Alexander Griaznov, Director Commodities 2020: Global, Elena Anankina, Senior Director Simon Redmond, Senior Director Mikhail Davydov, Associate Director
Russian, And CIS Rating Trends Nov. 16, 2020 Key Takeaways
– Ratings on Russian and CIS commodity producers were not significantly affected by COVID-19, but headroom has reduced. – The key challenges for the global oil & gas sector are increased volatility and the energy transition. – Given that the pandemic has hurt the fiscal position of sovereigns, governments could seek to raise taxes on national oil companies (NOCs) or cancel some of their benefits. – Russian gas producers can withstand unprecedented 2020 pressures on gas exports thanks to profitable liquids, resilient domestic gas, fundamentally low costs, and capex cuts. – Big global miners have not suffered as much from COVID-19 as big global oil, with solid financial frameworks and the rapid Chinese rebound being key supports. – Russian metals and mining companies have significant flexibility to cut capex and dividends, which supports their ratings. – Although Russian steel demand is set to decline by up to 7% in 2020 with a full recovery taking two years, Russian steelmakers will demonstrate resilient performance thanks to low costs and exports to Asia.
2 Key Challenges For Oil CIS
Alexander Griaznov Director Commodities EMEA Key Takeaways
– The key challenges for the global oil & gas sector are increased volatility and the energy transition. – Meaningful headroom allowed Russian oil & gas players to maintain their credit ratings, but the leeway has reduced. – Leverage for KMG and SOCAR is high, but government support is only moderate, supporting our view that their credit quality should not be equalized with that of sovereigns. – Given that the pandemic has hurt the fiscal position of sovereigns, governments could seek to raise taxes on national oil companies (NOCs) or cancel some of their benefits. – With the high cost of new projects, not to mention sanctions against Russia, NOCs will not find it easy to raise capital and find partners, resulting in limited growth opportunities. Gradual oil price recovery from 2021
S&P Global Ratings’ Brent And WTI Price Assumptions
100
90
80
70 Brent Assumptions 2020: $40 2021-2022: $50 2023: $55 60
50
$ per bbl 40
30 WTI Assumptions 2020: $35 2021-2022: $45 2023: $50 20
10
0 July-15 July-16 July-17 July-18 July-19 July-20 July-21 July-22 July-23 Brent WTI S&P Brent Price Deck S&P WTI Price deck
Source: Bloomberg, S&P Global Ratings, as of 21 October 2020
5 Low Oil Prices Are Amplifying The Divergence Between Oil And Gas Players
Oil Majors And NOCs: Capex Cuts By Up To 30% For 2020 Oilfield Services: Pressure As Majors Cut Back
40 490 72 480 70 30 470 460 68 20 450 66 10 440 64 430 62 0 420 Saudi Exxon Shell Chevron Total BP Petrobras Equinor Eni 410 60 Ara mco Mobil Jun 19 Jul 19 Aug 19 Sep 19 Oct 19 Nov 19 Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20
Previous 2020 CAPEX guidance Current 2020 CAPEX guidance Drilling, # Competitive Utilization, % (RHS)
But They Have Different Approaches To Dividends Small U.S. Players: Bankruptcies Rising
Saudi Exxon No of bankruptcies in U.S. E&P and OFS Shell Chevron Total BP Petrobras Equinor Eni Aramco Mobil 250 200 150 100 Dividend 50 0 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018 Q3 2018 Q1 2019 Q3 2019 Q1 2020 CAPEX Cumulative bankruptcies US E&P Cumulative bankruptcies US OFS
As of end September 2020 Sources: Bassoe Analytics, Bloomberg, company reports, Haynes and Boone; Q2 2020 data only as of May 31, 2020.
6 Majors’ Metrics Should Improve In 2021
S&P Global Ratings’ Forecast For Supermajors’ Funds From Operations To Debt 100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F
Chevron Exxon Mobil Total BP Royal Dutch Shell threshold
Source: S&P Global Ratings, as of end-October 2020.
