Russian steel companies’ 1H20 sales and operating profits were better than Fitch Ratings had expected due to strong Russian domestic premiums, resilient construction sectors, and stronger-than-expected sales volumes – despite pressure from the pandemic. We now expect that Russian steel producers will outperform our previous earnings forecasts for 2020.

We also anticipate that the Russian companies will continue investment programmes and pay higher dividends than we had expected. Free cash flow (FCF) is likely to be negative, and therefore Fitch continues to forecast that leverage will rise in 2020 and will only return to levels below the negative rating sensitivities in 2021.

1H20 Leverage Slightly Better Than Expected Financials for 1H20 indicated that PAO Severstal, PJSC Manitogorsk Iron & Steel Works (MMK), and EVRAZ plc were within the rating guidelines, with PJSC Novolipetsk Steel (NLMK) slightly above. All are rated ‘BBB’ but EVRAZ plc (BB+). This reinforces the Stable Outlooks for all four companies as we apply our ‘through-the-cycle’ rating approach. Russia’s AO Holding Company METALLOINVEST (BB+) and Ukraine’s Metinvest B.V. (BB-) generate most of their earnings from iron ore products, although both have sizeable steelmaking operations.

In the absence of 1H20 results, we expect METALLOINVEST to keep sufficient leverage headroom due to the supportive iron ore market. The Negative Outlook for Metinvest reflects its weak financial position at the start of the pandemic, making it less likely that leverage will be within the negative rating sensitivities by end-2021.