[ferro-alloys.com]Russian metals producers are facing a three-pronged challenge from plunging oil prices, a weak ruble and the coronavirus outbreak, but the medium-term outlook still presents a mixed picture, according to analysts.

Brent crude prices crashed to around $35/b this week, down from nearly double that a month ago, while the ruble has slumped to 74 against the dollar from 64 over the same period. At the same time, the coronavirus pandemic is causing panic and chaos across the world, sending equities and commodities markets tumbling.

Cheaper ruble = lower costs

Russian metals companies could wade through all of this with minimal losses if oil stabilizes around $45/b in the next six months," Maxim Khudalov, senior director at Moscow-based analytical credit ratings agency ACRA told S&P Global Platts. This level would allow the Russian economy, and possibly other oil-dependent economies, to emerge relatively unscathed.

"Oil below $40/b put things on a rough track for everyone, including the Saudis, therefore I dare say today's price is not sustainable and is bound to bounce back soon," he said.

The oil price collapse was followed immediately by a sharp depreciation of the ruble. However, this curse of the national currency -- its unbreakable bond with oil -- presents a gift to export-orientated producers. Even without ramping up exports, they get a boost to revenues, Khudalov noted.

Historically, a devaluation of the ruble has a cost-cutting effect on commodities production in Russia. For instance, the nation's second-largest gold miner Polymetal gains $15 million-$17 more EBITDA with every extra ruble per dollar. However, this effect is not boundless and once the ruble surpasses the 70 mark, it starts wearing off, said Boris Krasnozhenov at Moscow-based investment bank Alfa Bank.

Krasnozhenov said the devaluation of the ruble will not undermine the borrowing capacity of Russian metals producers since a significant portion of their revenues come either in hard currencies or linked to them via global benchmarks that uphold ruble-denominated prices. in addition, the vast majority of Russian metals majors have net-debt-to EBITDA ratios below 1x attesting to their strong ability to pay off debts.

Chinese appetite for raw materials, scale of quarantine

A spokeswoman for Novolipetsk Steel (NLMK) told S&P Global Platts that the company "continues to monitor the situation and will be ready to adjust operational and strategic decisions accordingly."

Given their integration into mining and a hefty contribution of raw material sales in consolidated earnings, metals producers in the Commonwealth of Independent States are pinning their hopes on China's appetite for raw materials; how far the coronavirus pandemic affects Europe and the broader European, Middle East and Africa region is also crucial for them, according to Krasnozhenov.

"Whether China maintains stable uptake of raw materials, especially iron ore, will be decisive," he said. "Demand and price wise, the latter is holding out OK at the moment."

Krasnozhenov also said that, under the weight of the coronavirus pandemic, it is to be hoped that the EU and the US can do without mothballing large investment projects and suspending manufacturing plants. "China has coped well. We now need a month or two to see how the EMEA region withstands the challenge, as the region is a rather crucial outlet for Russian metals, which will have nowhere to spill over to in the worst-case scenario," he said.

Sacrificing imports or capacities?

Khudalov said the oil price slump and the spread of the coronavirus have already led to 10%-15% drops in certain industrial metals prices to levels close to critical for survival.

"Should they linger that low, it will put a few producers at a crossroads – to demand yet more protection from imports or abandon the business, in which case we will see the retirement of the least efficient capacities across a few sectors," Khudalov said.

The aluminum sector may be the first to respond, with steelmakers being capable of waiting longer. Nickel and PGM companies, primarily Nornickel, should be able to cope well in any circumstances, he said.

The US Aluminum Association has already used the market turmoil to request antidumping duties on imports of aluminum sheet from 18 countries, he pointed out. "The initiative is a sign aluminum prices do not make production sustainable even in a country already closed to Rusal and some Turkish and Chinese imports," he said.

Khudalov also said capacity closures may become essential in developed markets, in dollar and euro zones, and take place as soon as the second half of this year and into the first half of next year if the situation does not improve. "In the EU, the only source of additional income could be those CO2 border taxes, currently being contemplated, provided their proceeds are distributed among domestic mills. So we may expect EU steelmakers to speed up their introduction," the analyst said.

Awaiting a remedy

"The downward pressure on commodities should ease as soon as we start getting good news," said Khudalov "A slight gleam of positivity -- a growing number of recoveries from COVID-19, the arrival of a vaccine or a pending compromise within OPEC on production cuts -- could resurrect investors' trust in commodities and send prices up."

Until the current panic subsides, investors, however unwillingly, will keep pumping into risk-free assets despite most of them, on rare exceptions, including gold, having nearly negative profitability.

(S&P Global Platts)

• [Editor:王可]