7 Falling Profitability And Growing Volatility Are Weighing On Our Business Risk Assessment ― Return on capital (ROC) for supermajors has been declining for a decade. ― Volatility higher than excellent companies from other industries but returns are not compensating. ― These may lead us to review our excellent business risk profile assessment on majors. Excellent BRP – Average return on capital Excellent BRP: Average EBIT and Capital
45 60 300
40 50 250 35
30 40 200
25
% 30 150 20 Bil.$ Bil.$
15 20 100
10 10 50 5
0 0 0 2006 2008 2010 2012 2014 2016 2018 2006 2008 2010 2012 2014 2016 2018
EBIT Non O&G (LHS) EBIT Supermajors (LHS) Non O&G Excellent BRP O&G Supermajors Capital Non O&G (RHS) Capital Supermajors (RHS)
Source: S&P Global Ratings. BRP–Business risk profile.
8 Growing Challenges From The Energy Transition
Emissions are improving over past few years, with Exxon being an Reserve Life Index – steady decline exception 18 85
80 16
75 14
70 boe 12 Years 65 GHG,kg/
10 60
8 55
6 50 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
Exxon Mobil BP Total Chevron Royal Dutch Shell Exxon Mobil BP Total Chevron Royal Dutch Shell
Sources: Company reports, S&P Global Ratings. Note: Exxon Mobil reports on net equity basis, reflecting its equity stakes, and not only operated facilities. No data available for 2019. Kg – kilogram, boe – barrel of oil equivalent.
9 Slower Recovery For Russian Oil & Gas Producers
― Similar to major producers, credit metrics will fall with Brent, about $40/bbl in 2020 (versus $64/bbl in 2019). ― Oil production cuts in line with OPEC result in up to 12% fall in 2020 and 2% in 2021. ― Similar to majors, Russian producers announced capex and dividends cuts to support metrics. Funds From Operations to Debt Announced measures to preserve cash
100% Foreign Currency 2020 capex cut Dividends cut Lukoil FFO/D above 100% Rating* 90%
80% Rosneft BBB- / Stable ~20% Yes as linked to Net Income 70%
60% Lukoil BBB / Stable 10-20% Yes as linked to FOCF
% 50%
40% Gazprom Neft BBB- / Stable ~20% No
30%
20%
10%
0% 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F
Lukoil Gazprom Neft Rosneft
*As of Sept. 24, 2020. Source: S&P Global Ratings.
10 Kazakhstan Oil & Gas Producers – Metrics Squeezed By High Costs And Low Prices ― Unlike Russian producers, Kazakh companies are on negative outlook: lower headroom amid high costs (KMG, Nostrum) or impact of large capex (TCO). ― We don’t expect meaningful improvement in metrics even if prices go up due to either small contribution from upstream segment (KMG) or large capex program (TCO). Debt to EBITDA
9 8 7 6 5 (x) 4 3 2 1 0 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F Nostrum (Selective Default) KMG (BB/Negative) TCO (BBB/Negative)
*As of Sept. 24, 2020. Source: S&P Global Ratings.
11 Key Challenges For Gas CIS
Elena Anankina Senior Director Utilities and Infrastructure EMEA Key Takeaways
– Russian gas producers can withstand unprecedented 2020 pressures on gas exports (with the May-June European spot price below $2/mmbtu), thanks to profitable liquids, resilient domestic gas, fundamentally low costs, and capex cuts. – The main long-term challenge is the uncertain role of gas in the global energy transition. While European majors increasingly focus on renewables, Russia’s response is to increase exports to growing Asia-Pacific markets, but a multibillion dollar 50 bcm pipeline to China will depend on a new sales contract. – Nord Stream 2 has little impact on Gazprom’s credit quality or for Europe’s energy security, because most of €9.5 billion cost is sunk and ample transit capacity is available. – SOCAR’s credit gap with the sovereign results from high leverage, its complex structure, and absence of state guarantees. – We expect TAP, where SOCAR is a minority shareholder only, to be completed in November 2020. Unprecedented Challenges For Export Gas Prices And Volumes Hit Russian Gas Producers
Russia’s Pipeline Exports To Europe Fall The Most European Gas Prices Under Pressure Well Before COVID-19 In 1H2020 Versus 1H2019
12 25 40%
35% 10 20 30% 8 25% 15 6 mmBtu %
$/ 20% bcm
4 10 15%
2 10% 5
0 5%
0 0% Russia Alge ria Norway Libya
TTF day-ahead TTF forward Export decline absolute Export decline %
As of end September 2020 Source: Cedigaz. Europe excludes Turkey but includes non-EU countries Bosnia and Herzegovina, Source: S&P Global Platts. Macedonia, Serbia, Switzerland, U.K.
