Fitch: Stable outlook for CIS Metals & Mining Companies

LONDON - MOSOW. January 24. KAZINFORM Fitch Ratings says in a newly-published annual outlook report that its outlook for CIS metals & mining companies is stable.

The stable outlook reflects Fitch's expectations that the sector's recovery will continue in 2011 following a strong performance in 2010. In the CIS, all but three of the rated companies have a Stable Outlook, with two, OJSC Magnitogorsk Iron and Steel Works (MMK; 'BB'/Positive) and Evraz Group SA (Evraz; 'B+'/Positive) having a Positive Outlook, and one, Interpipe Limted ('RD') on Restricted Default. The main risks to the ratings are debt-funded M&A and large cash outflows (including dividends and share buybacks).

Fitch expects steel production in Russia to grow by 6% in 2011 (see '2011 Outlook: Steel Producers' at www.fitchratings.com). Almost all the companies discussed in the report rely heavily on sales outside Russia/Ukraine, which account for over 50% of their revenues (MMK is a notable exception with a share of export revenues of 37% in 2009). As a result, external drivers (demand from both emerging and developed markets) will dominate companies' performance in 2011.

While Fitch expects GDP to increase by 4.3% (see 'Global Economic Outlook', at www.fitchratings.com), domestic demand in Russia is not expected to reach its pre-crisis level until 2012, and will continue to depend on Russian government's ability to spend on infrastructure projects (including Sochi 2014, and oil and gas projects by Gazprom and Transneft). Demand from the auto industry will continue to improve after a strong 2010, when Russian manufacturers doubled their production year-on-year.

Firm commodity prices will continue to dominate performance in 2011, especially for those companies producing coal, iron ore and copper products. Like the steel producers, CIS mining companies will continue to have above-average margins compared with international peers thanks to their low cost of production and cheap labour. However, high domestic inflation rates (forecast by Fitch at 7.7% and 10.8% in Russia and Ukraine in 2011, respectively) will continue to increase costs of production and could threaten margin improvement.

Higher margin products will underpin steel makers' performance as they try to counter increases in input costs, especially for MMK and OJSC Novolipetsk Steel (NLMK; 'BB+'/Stable). However, the success of this strategy depends on domestic demand, especially from the oil and gas and auto sectors, and will be tested over the next 12-18 months.

Investment in upstream assets will continue to be another source of steel producers' competitive advantage. METINVEST B.V. (Metinvest; 'B'/Stable) will continue to benefit from high commodity prices for its surplus production of both hard-coking coal and iron ore products, whereas OAO Severstal (Severstal; 'B+'/Stable) benefits from its gold division earnings.

Liquidity remains healthy for most rated companies following a busy 2010, when the majority of companies refinanced foreign liabilities from mostly domestic sources. State-owned banks will see their share in companies' total funding drop as companies tap domestic and international public capital markets to replace more costly domestic bank loans, the agency's press release reads.

The report, entitled '2011 Outlook: CIS Metals and Mining' is available at www.fitchratings.com.