WOOD Flash – NLMK: 4Q18 trading update

NLMK announced its 4Q18 trading update this morning (18 January). Group steel sales rose 5% qoq and 6% yoy (more than the 2% qoq growth and 1% yoy decline reported by Severstal for 4Q18), due in part to some delayed shipments from 3Q18, which allowed NLMK to avoid the usual 4Q seasonal decline in volumes. However, the sales mix deteriorated, with finished steel sales down 10% qoq and flat yoy (semi-finished steel sales rose 34% qoq and 15% yoy) as 4Q is typically a seasonally weak period in the Russian market, where NLMK sells most of its finished products. Guidance on benchmark pricing trends suggests a significant price decline qoq, with export slab prices falling 13% qoq, uncoated flats down 5-9% and rebar down 3% in the Russian market, and prices falling 10% qoq in the US and 5-7% in Europe. While long-term contracts and price lags might allow NLMK to realise prices that fall less than the benchmark (like SVST this morning), NLMK’s large proportion of slab sales and exposure to the US market should see prices fall more than the 5% fall reported by Severstal this morning in its 4Q18 trading update. Global coking coal prices also rose 19% qoq (NLMK buys 100% of its coking coal) so, with falling steel prices and a weaker mix, we would expect lower margins in 4Q18E. However, this should be expected and we do not expect a significant market reaction to these numbers.