Summing up the potential outcome of the first quarter, we expect a robust set of financials on back of the stable production after major overhaul completions and surging steel prices. As Europe struggles to fulfill pent-up demand due to slow idled capacity restarts, and US demand is boosted by newly announced stimulus, we forecast an improvement in the margins of Russian steel majors supported by exports amid efficient upstream vertical integration. We note that raw material prices demonstrated slower growth compared to steel prices in 1Q21. The working capital build-up implies certain downside risk to quarterly free cash flows (FCFs), yet we forecast the average dividend yield to be at least 2% for the Russian steel majors with a material upside risk to our estimates. The elevated steel price levels look sustainable on a 2-3 moth horizon: Turkish domestic HRC quotes entered Ramadan with mills offering nearly $1000/t, US domestic steel prices do not appear to have reached their peak with HRC quotes ranging $1350-1400/t. HRC in Northern Europe reached $1069-1128/t in early April. The weekly assessment of HRC sold on FOB Black Sea basis reflects a $830-840/t range, which creates apprehension that 2Q21 steel benchmark averages may exceed 1Q21 price levels.
Preliminary data reveals seasonal developments and technical aspects affecting the sales volumes of NLMK and MMK. Severe winter weather affected shipments in the Urals and Siberia while unfavorable weather conditions in the ports of the Black Sea created bottlenecks in export shipments. That comes on top of an export sales factor that leads to a longer realization period and corresponding to a working capital build-up. MMK’s finished products sales were 2.9 mn t ( up 5.8 % y/y) while NLMK shipped a total of 3.9 mn t, down 13% y/y on back of lower sales of semi-products and higher intragroup deliveries. We expect Severstal sales volumes to stay comparable q/q with export sales volumes accelerating in 1Q21. The company is to report operational volumes simultaneously with its financial results. Speaking of the price environment, we note that despite benchmarks for uncoated steel almost doubling in dollar terms y/y, the Russian domestic premium was lagging in growth as demand was higher on the export markets. We should also note that the price increase is expected to have a more extended effect on revenues due to the nature of business tied to deliveries and as well as to the varying share of sales on spot.
As steel prices were seen surging at a higher pace vs raw materials we project margins to expand even for MMK, the least integrated vs peers. Robust steel demand on the export markets, in our view, will help offset the 2% ruble appreciation recorded in 1Q21. We expect companies to deliver record high EBITDA for the quarter with further upside potential in 2Q21 as steel prices continue to climb in 2Q21. It is fair to note that the 4Q20 EBITDA of NLMK was positively affected by such one-off as a c.$100 mn cash refund for slab duties. The company’s EBITDA gain otherwise would have been closer to 40% q/q by our estimates.
Free cash flow and dividends
Solid EBITDA gains support robust free cash flow expectations. Yet we are eying roughly $3.5 bn of capex in 2021 for Severstal, NLMK and MMK. First quarter investments are traditionally lower and imply an acceleration further in the year. On a separate note, rising steel and raw material prices would affect inventory buildups while logistical issues lead to further working capital build-ups. Our FCF estimates are subject to working capital considerations. Meanwhile, the FCF of NLMK should see a positive effect from cash proceeds of slab duties refunded from the last quarter. We assume a 100% FCF payout from flat steel producers on a quarterly basis. That currently implies DPS of $0.45/GDR for MMK, $0.59/GDR for Severstal, $0.69/GDR for NLMK.