NLMK increases the melting

The group saw the prospect for expansion.
NLMK owned by Vladimir Lisin (84%) by 2022 could by 2.2 million tons increase steel production in Lipetsk. As early as the summer of 2016, the company considered an increase of 3.5-4 million tons, but now the group is more cautious: it will definitely raise the output of slabs by 1 million tons by 2019, mainly to load its factories in the EU and the US. NLMK does not exclude the purchase of rolling capacities, but analysts do not expect major deals so far.

The strategy for NLMK's development until 2022 presupposes the growth of steel smelting at the main Lipetsk site to more than 15 million tons per year from 13 million tons. The decision to increase capacity to 14 million tons by 2019 is accepted as a "win-win", NLMK top management said at a meeting with investors in London. These investments are estimated at $400-500 million, an expected EBITDA is $150 million per year (in 2016 prices), and IRR is over 30%.

In 2016, NLMK Group smelted 16.6 million tons of steel: to the Lipetsk volumesof about 2.9 million tons, grade capacity in Russia were added, 561 thousand tons - NLMK Indiana in the US and 200 thousand - European division of NBH. Sales were 15.9 million tonnes, revenues were $7.64 billion, EBITDA was $1.94 billion. NLMK's net debt was $0.69 billion (0.36 EBITDA, down one third).

NLMK explains the decision by the presence of free capacities for 2.2 million tons of cast iron. To smelt another 1 million tons of slabs, it is only necessary to modernize capacities and infrastructure, expanding the output of iron ore. The rolling capacities in the USA are under-loaded, so it is possible to increase the output by 1-1.5 million tons per year (sales of the segment in 2016 were 1.8 million tons), and in Europe, where the growth may amount to 500-750 thousand tons per year (sales in 2016, taking into account NBH, were more than 2.6 million tons), said NLMK President Oleg Bagrin. In the EU and the US, there's a peak of protectionism: factories are seeking anti-dumping and countervailing duties for importers, but for the foreign assets of NLMK it is only positive, he said.

The Group increases the supply of Lipetsk slabs to foreign assets, but it is possible to sell part of the slabs on the market or buy rolling capacities, said NLMK senior vice president Grigory Fedorishin. What assets are considered, the group does not disclose. Oleg Bagrin said only that confidence in sales and synergy with production is important. He cited the example of Italy with cheap rolling capacities, underloaded due to the fact that the sales are outside the country. NLMK, according to the top manager, may be interested in assets that will complement the competencies in products for energy and offshore technologies.

The decision to increase the smelting to more than 15 million tons per year requires elaboration, the company notes: the costs will be higher, it is necessary to determine the sales markets and the product line. The final decision to build a galvanizing line for 450,000 tons (estimated at 6.3 billion rubles.) has not yet been made. In the summer of 2016 Oleg Bagrin spoke with Belgian Trends-Tendances about the possibility of increasing the smelting to 20 million tons per year by 2020. But now the top manager recalled that the market still has 600 million tons of excess steel capacity (half of it in China).

The group promised to update the strategy in 2018, but it still does not involve the development of coal assets (NLMK license for the areas of Usinsky-3 and Zhernovsky-1). The group sees a more promising reduction in coal consumption: in five years it fell by 2 million tons, and the introduction of pulverized coal injection will save another 1 million tons per year by 2018.

According to Worldsteel, world steel production in 2016 increased by 0.8%, to 1.63 billion tons, in the EU, the US and Russia decreased by 2.3%, 0.3% and 0.1%, respectively. Demand for steel in Russia fell by 12%, in the EU - by 5%, in the US - by 10%, follows from the presentation of NLMK. The group expects the recovery of demand in the Russian Federation and the EU in 2017 (about 0.9% and 1.4% according to the forecast of Worldsteel), sharing optimism with Russian competitors. However, they do not plan to increase capacity in steel, although Evraz restarts the Palini e Bartoli plant in Italy (450 thousand tons of sheet metal), and MMK will decide by July to restart the hot-rolled steel line at MMK Metalurji in Turkey.

NLMK is progressively implementing a cautious strategy, the foundation of which was laid in 2014, when it became clear that it was necessary to reduce costs and not be addicted to expansion, says Sergey Donskoy from Societe Generale. The group has increased the threshold of comfortable net debt to 1-1.5 EBITDA from 1 EBITDA, but this does not mean that NLMK can dramatically cut dividends: there are no major deals for which it is necessary to borrow money on the horizon. Russian metallurgists are still not confident in major projects, Oleg Petropavlovsky from BCS states: to build steel capacities against the background of overproduction does not make sense, and it would be possible to increase the debt by purchasing effective assets, "but there are no such offers on the market or the assets are too expensive" .