Steel recovery underway

The Russian steel sector – a key sector for the domestic economy – is attracting renewed global investor interest with rebounding steel prices and growing demand underpinning its outlook.

When the global economy ground to a halt nearly two years ago, steel makers were among the worst hit as construction and manufacturing suffered a sharp slump. But it wasn't only falling revenue they had to contend with, there was also asset depreciation according to George Buzhenitsa, Metals and Mining Analyst at Unicredit.

“Revaluation losses, losses from fixed assets revaluation, from financial investment revaluation, good-will write offs, inventory write downs, doubtful debts provisions created – all this has been pressuring the bottom line.”

Russia's steel companies have recovered strongly in the last 6-9 months on the back of strong demand from export markets.

Since the beginning of last week, foreign investors have been piling in to Russian steel producers. Mechel up by 6.8% in New York, while in London Evraz has risen 8.7% and Severstal 13.3%.

The Chief Financial Officer of Evraz, Giacomo Baizini, says the market is coming back more quickly than expected and the indicators suggest the growth is sustainable.

“Steel is major input in any economic activity and therefore it should be sustainable with some volatility, but generally recovery should be there.”

And it's not just international demand. Economic growth has returned to Russia, construction projects put on hold at the beginning of the crisis have been restarted and, George Buzhenitsa adds, manufacturing activity is beginning to pick up.

“We see at the moment demand recovery in domestic market and this is very encouraging in our view, because historically more than 60% of the Russian steel was consumed locally, and that should underline the sustainability of the recovery in the steel sector.”

There is still concern about the possibility of a double dip recession. In addition the vast amount of liquidity pumped into the global economy in the form of stimulus packages will not last forever. And these two factors may serve to limit optimism in a sector that is once again finding its feet.