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Coking coal price sensitivity

Sensitivity to a 10% decrease in coking coal prices

We measure operational gearing for the steel producers we cover as sensitivity to a 10% decrease in coking coal prices. AMSA and NLMK are the most sensitive steel producers in our coverage universe. Evraz is the least sensitive as its coal operations support lost margin in the steel division.

EBITDA sensitivity

Figure 13: 2019E EBITDA sensitivity to a 10% decrease in coking coal prices
12%				% change in EBITDA
						10.0%+
10%
8%
6%			3.6%		4.8%
4%
		1.4%
2%
0%
-2%
	-1.4%
-4%
	Evraz	Severstal		MMK	NLMK	AMSA

Note: AMSA limited to 10% we calculate and 84% increase in AMSA’s EPS if coking coal prices decrease by 10%.

Source: Renaissance Capital estimates

EPS sensitivity

Figure 14: 2019E EPS sensitivity to a 10% decrease in coking coal prices

12%				% change in FY19E EPS
						10.0%+
10%
8%
					6.4%
6%			5.2%
4%
		1.7%
2%
0%
-2%
	-1.9%
-4%
	Evraz	Severstal		MMK	NLMK	AMSA

Note: AMSA limited to 10% we calculate and 84% increase in AMSA’s EPS if coking coal prices decrease by 10%.

Source: Renaissance Capital estimates

Renaissance Capital

3 December 2018

Steel

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Renaissance Capital

3 December 2018

Steel

EBITDA and EPS sensitivity are determined by:

1.Coking coal self-sufficiency

2.Operational gearing

3.Financial gearing

1)Coking coal self-sufficiency…

Severstal and Evraz have the highest coking coal self-sufficiency, enabling cost control and ensuring security of supply. MMK and AMSA have the lowest.

Figure 15: Coking coal integration by steel producer

	70%
		60%
	60%
			50%
	50%
				37%
	40%
	30%
	20%
	10%
					0%	0%
	0%
		Severstal	Evraz	MMK	NLMK	AMSA

Source: Company data, Renaissance Capital estimates

… provides coking coal integration benefit…

We calculate a steel producer’s integration benefit as the realised price per tonne of coking less cash unit costs (coking coal EBITDA margin per tonne) multiplied by internal sales volumes. Evraz has the highest coking coal integration benefit, which is a function of its low-cost coal operations and high levels of coking coal self-sufficiency. MMK has the least due to its low realisations on coking coal sales. We calculate no integration benefit for AMSA and NLMK as they have no metallurgical coal mining assets.

Figure 16: Coking coal integration benefit, $mn

	600				Coking coal integration benefit, $mn
		543
	500
$mn	400
	300
			165
	200				104
	100
						0	0
	0
		Evraz	Severstal		MMK	AMSA	NLMK

Source: Company data, Renaissance Capital estimates

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Renaissance Capital

3 December 2018

Steel

… which ultimately contributes to lower slab cash costs

Evraz and Severstal have the lowest YtD average slab cash cost for FY18. We believe coking coal integration allows Evraz and Severstal to maintain their low-cost position in periods of rising coking coal prices.

Figure 17: Russian steel producers 3Q18 slab cash cost compared with 2017

$/t

300

290

280

270

260

250

240

230

220

210

200

		2018 YtD slab cash cost, $/t		Coking coal integration (RHS)				70%
	60%						289
								60%
50%			267					50%
		Average, 258					37%
								40%
	242
235								30%
								20%
								10%
			0%
								0%
Evraz		Severstal		NLMK			MMK

Source: Company data

2)Operational gearing

We rank the steel producers by their FY18E EBITDA per tonne. Evraz and Severstal have the highest margins and NLMK and AMSA have the lowest.

Figure 18: FY18E EBITDA margins
250						EBITDA per tonne, $						EBITDA margin(RHS)						80%
	207			202														70%
200								189			170							60%
																		50%
150																		40%
				40%
																		30%
100	37%										37%
								33%										20%
															60
50																		10%
															9%			0%
0																		-10%
	Evraz			Severstal				MMK				NLMK			AMSA

Source: Company data, Renaissance Capital estimates

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Renaissance Capital

3 December 2018

Steel

3)Financial gearing

We look at net-debt to EBITDA and net debt gearing as a measure of financial gearing. Evraz is the most leveraged and MMK the least given its net cash position. The steel producers we cover have comfortable balance sheets on aggregate, with net debt/EBITDA below 1.0x.

Figure 19: Steel producers ranked by FY18E net debt/EBITDA

1.0x		0.9x
0.8x
0.6x
0.4x
			0.2x
0.2x				0.1x	0.1x
0.0x
-0.2x
						-0.2x
-0.4x
		Evraz	NLMK	Severstal	AMSA	MMK
Note: Gearing is defined as net debt/(net debt + equity)
						Source: Renaissance Capital estimates
Figure 20: Steel producers ranked by FY18E gearing
0.7x
		62%
0.6x
0.5x
0.4x
0.3x
0.2x
			13%	12%
0.1x
					4%
0.0x
-0.1x
						-8%
-0.2x
		Evraz	NLMK	Severstal	AMSA	MMK

Note: Gearing is defined as net debt/(net debt + equity)

Source: Renaissance Capital estimates

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Key upside steel demand risks

1)Growing steel demand from India supports met coal demand

We calculate, based on World Steel Association data, that India steel production has grown by a 6.6% CAGR since 2007. This rapid growth in Indian steel production could support demand for coking coal prices as India is a net importer of coking coal, with lower quality coking coal assets and limited reserves on a per capita basis. We believe India’s crude steel production may continue to grow, given its low steel intensity at 65 kilograms per capita compared to Russia and South Africa which are at 282 and 82 kilograms per per capita, respectively.

Figure 21: India crude steel production since 2007, mnt

130
120													118.1
												113.6
110											101.4
100										95.5
90								87.3	89.0
							81.3
80					73.5	77.3
70				69.0
			63.5
60		57.8
	53.5
50
40
	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019

Source: World Steel Association, Renaissance Capital estimates

Renaissance Capital

3 December 2018

Steel

India’s steel intensity falls short of average

India is growing its steel capacity at a rapid rate. However, limited metallurgical coal reserves increase demand for seaborne met coal to support its growth ambitions.

Figure 22: Steel consumption per capita by country, kilograms

1,200 1,106

1,000
800
600			523	509	506	453
400
							301	282
									204
200
										82	65
0
		South Korea	China	Germany	Japan	Canada	US	Russia	Mexico	South Africa	India

Source: World Steel Association

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Renaissance Capital

3 December 2018

Steel

India’s consumption of steel-making materials falls short of its implied requirement

	Figure 23: India consumption as percentage of world consumption
	25%				India consumption as % of world					India population as % of world
		20%
	20%
			India population as % of world, 18%
	15%
			13%
			10%
	10%
					6%	5%	4%
	5%									4%	4%
												3%	3%	2%
	0%
		Gold	Thermal Coal Manganese		Iron Ore	Steel	Met Coal			Oil	Platinum	Aluminium	Nickel	Copper

Source: World Steel Association

2)Successful implementation of China’s BRI could be supportive

There are around 400 core infrastructure projects around the BRI, according to BHP estimates, that meet our criteria for ongoing tracking. It is from this sample that it derive their spending figure of $1.3trn and its bottom-up steel demand estimates. This investment could result in around 150mnt of incremental steel demand (15mnt per annum) from 2013-2023.

China has set up a $40bn development fund investment for the BRI, which indicates its commitment to the project.

Figure 24: Road and sea network and countries included in the belt and road initiative

Source: World Bank

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