Moody's: Russian steelmakers' robust credit profiles provide bulwark against recession

Russian steelmakers' improved credit profiles will help them withstand recession in 2015 and stagnation in 2016 that will hit demand in the country's construction industry, the biggest domestic buyer of their steel, says Moody's Investors Service in a report published today.

"Steelmakers are in a strong position to withstand an anticipated 10% drop in domestic steel demand in 2015 and ongoing weakness in 2016, as the increase in exports and lower imports compensate for our expectation of a fall in domestic demand," says Denis Perevezentsev, a Moody's Vice President -- Senior Analyst and author of the report.

Last year's 42% devaluation of the ruble against the US dollar, successful cost-cutting programs and the completion of huge investment cycles have allowed Russian steelmakers to reduce debt levels using their significantly improved profitability and sizable free cash flows. Leverage, as measured by Moody's adjusted debt/EBITDA, fell to 1.42x for NLMK (Ba1 negative), 1.58x for PAO Severstal (Ba1 negative), 2.61x for Evraz Group S.A. (Ba3 stable) and 1.77x for Magnitogorsk Iron & Steel Works (MMK,Ba3 stable) by the end-2014 and continued to fall in Q1 2015 on price hikes and ruble strengthening.

Moody's expects steel demand to fall on the back of an anticipated 3% contraction in Russia's GDP in 2015 and stagnation in 2016, as a result of falling oil prices and international sanctions, which negatively affected the construction sector, a key user of steel in Russia. The domestic market price premium, which reached an abnormally high $110-$120/tonne by April-May 2015, is shrinking on lower demand and ruble weakening. This will lead to weaker financial results in 2H 2015. However the cushion that Russian steel makers have accumulated so far will allow them to comfortably weather the sector challenges over the next 12-18 months. Moody's believes that Russian steelmakers have ample liquidity and can comfortably cover future debt repayments with cash balances, committed credit facilities and solid operating cash flows.