14 Gas Producers’ Financial Metrics Under Pressure In 2020-2021
Funds From Operations
350% – Very weak gas prices pressure metrics, often below triggers we view as compatible with 300% the rating over the longer term. – March 2020: 250% Gazprom (LC: BBB/Negative, 200% FC: BBB-/Stable) Equinor (AA-Negative) 150% – Recovery will depend on the market and on 100% the companies’ financial policies. – Capex cuts under way (Gazprom – 20%, 50% Novatek – 20% + 15%).
0% 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F Novatek Equinor Gazprom Royal Dutch Shell Socar
Source: S&P Global Ratings, as of end-October 2020.
15 Liquids And Domestic Gas Support Russian Gas Producers’ EBITDA Through The 2020 Downturn
Novatek's EBITDA By Segment: S&P Global Ratings’ Estimate Gazprom's EBITDA By Segment: S&P Global Ratings’ Estimate
6 45 40 5 35 30 4 25 bn $ bn 3 20 $ 15 2 10
1 5 0 0 2018 2019 2020e 2021f 2022f 2018 2019 2020e 2021f 2022f Gas export (S&P estimate) Domestic gas sales (S&P estimate) Domestic gas Liquids JV dividends including from Yamal LNG Gazpromneft (oil) Electricity, heat, other
Additional mitigants, Novatek: Additional mitigants, Gazprom:
• Low costs. • Low costs . • Yamal LNG ring-fenced, outside of Novatek’s consolidation perimeter. • Partial tax hedge via export duty & MET. • Low leverage at YE2019, sale of equity stakes in Arctic LNG 2. • Capex cut: 20%. • Capex cut: 20%, 15%. • State support.
As of end September 2020 Source: S&P Global Ratings.
16 In The Short Term, Above-Spot Export Realizations And Stable Domestic Prices Add Resilience Gazprom’s Export Price Realizations Above Spot, Domestic Novatek: Yamal LNG Aims To Increase Netbacks Outperform Exports In 2020 % Of Favorably Priced LT Contracts 450 20 70% 60% 15 400 50% 40% 10 30% 350 5 20% Mn tons metric Mn 10% 300 0 0% 2018 2019 1H2020
250 Yamal LNG sales % under long-term contracts
$ / mc m 200 Gazprom’s 2019 Export Sales Structure
150 Trading, electronic Oil-linked 100 sales platform 17% 11% Hybrid 50 Forward hub 16% 23% 0 2012 2013 2014 2015 2016 2017 2018 2019 2020e Gas hub, spot Realized export price TTF average Domestic price Netback at the Russian border 33%
As of end September 2020 Sources: S&P Global Ratings, S&P Global Platts, Gazprom report.
17 Longer Term, COVID-19 Exacerbates Pressures On Gas: Which Credits Are Hit The Most?
Credit Short-term mitigants Long-term impact impact and strategic shifts
Independent U.S. gas producers High • Case-by-case ?
Large gas producers Average • Liquids • Shift from O&G to energy: renewables, CCUs, • Legacy contracts hydrogen • Low costs, tax hedges • Focus on still-growing markets: APAC, • Regulations petrochemicals • Capex/dividend cuts LNG producers Low • Contract structure • Availability of new contracts affects funding for new LNG European power generation Low • Diversification • Growth in renewables and regulated activities, • Hedges limited investments in gas
European gas utilities Average • Regulation, LT transit contracts • Regulatory pressures already mounting • Long-term strategic shift: H2? Biogas?
China gas companies Low • Short-term financial benefit from PipeChina • Benefit from robust domestic demand growth and deconsolidation strategic focus on energy security • Less exposed to gas than European peers • Regulations remain uncertain
Source: S&P Global Ratings.
