In its report ‘2011 Outlook: CIS Metals & Mining', the leading global ratings agency Fitch Ratings has said that its outlook for CIS metals and mining companies is stable, as it expects that the sector's recovery will continue in 2011 following a strong performance in 2010.
Stable outlook
In the CIS, all but three of the rated companies have a stable outlook, with two, MMK and Evraz, having a positive outlook. The main risks to the ratings are debt-funded M&A and large cash outflows (including dividends and share buybacks).
Rising Russian steel output
Fitch expects steel production in Russia to grow by six percent in 2011. Almost all the companies discussed in the report rely heavily on sales outside Russia/Ukraine, which account for over 50 percent of their revenues. As a result, external drivers will dominate their performance in 2011.
Improving Russian domestic demand
While Fitch expects GDP to increase by 4.3 percent, domestic demand in Russia is not expected to reach its pre-crisis level until 2012, and will continue to depend on the Russian government's ability to spend on infrastructure projects. Demand from the auto industry will continue to improve after a strong 2010, when Russian manufacturers doubled their production on year-on-year basis.
Rising commodity prices
Firm commodity prices will continue to dominate performance in 2011, especially for those companies producing coal, iron ore and copper products. As the steel producers, CIS mining companies will continue to have above-average margins compared with international peers thanks to their low cost of production and cheap labor. However, high domestic inflation rates (forecast by Fitch at 7.7 and 10.8 percent in Russia and Ukraine in 2011, respectively) will continue to increase costs of production and could threaten margin improvement.
Value-added products
Higher margin products will underpin steelmakers' performance as they try to counter increases in input costs, especially for MMK and NLMK. However, the success of this strategy depends on domestic demand, especially from the oil and gas and auto sectors, and will be tested over the next 12-18 months.
Captive demand for raw materials
Investment in upstream assets will continue to be another source of competitive advantage for steelmakers. Metinvest will continue to benefit from high commodity prices for its surplus production of both hard-coking coal and iron ore products, whereas Severstal benefits from its gold division earnings.
Liquidity continues to improve
Liquidity remains healthy for most rated companies following a busy 2010, when the majority of companies refinanced foreign liabilities from mostly domestic sources. State-owned banks will see their share in companies' total funding drop as companies tap domestic and international public capital markets to replace more costly domestic bank loans.