OREANDA-NEWS. August 26, 2011. NLMK held an analyst meeting today dedicated to its 1H11 IFRS results (see below). We highlight the following points:

- NLMK is the only Russian steel company that has provided a conservative outlook for 3Q (EBITDA margin expected to decline to 20-25% vs 28% in 2Q; total production to fall by 4% QoQ). The reason, according to the company, is slightly weaker export markets in 3Q, where NLMK ships 70% of its production (vs the domestic market where prices and sales volumes are relatively stable). Surprisingly, demand from the construction sector, which picked up in 2Q, remains quite strong. This explains why MMK and Evraz - which sell most of their products domestically - are more optimistic about 3Q.

- Production cost inflation is an ongoing concern. NLMK expects a 12% QoQ rise in cash costs for slabs in 3Q, driven by elevated prices for coking coal despite the turbulence on financial markets. Iron ore prices remain stable and are not expected to increase in 3Q. Given these rising costs, we think it make sense for NLMK to be conservative in terms of profitability in 3Q.

- The situation on export markets (Europe and North America) is different from 2008 when inventory levels were substantial and demand rapidly shrinking. Currently, inventory could be easily sold in a matter of weeks. NLMK said it has already filled its order book for September.

- Middle East turmoil is of little concern for NLMK, as most of its sales go to Turkey where the situation is stable.

- Demand for transformer steel is stable on both domestic and export markets. The company even expects an uptick in prices in 3Q.

- Most of NLMK’s investment projects are developing as planned. The commissioning of BoF in Lipetsk (capacity: 3.4mntpa) is planned in 3Q (Prime Minister Vladimir Putin may take part in the opening ceremony). A new converter (capacity: 3mntpa) will be commissioned in 4Q11.

Bottom line

Our overall impression of the meeting was positive. As usual, NLMK’s representatives sounded reasonable and confident. Despite difficult times on the financial markets, the sector remains stable in terms of demand and prices, which instils some optimism, in our view.