18 Energy Transition Triggers: Strategic Shifts For Gas Producers
Russian Energy Strategy Sets Ambitious Growth European gas companies Russian gas companies Targets For Pipeline And LNG Exports • Gas is less key for decarbonization • Aim to monetize their vast reserve endowment by 350 strategies focusing on growing market segments: • Pipeline(s) to China 300 • LNG (often offBS) 250 • Petrochemicals
200 • ESG: focus on becoming energy • ESG: focus on reducing carbon footprint of core companies, not just oil & gas operations 150
100
50
0 2018 2024 2035
Pipeline gas - High Pipeline gas - Low LNG - Low LNG - High
Source: Russia’s Energy Strategy, 2020.
19 Power of Siberia 2: Pipeline To Diversification Or Pipe Dream?
Power of Siberia-2 is critical for Gazprom’s pivot to the East
– New 50 bcm pipeline via Mongolia would enable use of core reserve base in Yamal for both European and Asian markets – a game changer compared to Power of Siberia 1. – China is one of the few growing gas markets but very competitive, lacks infrastructure, seeks supply diversification and favors domestic producers. – Massive capex needs – ongoing capex cuts and industry pressures. – Hinges on new offtake arrangements (Power of Siberia-1 contract took many years to sign). – Execution risks.
Source: Gazprom.
20 Nord Stream 2 – Strategic, But Not Critical For Credit Quality
Europe’s Gas Pipeline Ties To Russia
Why strategic: • Shorter distance from Yamal to NWE, lower transport cost. • Reduces transit risk. • Longer term, falling indigenous production in Europe leaves more room for gas imports (but Gazprom’s 2019 market share was already 36). Why not credit-critical for Gazprom: • Sunk costs (94% constructed), below X-default threshold. • Exports constrained by demand, not by pipeline availability; sufficient pipeline capacity already available. • Not critical for Europe’s security of supply. • BUT: broad sanctions on Russian energy exports are not part of our base case rating scenario.
Source: S&P Global Platts.
21 Socar: Shah-Deniz-2 Adds Little To EBITDA, Large Gap With The Sovereign
Socar is only a minority shareholder in Shah-Deniz-2 value chain % in countries’ 2019 oil & gas production
100%
50%
0% Qatar Saudi Gazprom Socar, gas Rosneft, oil Socar, oil KMG, oil and petroleum, oil Aramco, oil group, gas (including only gas and gas and gas only free gas from AZG)
Production, consolidated entities only Production, proportional share in JVs Other companies
TAP start in late 2020 won’t boost Socar ’s financial metrics: Credit gap with the sovereign (Socar: BB-/Negative, Azerbaijan: BB+/Negative): • High-cost gas, only gradual ramp-up. • Socar is not equal to Azerbaijan’s oil & gas industry. • Socar holds minority stakes only, set to transfer ShahDeniz-2-related • Complex structure, including trading and large international assets. assets to its 49:51% JV with the state SGC in 2023. • Large debt, mostly without state guarantees (IBA example).
Source: S&P Global Ratings, Socar. As of November 2nd 2020 • President Aliev’s recent speech criticizes continuing state funding of oil & gas capex in the COVID environment.
22 Metals & Mining Update: Global View
Simon Redmond Senior Director Commodities EMEA Key Takeaways
– Big miners have not suffered as much from COVID as big oil. – Solid financial frameworks and the rapid Chinese rebound are key supports. – Steel has been hit hard by COVID-19, especially in West Europe and North America. Global Miners: Stable Ratings - 2020 Contrasts 2016
Resilience due to: – Low leverage and prudent financial frameworks. – Strong iron ore prices and cost positions.
Big 5 Miners – Ratings Evolution 2014 - 2020
AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- S&P Price Revision (Downwards) S&P Price Revision (Upwards) BHP Vale Rio Tinto Anglo Glencore 4Q'14 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19 4Q'19 1Q'20 2Q'20 3Q'20
Data as of Oct. 22, 2020. Sources: S&P Global Ratings.
