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Russian Steel
Poised for Growth
Alexander Pukhaev
Research Analyst
(+7) 495 933-9219
alexander.pukhaev@db.com
Olga Okuneva
Research Analyst
(+7) 495 933-9239
olga.okuneva@db.com
Positive view reiterated
We keep our positive stance on the Russian steel sector for 2008. While steel is
clearly sensitive to global growth, it is also a very regional sector. Russian steel
companies benefit from being integrated (therefore they have better earnings
momentum than non-integrated peers when raw material prices are surging), low
cash costs (so are less sensitive to top line performance) and attached to the
Russian growth story.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Industry Analysis
Top picks
Evraz Group (HK1q.L),USD68.20 Buy
Novolipetsk Steel (NLMK.RTS),USD3.50 Buy
Severstal (CHMF.RTS),USD21.20 Buy
Companies featured
Evraz Group (HK1q.L),USD68.20 Buy
2006A 2007E 2008E
DB EPS (USD) 4.13 6.92 9.11
P/E (x) 5.6 9.9 7.5
EV/EBITA (x) 3.82 7.42 5.46
Magnitogorsk Steel (MAGN.RTS),USD1.00 Hold
2006A 2007E 2008E
DB EPS (USD) 0.13 0.14 0.15
P/E (x) 5.2 7.3 6.5
EV/EBITA (x) 4.19 4.33 4.06
Mechel (MTL.N),USD82.87 Hold
2006A 2007E 2008E
DB EPS (USD) 4.34 5.84 9.35
P/E (x) 5.5 14.2 8.9
EV/EBITA (x) 4.24 10.81 6.63
Novolipetsk Steel (NLMK.RTS),USD3.50 Buy
2006A 2007E 2008E
DB EPS (USD) 0.34 0.35 0.43
P/E (x) 5.9 10.1 8.1
EV/EBITA (x) 4.65 7.03 5.21
Severstal (CHMF.RTS),USD21.20 Buy
2006A 2007E 2008E
DB EPS (USD) 1.27 1.75 2.52
P/E (x) 9.6 12.1 8.4
EV/EBITA (x) 5.60 7.44 5.26
Global Markets Research Company
Steel price forecasts raised following upgrade in commodities
Deutsche Bank has recently upgraded its steel price forecasts in accordance with
the DB Commodities team’s upgrade of iron ore and coking coal on 11 January
2007. We see steel prices rising globally by around 13% in 2008, which is the only
way for non-integrated steel companies to protect margins in a year when iron ore
and coking coal prices are expected to increase by 40-50%.
Earnings have also been raised
As a result of the model changes, we have upgraded our forecast for all
companies (see page 7 for details). We expect significant earnings momentum in
most Russian steel stocks, fluctuating in the range of 27-34%. There are two Holdrated
outliers: Mechel, which is much stronger on the back of lower margins and
its very large long position in coal, and Magnitogorsk, which is not integrated and
whose revenue growth will therefore only be compensating the growth in
underlying costs.
Top picks
Our top picks are Novolipetsk, Evraz and Severstal, which are Buy-rated:
Novolipetsk as it has the highest profitability and production growth, Evraz on the
back of its good integration and strong market positioning, and Severstal due to
expected recovery in financial performance. We keep a Hold rating on
Magnitogorsk (due to its lack of integration) and are downgrading Mechel as the
company which had outperformed all peers, trades higher than peers on multiples
and still has a higher risk profile.
Risks
The major risks that influence the steel sector as a whole are steel prices, the
prices for raw materials and macroeconomic trends such as inflation and currency
appreciation. Company-specific risks are described in more detail in the respective
company sections.
Table of Contents
Stock performance 3
Executive summary 4
Global steel industry 14
Russian steel sector 22
Steel price performance 29
Iron ore 30
Coking coal 34
Scrap & electricity 41
Company sections 45
Evraz Group 47
Magnitogorsk Steel 57
Mechel 65
Novolipetsk Steel 73
Severstal 81
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