Higher commodity forecasts drive up PTs: We
increase our Russian steel and raw materials price
forecasts by an average of 13% and 30% respectively
on the back of our global commodities update (see
Global Metals Playbook - 4Q09, October 14). As a result,
our price targets rise by an average of 28%. Our new
estimates imply average 2010e EV/EBITDA discounts
for Russian coal and steel producers of 33% and 30%,
respectively vs global peers (ex-SVST).
We remain bullish longer term but are wary of
several short-term risks. Although we anticipate
long-term strength in the Russian steel and coal sectors
due to cost advantages and growth profiles, we also
think that there are three near-term risks in addition to
the Russian market’s traditional October-February
seasonal slowdown. Nevertheless, we would view any
stock price weakness as a buying opportunity:
1) Lack of much anticipated post-Ramadan demand
in the Middle East: The lack of demand post Ramadan
may indicate that export prices and volumes could
decline in the short term, particularly for Russian long
steel producers. Our analysis, however, shows that
demand usually picks up 5-8 weeks following the end of
Ramadan, whereas we are currently only in the 4th week.
2) Soaring Russian domestic scrap prices: Russian
scrap prices have nearly doubled since mid-July and
volumes may remain limited in the medium term given
YTD scrap output has fallen sharply compared to steel
output (50% vs 29% YoY). Our analysis indicates that
Russian steel cash costs will rise c. 26% in 2010 from
current levels on the back of rising raw materials prices.
3) China continues to ramp up steel exports at ever
more competitive prices to every major Russian
export region, putting at risk Russian steel producer
prices – particularly for flat product producers Severstal,
MMK and NLMK. However, we expect September steel
production in China to be down MoM, and, hence, ease
investors’ concerns somewhat.