25 Global Miners: Downside Scenario Tested In 2018 And 2019
Expected Adjusted FFO-To-Debt For Existing Rating* And Under Aggregated EBITDA: Base And Stress Cases Our Stress Case Scenario In FY2020 80 100
90 60
80
% 40 70
60 20
bn 50 $ 0 BHP Rio Tinto Vale Glencore Anglo 40
Base Case Stress Case Midcycle Downturn 30 We tested the resilience of financial frameworks: 20 • Prices at Q4 2015 levels. • Similar FX rates. 10 In 2020, iron ore prices have been much stronger. 0 2017 2018 2019e 2020e 2021e Stress Case
*As of July 2019. Source: S&P Global Ratings “The Top Five Global Miners Remain Sensitive To Environmental And Social Risks (June 18, 2019).
26 Metals Prices Strengthen As U.S. Dollar Weakens
Price And Exchange Rate Indices (Jan. 2, 2020 = 100)
140 – Weakening U.S. dollar providing additional price support. 130 – Gold and silver boosted by uncertainty and low interest rates. 120 – Chinese-driven demand-rebound fuels 110 recovery for industrial metals including copper. 100
90
80
70 01/02/20 02/02/20 03/02/20 04/02/20 05/02/20 06/02/20 07/02/20 08/02/20 09/02/2 Trade-weighted index of US$ Copper price Gold price
Data as of Sept. 7, 2020. Refinitiv. Sources: S&P Global Market Intelligence; S&P Global Platts; London Metal Exchange.
27 Gold Rallies To Multiyear Highs On Uncertainty And Inflation Concerns
COVID-19 risks build on a positive trend with lower interest rates Gold above GFC prices and multiples of three-decade levels
2,300 2500
2,100 2000
1,900
1500 1,700 $ per troy oz. 1,500 $ per troy oz. 1000
1,300
500 1,100
0 Gold (COMEX) Historical Price Gold (COMEX) Future Contracts S&P Price Assumptions at Aug-2020
Data as of Aug., 2020. Data as of Sept. 23, 2020. Sources: S&P Global Market Intelligence, London Metal Exchange, Refinitiv. Source: Bloomberg.
28 Copper Prices Supported By Weakening U.S. Dollar
Trade-weighted dollar weakens as U.S. presidential election Significant rebound since March low point approaches 128 8,000 3.6
126 7,000 3.4 124 6,000 3.2 122 5,000 3 120 lb
118 4,000 mt 2.8 $ / $ per 116 3,000 2.6 114 2,000 2.4 112 1,000 2.2 110 2 108 0 9/24/2017 9/24/2018 9/24/2019 9/24/2020
Copper - High Grade (COMEX) Historical Price Copper - High Grade (COMEX) Future Contracts Trade-weighted index of US$ LME Copper Cash Price, RHS S&P Price Assumptions at Aug-2020
Data as of Sept. 14, 2020. Sources: S&P Global Market Intelligence, London Metal Exchange, Refinitiv.
29 Chinese Refined Imports And Production Of White Goods Indicate High Demand
Chinese refined copper imports increased to record levels in June- Production of Chinese white goods have ramped up with eased July lockdown 700 20
18 600 16
500 14
12 400
10 300 Million units Million 8 Refined imports, (000 t) (000imports, Refined 200 6
4 100 2
0 0 Aug-16 Jan-17 Jun-17 Nov-17 Apr-1 8 Sep-18 Feb-19 Jul-19 Dec-19 May-20 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20
Refrigerators Washing Machines Air Conditioners
Data as of Sept. 14, 2020. Sources: S&P Global Market Intelligence, Global Trade Tracker, National Bureau of Statistics.
30 Iron Ore Prices Hit Six-Year High Amid China-Centric Demand Recovery
Chinese iron ore imports, steel output hit record monthly high in Iron ore leads industrial metals price recovery July 140 120 95
130 100 90
120 80 )
) 85 110 mt mt 60
100 Imports ( Imports 80 Production ( Production 40 90 Price Price index (Jan. 2, 2020 100) = 75 20 80
70 0 70 Jan-20 Feb-20 Ma r-20 Apr-2 0 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Jan-19 Apr-1 9 Jul-19 Oct -1 9 Jan-20 Apr-2 0 Jul-20
Iron Ore Copper Nickel Zinc Chinese iron ore imports, mt Chinese steel production, mt
Data as of Sept. 11, 2020. Sources: S&P Global Market Intelligence, S&P Global Platts, London Metal Exchange, Global Trade Tracker, World Steel Association.
