* Rouble up 7 pct against dollar so far this year
* Stronger rouble boosts cost, hits export earnings
* Steelmakers with high vertical integration seen at risk
By Jack Stubbs
MOSCOW, April 9 A rise in the value of the
rouble could knock Russia's steelmakers, increasing costs in
dollar terms and eating into export earnings at a time when the
sector is seen benefiting from a nascent economic recovery.
Companies including market leader NLMK and its
closest competitor Evraz have struggled over the last
two years as world steel prices plumbed 11-year lows and
Russia's economic crisis sapped domestic demand.
The sector's prospects are seen brightening in 2017 as the
Russian economy returns to growth, with officials forecasting a
rise in gross domestic product of up to 2 percent this year,
partly thanks to higher oil prices.
But higher oil prices combined with the Russian central
bank's policy of high interest rates, have also pushed the
rouble up 7 percent versus the dollar so far this year.
For Russia's steelmakers, whose export sales are priced in
dollars, that means higher production costs at home in dollar
terms, which analysts say could hit earnings and reduce
"The benefits from the better economy are by far compensated
by negatives coming from the stronger rouble," said Kirill
Chuyko, head of metals and mining research at BCS Investment
Bank. "We estimate a 10 percent rouble appreciation might eat up
to 15 percent of profits for Russian steel companies."
NLMK, Evraz and Severstal said the rouble's
strengthening would decrease the profitability of export sales,
but this would not impact wider earnings due to an uptick in
global steel prices and their focus on the improving domestic
market. MMK did not respond to a request for comment.
"Usually, if we lose on one market, we earn on the other.
The question of prices is much more important," a Severstal
NLMK and MMK both reported 2016 core earnings that were flat
or almost flat at $1.9 billion and $1.6 billion respectively.
Evraz's rose 7.2 percent to $1.5 billion.
Societe Generale analyst Sergei Donskoy said companies that
produced more of the raw materials needed in steel production,
and thus had more costs in roubles, would be harder hit by the
"Those who have low integration, they naturally have more of
an advantage," he said. "MMK perhaps looks more resilient...
those who have strong integration, Severstal, NLMK, Evraz, they
look more vulnerable."
Severstal and Evraz produced 110 percent and 81 percent of
the iron ore needed for their steel production respectively in
2016, as well as 70 percent and 195 percent of coking coal,
corporate filings show. The companies sell any surplus on both
domestic and export markets.
NLMK produced 95 percent of its iron ore but no coking coal,
which has prices pegged to the dollar despite being quoted in
roubles. MMK produced 19 percent of its iron ore and 39 percent
of its coking coal in 2015.
David Herne, managing director at asset manager SPRING, said
companies that focused on the domestic market would be partly
shielded from the stronger rouble.
"With regards to the rouble, probably Magnitogorsk (MMK)
benefits from strength because it sells 80 percent domestically.
NLMK exports quite a lot so is certainly not benefited.
"But NLMK claims to be the most efficient and has the
numbers to prove it. Year after year they have been eking out a
percent or two gain and it adds up."
Donskoy said he did not expect any immediate impact on the
companies' earnings, but the situation left them more vulnerable
to possible future problems.
"The stronger rouble is a drag," he said. "Right now I
wouldn't say it's a big drag... but the question is what happens
if global steel prices and export steel prices begin to fall and
at the same time the rouble stays resilient.
"This could be a headwind as we go into the second half of
(Additional reporting by Alexander Winning; Editing by Katya