Sunday, 21 March 2010

Russian steel: it’s a steal

Investors are looking for a steal on Russian steel stocks as a combination of returning demand and higher prices start improve the outlook for metals firms and push up valuations.

Both Evraz and Severstal outperformed the market on Wednesday, gaining 3.2 per cent and 2.2 per cent respectively while the Micex was up 1 per cent.

Rising prices of both finished products and raw steel have fueled the gains in recent days but analysts believe there are more to come with a further 5-10 per cent upside in April.

"With the rising raw material prices, the general expectation is that coke and coal prices will increase by at least $10 a tonne," said Olga Okuneva, a metals analyst at Deutsche Bank.

Therefore integrated producers will be the net beneficiaries of the trend."

In the last few months alone coke prices have risen more than 50 per cent while BHP Billiton, the world's largest coking coal producer, jumped 55 per cent on signing first-ever three month contract with Japanese steel producers.

With many contracts still to be determined for the third quarter and spot prices still on the rise, further big deals are expected in the second half of the year.

While fully-integrated firms Evraz and Severstal are the biggest beneficiaries, Russia's other steel producers are will be boosted ahead of some of their international competitors as they are at least partially integrated.

"NLMK lacks coal and MMK has coal but lacks ore," said Alexei Morozov, an analyst at UBS. "All of the companies have margin expansion this year, even the ones that are less integrated."
NLMK was up 0.5 per cent in early trading on the Micex, while MMK put on 1.5 per cent in London on Wednesday.

Investors have already been factoring in the price increases but many continue to see an upside with further growth expected throughout the year.

"The steel sector was also generally strong as investors look for further earnings upgrades as a result of still rising metal prices," Chris Weafer, chief strategist at Uralsib, wrote in a note to investors.

Although the price increases have been mostly driven by the export market and worries persist about continuing growth in China and the US, a return of domestic demand will further boost steel stocks.

"We expect at least a 15 per cent increase in domestic consumption this year," said Okuneva.

Severstal remains a favourite with investors, particularly following positive results last week, and hopes that its American assets will get back on track.

"MMK and Severstal [look good] because of the low valuations relative to the rest of the peer group," said Morozov.

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