31 Brazilian First-Half Supply Squeeze Has Underpinned High Prices Amid A Slump In Ex-China Demand
Australian iron ore export growth makes up for Brazilian supply Ex-China steel production drops 14% in January-July year on year shortfall 80 5
Bra zil* 70 0
60 -5
South Africa 50 -10
40 -15 Production (Mt) Production
Aust ra lia 30 -20 Change YOY (%)
20 -25
Canada 10 -30
0 -35 -10 -8 -6 -4 -2 0 2 4 6 8 Jan-19 Apr-1 9 Jul-19 Oct -1 9 Jan-20 Apr-2 0 Jul-20 January-July change YOY (%) Production Change YoY
Data as of Sept .11, 2020. *Brazil iron ore export data for January-August period. Sources: S&P Global Market Intelligence, Global Trade Tracker, World Steel Association.
32 Steel And Ratings | COVID-19 Impacts And Recovery Assumptions
Domestic demand supports production growth, but margins A story of China and the rest compressed by high iron ore prices in 2020
World Steel Association Regional Overview 2019-2021, steel demand Chinese Steel Margins & Iron Ore 2015-2020 15 2,000 140 10 120 5 1,500 100 0 1,000 -5 80
-10 USD / ton RMB RMB / ton 60 500 -15 40
-20 - 20 -25 EU Other CIS NAFTA Central Africa ME Dev-d. Dev-ing China World (500) - Europe South Asia Asia Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Africa excl. China
2019 2020 2021 Rebar spread (left scale) Iron ore price (right scale)
Source: World Steel Association, “The Pandemic and the Global Steel Industry,” June 30, 2020. Source: S&P Global Platts.
33 Steel And Ratings | Impacts And Recovery Assumptions - EMEA
ArcelorMittal's European Division COVID-19 in 2020 came after a weak 2019 – Financial impact of the demand collapse in 1,400 12% Q2 only partly offset by capacity cuts and furlough schemes in the EU and U.S. 1,200 10% – Longer-term structural challenges remain, 1,000 especially in the EU. 8% Assumed recovery path 800 – Q2 2020 was very bad, but it could have been 6% worse. 600 – Demand trends up through H2 2020 and 4% 400 2021, supported by GDP rebound and recovery for car markets in particular. 200 2% – Clear risks for construction and car sectors and their steel demand in the event of a 0 0% second wave of lockdowns, even if partial. 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1 2018-Q1 2019-Q1 2020-Q1 – Further risks to margins may emerge as EBITDA $ mil EBITDA margin, % supply comes back in H2.
Source: S&P Global Ratings.
34 Metals & Mining Update: Local View
Mikhail Davydov Associate Director Commodities EMEA Key Takeaways
– Russian steel demand to decline by up to 7% in 2020 with a full recovery taking two years. – Russian steelmakers will demonstrate resilient performance thanks to low costs and exports to Asia. – Both capex and dividends will remain high, contributing to weaker metrics and lower rating headroom. Russian Steel Market Hit By Lower Consumption And Weaker Prices, Full Recovery To Take Two Years ― Russian steel consumption will shrink by up to 7% in 2020, as a result of pandemic-driven GDP decline of 4.7%, taking two years to fully recover, which is still better than most developed economies. ― Both Russian and international prices to be on average 10% below 2019 levels this year, gradually recovering over 2021-2022. ― Domestic premiums to return to their historic average. Apparent steel consumption in Russia Steel prices
50 650 ~7% 45 600 40 550 35 500 30 $/ton 450 25 Mn ton Mn 20 400
15 350
10 300 5 Jan-18 Apr-1 8 Jul-18 Oct -1 8 Jan-19 Apr-1 9 Jul-19 Oct -1 9 Jan-20 Apr-2 0 Jul-20 HRC FOB Black Sea HRC Domestic 0 2015 2016 2017 2018 2019 2020 forecast Billet FOB Black Sea Slab FOB Black Sea
Sources: World Steel Association, S&P Global Ratings forecast, S&P Global Platts. As of end-October 2020.
