Russian Steel & Mining
Upgrading on Improving
Market Conditions
We are upgrading a number of our Russian steel
and coal stocks on the back of improving global market
conditions (see Global Metals Playbook – 3Q09
Short-term caution, medium-term optimism, July 1,
2009). Our new 2009 and 2010 flat steel price forecasts
are now on average 8% and 20% higher, respectively,
while prices for long products have been increased by
24% and 31%. We have also raised our domestic coking
coal price forecasts by 16% and 49% in 2009 and 2010.
Raising MMK and Raspadskaya from EW to OW,
and Severstal from UW to EW. A better demand
picture for Russian steel products is core to our rating
upgrades. As a result of our new commodity price
assumptions, our 2010 EBITDA estimates increase by
an average of 29%. MMK and NLMK now trade at
average discounts of 39% and 50% to their global steel
peers on 2010e EV/EBITDA and P/E, respectively.
We prefer NLMK while staying cautious on
Severstal. NLMK remains our top pick as it continues to
benefit from low cash costs and high export/production
volumes, which, we believe, are key for outperformance
in the current environment. Although we remain
cautious on Severstal relative to its Russian peers, we
raise the stock to Equal-weight as we think the company
is making progress restructuring its North American
business, and flat steel prices and demand in the US are
improving.
Export demand, prices and order book visibility for
Russian steel producers are improving. Most Russian
producers are now sold out of July production, with
several long product producers already attempting to
sell September tonnages. Import restriction risk remains
but is less of a concern, given the global dispersion of
Russian exports and lobbying by Russian steel consumer
companies in a number of importing countries for fewer
import restrictions.