Evraz Group, the Russian steelmaker part owned by Roman Abramovich, warned that 2012 was likely to be a “challenging” year for the global steel industry, as it reported a modest fall in net profits for 2011.
The world steel market has been through a volatile few months. In February, ArcelorMittal, the world’s biggest steelmaker and Tata Steel, the largest in India, both reported losses for the final quarter of 2011 as the eurozone’s troubles slowed demand. However on Wednesday, Posco, the world’s third-largest steelmaker said that it expected a rebound in the coming quarter.
Evraz’s chief executive, Alexander Frolov, said he expected a “modest overall rise in steel consumption, driven by demand from the emerging markets”, but cautioned that “the wider global economy and, in turn, the steel industry, continues to face challenges and will likely remain volatile”.
Evraz posted revenues of $16.4bn in 2011, up 22 per cent on 2010. However, only 8 per cent of this increase was as a result of higher volumes, with the lion’s share due to elevated steel prices.
Peter Fish, managing director of Meps International, a steel consultancy, said that the high prices were the result of the floods that hit Australia in the spring of 2011, driving up the price of coking coal – one of the key inputs in steelmaking – and forcing steel manufacturers to put up prices as well.
This rise in input prices, and the appreciation of the rouble – which raised labour costs in Russia – weighed on Evraz’s net profits, which dropped 4 per cent from $470m in 2010 to $453m in 2011.
Evraz also paid $161m to incentivise owners of convertible bonds – issued during the global financial crisis in 2009 – to switch their holdings to equity. This reduced the company’s gross debt by $553m, and helped bring net debt down to a multiple of 2.2 times earnings before interest, tax, depreciation and amortisation.
Giacomo Baizini, chief financial officer, said this was above the level he would like, but that the group would seek to improve the ratio by boosting earnings.
“We are making investments which should help cut our costs – for example, we are developing a coking coal mine, which should come online next year and reduce our exposure to coking coal prices. We are also investing in technologies which will reduce the amount of coking coal we use.”
However, the company felt confident enough to pay a final dividend of 17c per share, bringing the full dividend to 23c, payable from earnings per share of 36c. Shares in the company closed down 5.5 per cent in London at 359.8p.
● FT Comment
Evraz trades at a discount to the other major Russian steel manufacturers: Wednesday’s close left the company’s enterprise value at five times earnings before interest, tax, depreciation and amortisation, 10 per cent below the average of its peers. Given Evraz’s above-average exposure to the buoyant market for long steel – used for pipelines – and to Asia’s fast-growing economies, this seems a touch harsh.
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