37 Producers Respond With Higher Exports To Weak Domestic Demand
- 1H 2019 - 1H 2020 - Finished product exposure to industry, grey zone
Share of steel exported*, % Construction Rail Products Pipes Automotive – Pipes are among the worst-hit sectors as drilling volumes will be depressed for the next two years due to OPEC+ production cuts, while large pipeline projects are mostly 50 51 finished. NLMK – Residential construction impacted not only by the pandemic but by the high 2019 base. 45 – Infrastructure investment to be supported by Severstal 33 national projects, but acceleration will take time. 29 – Automotive looking relatively well thanks to MMK 11 state contracts. – Rail products are mixed: low demand for rail cars but relatively stable for rails. 30 35 Evraz**
*All exports from Russia only ** Export of construction products only. Sources: PWC, Association of European Business, Institute for Natural Monopolies Research (IPEM), Fund of the Pipe Industry Development, World Steel Association.
38 Higher Exports To Asian Markets To Ensure Stable Volumes During Recovery Period ― Chinese net exports are the lowest in many years on strong domestic demand and high prices. ― Asian markets, least affected by the pandemic, to remain open for steel imports. ― Low-cost Russian producers sell steel to Asia at profit. ― Lower prices and consumption in China are a major risk. China steel net exports Russian steel producers’ sales
12,000 70
60 10,000
50 8,000 40
tons 6,000 +0.1% Mn tons Mn Th 30
4,000 20
2,000 10
0 0 2015 2016 2017 2018 2019 2020 F 2019 1H 2020 1H
NLMK Evraz Severstal MMK Metalloinvest Other
Sources: World Steel Association, Companies’ trading updates, Bloomberg. Data as of October 2020.
39 Exports Will Ensure Resilient EBITDA, But Capex And Dividends To Remain High ― Stable volumes and improving prices will ensure EBITDA recovery. ― Capex will peak in the next few years as companies invest in efficiency and ecology. ― Dividends will adjust to performance but will remain high compared with historical levels. ― Mineral extraction tax (MET) change could impact some of the longer-term investment decisions. EBITDA Capex Dividends and Share Repurchases
18 6 8
16 7 5 14 6 12 4 5 10 $ $ $ 3 4 Bn 8 Bn Bn 3 6 2 2 4 1 2 1
0 0 0 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f
NLMK Severstal MMK Evraz Metalloinvest NLMK Severstal MMK Evraz Metalloinvest NLMK Severstal MMK Evraz Metalloinvest
Source: S&P Global Ratings, as of end-October 2020.
40 Leading To Debt Accumulation And Lower Rating Headroom
― MMK will maintain minimal leverage and highest rating headroom. ― NLMK and Severstal will approach rating threshold, but flexibility on capex and dividends will remain high. ― Evraz is the only one on negative outlook due to its coking coal exposure.
Discretionary Cash Flow Funds From Operations / Debt
4,000 200
180 MMK above 200% 3,000 160
140 2,000 120 1,000 % 100
$ mn 80 0 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f 60
-1,000 40 20
-2,000 0 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f -3,000 NLMK Severstal Evraz NLMK Severstal MMK Evraz Metalloinvest Metalloinvest 60% threshold 45% threshold
Source: S&P Global Ratings , as of end October 2020.
41 Carbon Tax – Are Russian Producers Ready?
GHG, CO2 tonnes (Scope 1+2) / tonne of crude steel produced 2.5
2.0
1.5
1.0
0.5
0.0 NLMK Evraz Steel Severstal ArcelorMittal Thyssenkrupp SSAB* Tata steel** China Steel Corp segment 2017 2018 2019
GHG – greenhouse gas emissions. * Includes CO2 only **Tata Steel Jamshedrup. Source: Company reports.
