Russian shock therapy harms miners

The steel market and companies with big debts such as pipemaker OAO TMK stand to lose the most in the Russian mining and metals industry from the central bank’s surprise rate decision.

“The news is bad for everyone to some extent, but the most indebted companies in the mining sector such as OAO TMK, Evraz Plc and OAO Mechel may be affected right away as they need to refinance,” George Buzhenitsa, a Deutsche Bank AG analyst in Moscow, said by phone today. TMK’s situation is exacerbated by the fact most of its revenue is denominated in rubles, he said.

OAO Uralkali and OAO Magnitogorsk Iron & Steel may suffer too as both have relatively high debt, and MMK, as the steelmaker is known, sells mostly on the domestic market, Kirill Chuyko, a BCS Financial Group analyst in Moscow, said by phone.

The Bank of Russia decided overnight to take its key interest rate to 17 percent from 10.5 percent to try to stop the ruble’s plunge. The move failed to restore confidence, with the currency erasing gains to trade 18 percent weaker at 78.44 rubles against the dollar at 3:10 p.m. in Moscow.

Steel demand, which Deutsche Bank had estimated would slide 5 percent in 2015 from this year, might have a steeper decline because the rate increase will hurt consumption, especially from the construction industry, Buzhenitsa said.

Companies that don’t feel the impact immediately will probably suffer if the rate stays high or even increases, Chuyko said. Companies such as PAO Severstal or OAO Novolipetsk Steel are shielded from the hike for now, as both have low debt-to- earnings ratios and don’t need to borrow, he said.

TMK, which derives about 55 percent of its revenue from Russia, will see consolidated earnings before interest, taxes, depreciation and amortization hurt by the currency’s decline, main owner Dmitry Pumpyansky said in October. The company has as much as $510 million of debt due in 2015, including $320 million of Eurobonds. It got financing from one of Russia’s largest banks to pay down the Eurobonds, he said at the time.

TMK’s spokesman Ilya Zhitomirsky declined to comment, as did Uralkali’s, Evraz’s and Mechel’s press services. Novolipetsk Steel and Severstal press officials also declined to comment.

MMK’s export revenue is sufficient to cover international loans and purchase raw materials abroad, spokesman Dmitry Kuchumov said, while declining to comment of possible corporate loans rate increases.

About the Author