International rating agency Fitch Ratings expects a slow recovery of CIS steel sector in 2010.

Agency will continue to monitor the situation on the six key industry factors that are likely to influence the ratings of steel companies in the Commonwealth of Independent States next year: the ratio of sales to export and the domestic market, the loading capacity, changing the range, the efficiency of enterprises outside the Commonwealth of Independent States the level and pace of reducing the leverage and the impact of exchange rates, said Fitch.

Given the growth of the economy by the summer of 2008, the majority of Russian steel companies realize 60-70% of its products in the domestic market. However, domestic demand for steel products has fallen by 30-50% in the IV quarter of 2008 - I quarter in 2009, forcing the company to increase sales to export markets such as China, the Middle East and Asia. Currently, export sales made up 50-70% of production companies.

Fitch believes that this strategy was acceptable in the short term to improve the operating and financial performance. At the same time negative to producers, export-oriented, there are lower margins, higher volatility in demand, potential countermeasures, and the possibility of rate weakening demand in key export markets , - the message.

capacity load factor for the majority of steel producers in the CIS countries decreased to 50-60% in the IV quarter. 2008 from the level of about 90-95% at the beginning of 2008 due to reductions in demand for end-markets. In these levels, some producers may have negative operating cash flows due to a significant proportion of fixed costs in their cost structure. Fitch noted a gradual improvement in capacity utilization ratios in the last three months, which currently average 75-80% in Russia and 60-70% in Ukraine. The Agency expects that by 2010 this figure could grow to an average 90% in Russia and 75-80% in Ukraine , - reported in the press release agency.

Another important point, which need to track, is the pace of recovery in the end markets for the bars on the flat rolled products. Fitch anticipates that the recovery in prices and volumes on the bars is likely to be slower than in rolled, Considering the shortage of new projects and the difficult financial situation of companies in the sector of real estate /estate development. These expectations are reflected in the actual change in prices of steel to the present time , - said the agency.

But in the longer term trend in prices in 2010 remains uncertain, given that the package of government measures to stimulate spending on infrastructure will likely lead to increased demand for bars. reytinguemyh Fitch among steel companies a greater share of Primal Rental is Evraz Group ( BB-/B, Rating Watch negative), while the rolled more focused company Severstal ( B /B, Rating Watch negative), Novolipetsk Metallurgical Combine ( BB /B , outlook stable ), Metinvest BV ( B /B , the forecast negative ) and Magnitogorsk Iron and Steel Works ( BB, outlook stable), - stated Fitch.

Evraz Group and Severstal, in recent years followed the strategy to expand through mergers and acquisitions that led to them having a significant share of foreign companies. Fitch notes that geographical diversification is a viable strategy to increase sales and diversify regional risk but the negative points include the high cost base in some foreign assets and the complexity of the integration of assets. The most affected by the CIS is Severstal, EBITDA margin, which in 2009 is likely to be reduced to less than 10% (2008 - 24 %) because of unsatisfactory results of its American assets, - said the agency.

Unlike the more conservative financial policy, Evraz Group, Severstal and Interpipe Limited ( CCC /C , Rating Watch negative ) entered a period of industry recession with a higher debt burden in connection with the financing of mergers and acquisitions and /or technical improvements, and exposed to risks of non-financial Covenant, the pressure on liquidity and difficulty in refinancing debt. In 2009, net leverage from Evraz Group, is expected to be 2,7-2,9 times (2008, - 1.6 times), the Severstal - 6-7 times (2008 - 0.9 times) and the Interpipe Limited - 3,4-3,5 times (estimate for 2008 - 2.8 times ) , - the press release.

Fitch believes that will also be important to continue to monitor the dynamics of exchange rates CIS. While in 2009 the steel companies of CIS are major advantages of the devaluation of national currencies, as the export sales made in dollars and euros, and the majority of costs denominated in national currency. At the same time, it can not be regarded as a stable advantage, and the situation could change at the back, for example, in the case of increasing the rate of the ruble as a result of rising oil prices (taking into account the strong positive correlation between these two parameters), - thought Agency analysts.

When modeling Fitch uses the following general assumptions for steel companies in the CIS in 2009: a reduction in production volumes at 15-35% and a reduction of revenue at 45-65% over the previous year, with an average EBITDA margin of 19% ( 2008 - 30%). With regard to the prospects for 2010, Fitch expects recovery in demand for steel in the world in the first half of the year on increasing consumer spending and investment, and reduce stockpiles of our clients. Prices should rise from current low levels albeit at a slow pace. In 2010, Fitch expects growth in earnings of steel companies in the CIS average of 10-15% on the previous year, while EBITDA margin is projected to increase to 22-24% , - reported in the media agency.

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