OREANDA-NEWS. February 28, 2012. Renaissance Capital, the leading emerging markets investment bank, has issued a major research report on the EMEA ferrous and carbon sector, arguing that neither cost-push nor demand will support steel prices in 2012, and that steel profits are set to slide.

According to Steel prices: Where to from here?, authored by Renaissance Capital metals & mining analysts Boris Krasnojenov and Vasiliy Kuligin, steel is unlikely to see cyclical pricing power restored from the production cuts taking place. Krasnojenov and Kuligin see only two major steel-price drivers this year: cost-curve dynamics, and demand/supply fundamentals. They consider it likely that 2011 was the peak year for coking coal and iron ore prices, and expect no cost-push effect in 2012.

Renaissance Capital sees sizeable oversupply in hot-rolled/cold-rolled coil in many markets, and currently favours integrated long-steel producers exposed to oil-rich economies. Current steel prices are close, to or below their 2005-2011 averages, notes the report, while metallurgical coal and iron ore prices are significantly above their 2005-2011 averages.

The report states that although equity market sentiment comes from the developed world, emerging markets define the supply/demand balance – and demand fundamentals do not look strong to the Renaissance Capital research team. Experts expect China’s steel output growth to moderate, and steel output in other countries, including Russia (with forecast 2.3% GDP growth in 2012) and Turkey (1.3% 2012E GDP growth) to correlate with GDP dynamics.

Regarding Russia, analysts believe the government is committed to accelerating modernisation in the metals & mining sector, as a number of companies operate obsolete equipment and have fixed assets with critical wear ratios. Disregarding mass media and market speculation about Russia introducing export tariffs on steel products and bulk commodities, analysts doubt Russian companies will face strict regulations on their capex programmes or fixed assets. In their view, the Russian state’s proposal will have to be significantly revised and adjusted to the realities of the market, and the sector, if it is to go ahead.

Companies with efficient upstream integration and high-value-added product mixes could demonstrate relatively stable earnings and margins in 2012, according to Renaissance. Analysts favour Severstal, Evraz and Erdemir, citing their earnings visibility, dividend yields with payout growth, and strong balance sheets.