Russian mining and steel company Severstal may achieve yet higher EBITDA margins following the sale of its Balakovo steel and rebar mill, analysts said Thursday.
Located near Saratov in Russia's Volga district, the mill was weighing down Severstal's profitability for years, several analysts told S&P Global Platts Thursday, the day the company reported its $215 million sale of Balakovo was completed.
The analysts said Sevestal found a buyer for the mill - Russian bar, rod and billet maker Abinsk Electric Steel Works -- amid the best year for rebar sales in Russia since 2014, though the proceeds earned Severstal just a third of the mill's initial $650 million cost in 2013. Still, Severstal secured a good deal, the analysts said, aided by a sharp change in the rules of selling properties under development in Russia that jacked up rebar prices in the first half of the year.
Severstal commissioned Balakovo in late 2013, agreeing to sell it for the $215 million in May. The reason behind the sale is the fact mill's revenues are overly dependent on spread between scrap price and that of finished products, according to Severstal.
"If Balakovo generates 10% EBITDA margin, that would be a success," Boris Krasnojenov, an analyst at Alfa Bank, told Platts. "Severstal has underestimated the scrap factor; it has not foreseen that scrap supply in Russia will become tighter over the years and prices will grow that much."
The 1 million mt/year Balakovo mini-mill makes rebar from billet received via melting ferrous scrap in an electric arc furnace.
The price of heavy-melt scrap imports into Turkey - the main determinant for both FOB Black Sea price and that on the Russian market - have grown 22% to just over $300/mt in 2017-2019 from $250/mt CFR Turkey in 2014-2016, according to Platts assessments.
"Look at Russian scrap price and add a conversion cost [the cost of converting scrap to rebar], then compare it to rebar price of Russian steel majors and you will arrive at a single digit EBITDA margin," said a source close to the company. He calculates that the current Russian domestic rebar price is overheated, with 2018 giving a more adequate picture. That year was a good one for EAF-based rebar mills, but even then their sales generated rather low margins, especially if compared with rebar producers whose steelworks were equipped by blast furnaces.
Both sources noted the first half of this year presented good momentum for the mill's divestment: construction steel products met unprecedented demand and temporarily made long-rolled steelmakers uncharacteristically profitable. Severstal itself said January-June saw a 10% year-on-year hike in Russian steel demand, although added it will drop back in the second half of the year.
Russian domestic rebar (CPT Moscow basis), which traded with $15/mt discount to FOB Black Sea price throughout 2017-2018, has gained a $65/mt premium this year; the premium has swallowed to $82/mt this month. The last time, home price premium over export reached comparable $66/mt was back in 2014, the year Severstal launched Balakovo.
Amendments to the Russian law regulating property sales in unconstructed houses, effective July 1, is what lies behind the surge in construction steel procurements this year, according to Krasnojenov. Developers, all this year prior to July, were in a rush to complete old projects and start news ones before the new rules were to come in force. Their frenzied activity caused a commotion in construction material markets and steel sales moved much higher.
