Russian metallurgists are ready to face economic challenges - Moody's

Russian steelmakers reduced their debts in 2014 as profitability improved significantly due to the devaluation of the ruble against the US dollar, as well as due to the implementation of successful programs to reduce costs and complete investment cycles, according to the rating agency Moody's.

Improved credit profiles for Russian steel companies will help them counter the recession in 2015 and stagnation in 2016, as demand from the country's construction industry, the largest domestic buyer of steel, is expected to decline, Moody's Investors Service said in a report. “Metallurgists are in a strong position to withstand the expected 10% drop in domestic steel demand in 2015 and continued weakness in demand in 2016, as increased exports and reduced imports will be able to offset the drop in domestic demand.”

The devaluation of the ruble against the US dollar last year, successful cost-cutting programs and the completion of huge investment cycles allowed Russian steelmakers to reduce debt levels and significantly improve profitability, while increasing free cash flows. In 2014, the leverage decreased to 1.42x for NLMK (Ba1 negative), 1.58x for PJSC Severstal (Ba1 negative), 2.61x for Evraz Group SA (Ba3 stable) and 1.77x for Magnitogorsk Iron and Steel Works (MMK, Ba3 stable) and continues to fall in the 1st quarter of 2015 amid rising prices and the strengthening of the ruble.

Moody 's expects steel demand to fall as a result of an expected 3% contraction in Russia's GDP in 2015, as a result of falling oil prices and international sanctions that have negatively impacted the construction industry, the main consumer of steel in Russia. This will lead to a weakening of financial results in the second half of 2015.

The cash that Russian steel producers have amassed to date will allow them to comfortably weather the sector's troubles over the next 12-18 months. Moody's believes that Russian steelmakers have sufficient liquidity and are free to cover future debt payments from cash balances, credit lines and firm operating cash flows.