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How to trade steel companies around met coal prices

Sensitivity to coking coal could present trading opportunities

Metallurgical coal is used to make coke which is required in steel making, predominantly through Basic Oxygen Furnaces (BOF). Coke is a significant input into steelmaking as it accounts for around 30% of raw material costs.

We forecast declining metallurgical coal prices, which could have a favourable impact on non-integrated steel producer margins and offset falling steel prices to some extent.

In a falling coking coal price environment, we believe MMK, NLMK and AMSA, the least integrated steel producers, would benefit the most from lower input costs. We calculate that AMSA and NLMK are the most sensitive to changes in the met coal price and Evraz is the least sensitive.

Preference for long-term value creators

Our preference among the steel companies we cover is for Severstal and Evraz due to their low-cost operations, which support their ability to generate attractive margins through the cycle. Severstal is the highest-margin steel producer that we cover and Evraz has the lowest FY18E slab cash cost. We believe this is due to their low-cost and long-life iron ore and metallurgical assets, which provide them with the ability to control costs and ensure security of supply.

Renaissance Capital

3 December 2018

Steel

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