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Evraz's steel output stays stable in H1 2022 despite sanctions

Highlights

Capacity utilization at Russian mills still close to maximum

Steel export sales made at $40–$80/mt discounts to market

Long-term projects, including casting and rolling, are postponed or paused

Russian coking coal consumption came off 7.5% in H1

  • Author
  • Ekaterina Bouckley
  • Editor
  • Valarie Jackson
  • Commodity
  • Coal Oil Metals

Mining and steel company Evraz, with mines and mills in Russia, the US, Canada, the Czech Republic, and Kazakhstan, managed to keep its steel production stable during the first half of the year, according to its H1 results released Aug. 4.

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Evraz's crude coal output fell by 1.5 million mt, but its iron ore extraction rose to 7.4 million mt, up 4%.

Despite challenges and uncertainties, Evraz's H1 EBITDA, even partly offset by lower earnings from the Russian division, climbed 19% on the year to $2.5 billion on higher coal prices and better performance from the North American division.

Despite poor logistics, including limited availability of vessels and rolling fleet, mining difficulties amid challenging geological conditions, and interrupted quarrying equipment supplies, the coal segment's EBITDA more than tripled providing 47% of the H1 consolidated earnings.

In H1 2022, Evraz's crude coal extraction declined 13% on the year to 10.1 million mt. With several Korean and Japanese customers avoiding purchases of Russian coal, May-June saw sales to China grow to absorb 70%–90% of the company's coal exports.

Due to a slowdown in steel production, Russian coking coal consumption fell 7.5% on the year to 17.9 million mt in H1 2022.

Sluggish domestic demand resulted in a jump in coking coal exports: in January through May they totaled 14.8 million mt, up 44% on the year.

As it was no longer possible to ship coal to the EU, deliveries to the Far East intensified, causing a rolling fleet deficit and even more congestion on Russia's eastern railway network, said Evraz.

Met coal prices in Russia were relatively stable throughout H1 2022 with premium Zh-grade fetching $350/mt FCA Kuzbass, up from the H1 2021 average of $101/mt, but domestic prices are expected to drop in the July-September quarter.

Globally, the short-term outlook for coking coal prices is negative as well because of slowing demand, but supply from Australia is recovering after recent heavy rainfalls.

Steel

The Russian steel and mining industries in general, and Evraz in particular, were affected by sanctions that the US, the EU, and other countries imposed on many Russian state and commercial organizations, including banks, individuals, and certain sectors of the economy. Sanctions caused an economic slowdown in Russia and cut Russian businesses off from international capital markets with other effects, including export and import limitations, and restricted access to foreign technologies. Many enterprises suspended activities in Russia and stopped supplying their products to the country. Mills are also experiencing problems receiving payments from foreign customers.

Evraz's crude steel production over H1 2022 remained at 6.8 million mt. The company's Russian mills are still operating at almost 90% of capacity but, all the same, mining and steel companies are compelled to revise their production programs for the remainder of the year, also because the domestic market is in a downturn.

The signs of Russian steel consumption going into a decline appeared in March, with the biggest slump now seen in non-residential construction, where 35%-40% of the announced projects have been suspended.

In May, demand for rebar plunged 22% on the year, and June saw the consumption of beams drop to the lowest level in five years. Steel demand from the transport infrastructure and mining sectors was less affected.

In H1 2022, ruble-denominated prices for most construction products declined on the combination of weaker demand and increased supply on fewer export alternatives. In June, rebar came off to $747/mt ex-warehouse Moscow, down 14% from January, and for some products, prices in ruble terms contracted by 35% from the beginning of the year.

Geopolitical tensions affected the pricing of some Russian steel products selling abroad, with discounts to global benchmarks reported in the $40-$80/mt range.

Capex, new businesses

The tough six months were fruitful in other respects, however. From January through June, Evraz developed Steel Building and Steel Box—new businesses promoting the construction of steel-framed buildings. Evraz Steel Box, which works with small firms and individuals, secured nine contracts so far, while steel frames and structures manufacturer Steel Building is completing a major supply contract for a prefabricated construction project in Egypt. Also, Evraz delivered the first batch of green rails.

Overall, Evraz had $513 million of capital expenditures in H1, almost 20% more on the year, with roughly half of the total spent on growth projects.

But given macroeconomic concerns and hindered access to foreign equipment, Evraz revised the schedules of investment projects not launched into construction. The completion of the rail and beam mill modernization at the NTMK mill was deferred by one year to 2024, and the project for the 2.5 million mt/year thin slab and coil rolling facility, which is currently at the engineering stage, at the Evraz Zapsib mill is now being reconsidered.

The company only will proceed with advanced-stage projects, including the ongoing construction of a new long-rail mill at Pueblo, Colorado, in the US and of a $228 million vanadium-containing slag processing line in Uzlovaya, the Tula oblast, in western Russia.