2008, has slid 8.7 percent from this year’s high as the ruble rallied the most among emerging-market currencies. OAO Novolipetsk Steel, which jumped 21 percent in 2014, has tumbled 18 percent from this year’s peak.

While most stocks sank last year amid international sanctions and tumbling oil prices, a 46 percent drop in the ruble boosted the steelmakers as they made sales abroad and covered costs in the local currency. BCS Financial Corp. last week cut its outlook on Russia’s steel industry to negative and recommended selling Severstal and Novolipetsk, saying investors have largely ignored a strengthening ruble, domestic steel prices at an all-time high and shrinking global demand.

“A lot of investors are looking at the steel industry as if the ruble prices are still devalued, disregarding the fact that the ruble has strengthened, meaning profitability will decline,” Kirill Chuyko, the head of equity research at BCS Financial Group, said by phone on March 23. “The appreciation in the ruble, along with decreasing demand for steel globally and really high prices domestically, will inevitably affect the performance in the steel sector.”

Ruble Rebound

Economists surveyed by Bloomberg estimate that gross domestic product will probably contract 4 percent this year as crude trading around the lowest levels since 2009 exacerbates the impact of international sanctions linked to the Ukraine conflict. Oil is Russia’s biggest export.

Severstal and Novolipetsk Steel pay wages and other costs in rubles while earning dollars or euros for exported steel. The ruble has appreciated 5.1 percent this month amid a tenuous cease-fire in Ukraine and Brent crude prices holding above $50 a barrel.

While industries that benefited from the weaker ruble are now taking a hit, the rally in the currency, which has gained 17 percent to 58.7458 per dollar since the end of January, might be short-lived, according to Oleg Popov, a money manager at Moscow- based April Capital asset management. The median estimate of analysts surveyed by Bloomberg is for the ruble to weaken to 64.75 in the third quarter.

Steel Demand

“I don’t see the trend of the ruble’s strengthening lasting,” Popov, who oversees about $500 million, said by phone on March 23. “I think this is short-term.”

Spot prices for steel-making coal are down 14 percent this year after a 28 percent slide in 2014 amid a supply glut. Steel output in China will shrink this year as consumption has peaked, a representative of the China Iron & Steel Association said March 11.

Shrinking consumption in China will further diminish steel demand, pushing down prices, while domestic prices of the metal will have to be lowered to match the ruble rally, BCS said in its report dated March 20.

Severstal’s global depositary receipts dropped 0.6 percent to $11.52 in London Monday. Novolipetsk Steel gained 0.6 percent to $12.85. The Bloomberg-Russia US Equity Index added 1.4 percent to 57.70. United Co. Rusal fell 0.2 percent to HK$4.94 at 11:05 a.m. in Hong Kong.

“If the ruble continues strengthening, metal producers will suffer the most since they export almost everything they process,” Vadim Bit-Avragim, a money manager in Moscow at Kapital Asset Management LLC, which oversees 175.4 billion rubles, said by phone. “The market is concerned that the ruble might strengthen to 55 against the dollar.”