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Shares in international steelmaker Evraz are -6.7% this morning in spite of a largely positive half-year report yesterday, highlighting how geopolitical and macroeconomic factors can do damage even to profitable companies with healthy earnings prospects. USD is surging against major peers, as Sterling remains under persistent pressure of disorderly Brexit, while EUR has been pummelled by ECB concerns over contagion of the Turkish credit market and Eurozone banks’ exposure to TRY’s relentless weakness.
All UK Index Metals & Mining companies are down today, as Greenback is making commodities more expensive, but Evraz is particularly hurt by its close association with the Russian market (fellow CIS-exposed miners Polymetal and KAZ Minerals are also both down, though less than Evraz). The spectre of a new round of US-led sanctions against Russia over the Salisbury poisoning and the overall noxious atmosphere of Russia-West relations is souring interest for the Russian steelmaker.
Evraz has benefited for some time from the recent trade war tensions, as Trump’s steel & aluminium tariffs buoyed metals prices, with steel +26% to $595/ton in H1 2018, while steel consumption increased across the world (H1: +2% YoY in Russia, +3% in the US). Moreover, Evraz has been well-positioned to further benefit from US steel tariffs due to its significant US operations (it has 6 production facilities in Oregon and Colorado).
Nevertheless, positive latest results (revenues +25% YoY, net debt -2.1%) and promising steel market conditions are insufficient to overcome the greater problem of stronger USD, as well as its connections to Putin’s Russia. While direct US sanctions have so far been limited to state-owned Russian companies and President Putin’s close associates (Oleg Deripaska’s Rusal comes to mind), how long before another US policymaker starts talking about Evraz’s billionaire owner Roman Abramovich’s “friendship” with Putin and Evraz suffers the fate similar to that of deeply-damaged aluminium giant Rusal?
While Evraz can certainly take steps to address its exposure to Russian market or its ownership structure, FX headwinds are entirely out of company’s hands. More wild share price swings to come?
Artjom Hatsaturjants, Research Analyst, 10 August 2018
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