NLMK (MCX: NLMK) — one of the world's largest producers of steel products and the first in terms of steel production in Russia. The production capacity reaches 18,5 million tons, and the assets are located in Russia, Europe and USA.
20 January, the company published a production report on the results 2021 of the year. The results were very mixed. On the one side, steel production volumes returned to pre-crisis levels and showed good dynamics. On the other hand, the company's sales have dropped significantly compared to last year.. To understand, why did this happen?, should assess the overall situation in the steel market and carefully study the main operating indicators.
We recently wrote in detail about NLMK's business, so, if missed, be sure to read.
Disclaimer: if we write, that something went up or down by X%, then by default we mean a comparison with the report data for the same period last year, unless otherwise stated.
Position in the industry
The situation in the ferrous metallurgy market remains uncertain. Much depends on, how quickly the world economy will return to sustainable growth, and the world's largest consumer of steel, China, will deal with its real estate crisis.
It is worth noting, that the industry quickly recovered from the crisis 2020 of the year. Starting from the second half of the year, steel prices went up thanks to the recovery of demand in the world market and grew until the first half of the year. 2021 of the year. But since the third quarter, price growth has slowed down., turned into a fall, and following the results of the past year, steel prices corrected from the peak.
In the Russian market, steel prices began to fall from mid-August, among other things, under the pressure of internal factors.
At the end of June, the Russian government approved temporary duties on the export of metals from 1 August to 31 December 2021 of the year, to stabilize the situation in the domestic ferrous metallurgy market.
Furthermore, in November 2021 the government changed the export tax rate for scrap and waste of ferrous metals. Previously, the rate was 5%, but not less 70 € per ton, and now - 5%, but not less 100 € per ton. The new rules came into effect from 1 January 2022 years and will operate 180 days.
These measures will put pressure on the Russian steel industry and NLMK's key indicators, because the company has production assets outside of Russia.
In addition, the FAS initiated cases of violation of antimonopoly law against three Russian steel producers: NLMK, MMK and Severstal. Companies deny allegations of collusion to manipulate flat steel prices. In January 2022 the proceedings were adjourned indefinitely.
Production indicators
Based on the results of 2021 steel production increased by 10% - to 7,4 million tons due to the modernization of blast furnace and steel production. At the same time, the total capacity utilization decreased to a record low in recent years — 93%.
Coke. Production volumes decreased by 4% - to 5,49 million tons due to a drop in output at production sites in the Lipetsk Region and Altai Territory.
Iron ore raw materials. Production increased by 8% - to 19,97 mt due to capacity expansion at Stoilensky GOK in the first half 2021 of the year.
Metal products. Gross production increased by 6% - to 19,28 million tons — against the backdrop of an increase in the production of flat products by 7%, commodity slabs - on 20% and long products - on 17%. Despite the impressive growth, output of steel products for third-party buyers decreased by 1% - to 17,12 million tons. This is due to an almost threefold increase in NLMK's consumption, to 2,17 million tons.
In my opinion, it's a positive signal., and that's the logic: the more semi-finished products are used to produce high value-added products, the higher should be the profitability of sales and operating profit of the company.
Production dynamics, million tons
| Steel | Coke | Iron ore raw materials | Metal products | |
|---|---|---|---|---|
| 2017 | 17,08 | 6,49 | 17,11 | 16,61 |
| 2018 | 17,49 | 6,03 | 18,38 | 17,62 |
| 2019 | 15,7 | 5,5 | 18,43 | 16,36 |
| 2020 | 15,83 | 5,7 | 18,51 | 17,37 |
| 2021 | 17,40 | 5,49 | 19,97 | 17,12 |
The structure of metal products production in 2021 year
| Flat products | 46,3% |
| Commodity slabs | 34,8% |
| Long products | 12,5% |
| Commercial iron | 3,4% |
| Other | 3,0% |
Dynamics of capacity utilization
| 2017 | 98% |
| 2018 | 99% |
| 2019 | 94% |
| 2020 | 94% |
| 2021 | 93% |
Sales
In real terms, NLMK's consolidated sales decreased by 4% - to 16,85 million tons. The main reason is the drop in sales of semi-finished products by 19% year to year, to 5,63 million tons.
Let me remind you, what's in the first half 2020 steel demand fell amid the pandemic and general uncertainty in the iron and steel market. NLMK sold significant stocks of semi-finished products, instead of using them to produce more expensive products. IN 2021 market prices and demand recovered, therefore, the company increased the consumption of semi-finished products, to produce more high value-added products.
This thesis is confirmed by the record growth in sales of finished products - by 6%, to 11,21 million tons. Sales of flat products increased by 4% - to 8,51 million tons, and sales volumes of long products and hardware increased by 16% - to 2,7 million tons. I will note, what, according to NLMK, average prices for flat products increased over the year in the US by 136%, and in the EU - on 80% in dollar terms.
Russia is considered to be NLMK's home markets, USA and EU. Their total sales increased by 6% - to 11,43 million tons. The Russian market remains the main, and its sales growth was 9% - to 7,28 million tons. US sales increased by 27% - to 2,04 million tons, — while in the EU fell by 15%, to 2,1 million tons. This is partly due to the speed of steel demand recovery in the US market and tight covid restrictions in Europe..
NLMK delivered to foreign markets 5,22 million tons of steel products 22% less, than last year. This is due to the high base, when the company exported large volumes of semi-finished products.
Sales dynamics, million tons
| Finished products | Foods | Consolidated sales | |
|---|---|---|---|
| 2017 | 10,76 | 5,71 | 16,47 |
| 2018 | 10,76 | 6,83 | 17,59 |
| 2019 | 11,06 | 6,01 | 17,07 |
| 2020 | 10,54 | 6,99 | 17,52 |
| 2021 | 11,21 | 5,63 | 16,85 |
Dynamics of sales in foreign markets
| 2017 | 36% |
| 2018 | 39% |
| 2019 | 34% |
| 2020 | 39% |
| 2021 | 31% |
Sales structure of steel products in 2021 year
| Russia | 44% |
| ES | 13% |
| USA | 12% |
| Other | 31% |
What's the bottom line?
At first sight, NLMK's production results based on 2021 years look weak. The company reported a reduction in the production of steel products and in-kind consolidated sales. But if you look deeper into the report and consider the structure and dynamics of individual types of products, then the situation looks much better.
Against the backdrop of a recovery in demand and prices for steel products, the company increased domestic consumption of semi-finished products to create higher value-added products. As a result, sales of finished products reached a multi-year high, which will have a positive effect on the financial performance of the company, especially given the high average selling price for the financial year.
But don't forget about, that the ferrous metallurgy industry is one of the cyclical, where the rise in prices and demand for products is quickly replaced by a fall. IN 2 Half 2021 prices have already significantly adjusted from their peaks, and the downward trend will continue in 1 Half 2022 of the year.
In the Russian market, additional pressure on the company is exerted by the state, which strictly regulates the ferrous metallurgy industry and monitors, so that there is no cartel between manufacturers. Due to the introduction of export duties in the second half of the year, sales abroad became less profitable and led to an increase in the share of sales within Russia. Besides, claims from the FAS, leading to significant penalties, hang over the company "sword of Damocles".
