MMK reduced steel output by 15% in the II quarter
Viktor Rashnikov’s MMK cut steel output in the second quarter of 2022 by 15% year-on-year to 2.9 million tons, according to the company’s announcement. Production of pig iron during the same period decreased even more – by 22%, to 2.1 million tons.
In the first half of 2022, MMK produced 6 million tons of steel, 9.5% less than in the first half of 2021. Iron smelting for the first half of the year decreased by 17.3% to 4.3 million tons. Sales of metal products fell even more. In the second quarter, the decrease was 29% to 2.4 million tons, for the first half of the year – 15.7% to 5.2 million tons, the company reports.
MMK explains the decrease in indicators as “unfavorable situation on the market of metal products”. The decrease in the production of cast iron is also explained by the lack of demand for it against the background of reduced demand for metal products and long-term capital repairs in blast furnace production.
Bad sales results were influenced, including restrictions imposed due to Russia’s special military operation (SVO) in Ukraine, and unfavorable conditions in export markets, MMK explains. The company also reduced sales of premium products, as a result of which its share in the portfolio was 45.4% in the first half of the year, and 43.7% in the second quarter.
At the same time, the production of coal concentrate increased by 4.5% to 1.8 million tons in the first half of the year and by 6% to 923,000 tons in the second quarter. The company explains this by increasing the share of its own coal processing.
Average selling prices of metal products in the second quarter increased by 15.7% compared to the level of the first quarter of 2022 and amounted to $1,023/t due to the strengthening of the ruble, MMK calculated. At the same time, ruble prices for metal products decreased by 10.1% due to a significant decrease in demand on the Russian market. Average prices in January–June increased by 13.3% to $947/ton.
MMK is the first of the large Russian metallurgical holdings to publish production results after the start of the SVO. The company has not yet disclosed financial results. In January-June 2021, MMK’s revenue according to IFRS grew 1.8 times to $5.4 billion, EBITDA – 3 times to $2.2 billion, net profit – 8 times to $1.5 billion. By the end of 2021 revenue amounted to $11.87 billion (a two-fold increase), EBITDA – $4.3 billion (a 3-fold increase), net profit – $3.1 billion (a 5-fold increase).
In March 2022, the EU banned the import of rolled steel, fittings, welded and seamless pipes from Russia as part of sanctions. In 2021, according to the FCS, Russia exported only rolled steel for $7.36 billion, the physical volume of deliveries increased by 11.6% to 8.5 million tons. Sanctions were also imposed against a number of shareholders and top managers of metallurgical companies.
By the end of May, due to the closure of European markets, steel prices in Russia came close to the level of export parity, i.e. they decreased and compared with the price on leading trading platforms abroad (“Vedomosti” wrote about it on June 13). This can lead to a significant decrease in production, Vedomosti’s interlocutors in metallurgical companies warned. The second reason for the decline in production is the decrease in investment activity in the construction industry. Earlier, from January 1, 2022, the government increased the MET for metallurgists, tied it to the quotations of raw materials on world markets, and also introduced an excise tax on liquid steel.
The World Steel Association (WSA) in its April review forecasted a decrease in steel consumption in Russia by the end of 2022 by 20% compared to last year’s level to 35.1 million tons. According to the NLMK group, Russian metallurgists in 2022 can reduce steel production by 15% to 59.6 million tons. Production in the second half of the year may fall by 26% to 26.3 million tons, the most significant of which will be in the segment of hot-rolled products, the company predicted earlier. The export of steel products from Russia, according to the NLMK forecast, may decrease by 23% in 2022 (“Vedomosti” reported on this in detail on June 15).
The vice-president of the association “Russian Steel” Andrey Leonov stated in early July that the decrease in production of steel companies in June amounted to 20-50%, steel prices have decreased by 35% since the beginning of the year, and the cost price has increased by almost 50%.
“Vedomosti” sent requests to other large steel-producing holdings – NLMK, Severstal, Metalloinvest. Representatives of Evraz and “Mechel” refused to comment.
With the current market conditions, in the 3rd quarter, MMK’s production indicators may still deteriorate, but the scale of the decline should be less than in the 2nd quarter, according to Dmitry Puchkarev, an expert on the stock market “BCS World of Investments”. Boris Krasnozhenov, head of Alfa-bank’s securities market analysis department, notes that the most significant decline in MMK production occurred in May and June. If the situation on the domestic market does not improve in the second half of the year, the company’s steel production may drop by 15% in 2022, he predicts.
“Finam” analyst Alexey Kalachev notes that according to the results of the first half of the year, a noticeable decrease in the financial indicators of the MCC should be expected, mainly due to a reduction in production and sales, as well as an increase in the tax burden. According to Puchkarev, the decrease in revenue at the end of the first half of the year may be up to 5%.
According to experts, the reduction in sales volume will be partially offset by the increase in steel prices. At the same time, according to Puchkarev, the margin of sales of MMK will decrease – due to the increase in the price of raw materials, the strengthening of the ruble, the increase in the tax burden, as well as the decrease in the share of more marginal export supplies. In June, MMK worked with a profitability of 4%, the expert reminded. According to Krasnozhenov, the company’s EBITDA could fall by 30-35% in the first half of the year, and by the end of the year it could decrease more than twice.
The current situation is typical for the entire industry, experts note. Krasnozhenov reminds that the distinctive features of MMK in comparison with the main competitors are a greater focus on the domestic market (up to 80% of sales), a lower level of integration in the iron ore segment and a higher level in the coking coal segment.