42 Performance Is Resilient, But Other Matters Constrain Ratings On Ukrainian Steel And Pellet Producers – Ferrexpo to demonstrate solid performance on supportive iron ore prices, but governance issues constrain the rating, with negative outlook on a ‘B-’ rating. – Metinvest’s better-than-expected first-half 2020 results helped it to avoid covenant breach, but it is yet to deliver deleveraging from the 2019 trough. Ferrexpo Metinvest
700 160 2500 60
600 140 50 2000 120 500 40 100 1500 400
80 % 30 % $ mn $ min 300 1000 60 20 200 40 500 10 100 20
0 0 0 0 2014 2015 2016 2017 2018 2019 2020e 2021f 2014 2015 2016 2017 2018 2019 2020e 2021f
EBITDA Capex Dividends FFO/Debt (RHS) EBITDA Capex Dividends FFO/Debt (RHS)
Source: S&P Global ratings , as of end-October 2020.
43 Kazakhstan’s ERG Remains On Negative Outlook, Sensitive To Industry Challenges
ERG credit metrics
2500 16 – Global demand and prices for ERG’s key products (FeCr, copper, aluminum, coal, and 14 cobalt) will remain sensitive to post- 2000 12 pandemic economic recovery. – Iron ore is the only resilient commodity in 10 1500 portfolio with 22% of revenues. – Liquidity remains a longer-term concern,
8 % $ mn although immediate pressures have been 1000 6 resolved through negotiations with lenders. – Leverage will remain very high for a 4 500 commodity producer but will start 2 approaching 12% threshold.
0 0 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f EBITDA Capex Dividends FFO/Debt (RHS) 12% threshold
Source: S&P Global Ratings , as of end-October 2020.
44 Gold Producers Benefit From High Prices And Increased Production, But Use Of Funds Remains Uncertain
– All gold producers will deliver strong results both on EBITDA and credit metrics. – Future metrics will depend on how much of the proceeds the companies will use to reduce and maintain low debt. – Higher taxes for the industry are a risk. Polyus Petropavlovsk and Geopromining
4,000 160 350 50
45 3,500 140 300 40 3,000 120 250 35
2,500 100 30 200 % 2,000 80 % 25 $ mn $ mn 150 20 1,500 60 100 15 1,000 40 10 50 500 20 5
0 0 0 0 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f
EBITDA - GPM EBITDA - Petropavlovsk EBITDA Capex Dividends FFO/Debt (RHS) FFO/D - GPM (RHS) FFO/D - Petropavlovsk (RHS)
Source: S&P Global Ratings , as of end-October 2020.
45 Norilsk Nickel Faces Rating Pressures From Higher Taxes And Environmental Fine
Norilsk Nickel credit metrics
9,000 2.5 – Environmental fine of almost $2 billion is a 8,000 key unknown. 2.0 – Higher MET could add another $350 million 7,000 to annual cost. 6,000 – The company will need to decide between 1.5 capex, dividends, and leverage – which will 5,000 be key to the rating. (x) $ mn 4,000 1.0 – Demand for key products, nickel and 3,000 palladium, will remain volatile.
2,000 0.5 1,000
0 0.0 2014 2015 2016 2017 2018 2019 2020e 2021f 2022f EBITDA Capex Dividends Debt/EBITDA 2x threshold
Source: S&P Global Ratings , as of end-October 2020.
46 Alrosa To Recover In 2021 As Diamond Market Severely Hit By The Pandemic – Demand for diamonds should recover in 2021 after pandemic-driven collapse in 2020. – Alrosa will exceed its leverage target in 2020 but should be getting back on track beginning 2021. – Government support through diamond purchases could be provided if sales don’t recover sufficiently. Alrosa production and sales Alrosa credit metrics
45 250 160
40 140 200 35 120 30 100 150 25
80 % $ mn
Mn tons Mn 20 100 60 15 40 10 50
5 20
0 0 - 2014 2015 2016 2017 2018 2019 2020f 2021f 2022f 2014 2015 2016 2017 2018 2019 2020f 2021f 2022f
Production Sales EBITDA Adjusted Debt FFO/Debt % (RHS) FFO 60% threshold
Source: S&P Global ratings, as of end-October 2020.
47 Analytical Contacts
Simon Redmond Alexander Griaznov
Senior Director Director
[email protected] [email protected]
Elena Anankina Mikhail Davydov
Senior Director Associate Director
[email protected] [email protected]
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