Riding The Wave Of Turkish & Russian Steel Demand


BMI View: We have previously highlighted Turkey and Russia as key centres of steel demand growth, contrasting with the bearish outlook for the rest of Europe. Here we take a closer look for value on the two countries' steel sectors, noting companies which are well placed to benefit from rising demand. Turkish steel companies look the most promising, but bullish sentiment is a bit overstretched at present.

We continue to see massive divergence in the outlook for Western and Eastern Europe's steel sector over the coming years. Germany, France and Italy will see subdued growth in steel demand due to negligible GDP growth rates and a lack of construction activity, whilst production will remain muted on the back of low steel prices. The situation is almost diametrically opposed i n Russia and Turkey as the countries embark on significant infrastructure and construction development. Regarding production, both countries have major projects on the horizon, despite the availability of cheap imports of Chinese steel , with domestic producers best placed to benefit.

Technicals Support Bullish Outlook
Turkey - Eregli (LHS) & Kardemir (TRY)

We expect Turkey to be the key growth driver of steel demand in Europe over the period to 2017. This bullish outlook is based on our expectation that the country's construction sector will see 6.5% y-o-y real growth over the next five years, underpinned by a healthy project pipeline. These projects include; the re-launched tender for the North Marmara Highway project, the announcement of a third Istanbul airport, the completion of the Ankara to Istanbul high speed railway, and increased investment in the country's gas sector. A major urban redevelopment plan across the country - which plans to offset the demolition of estimated 6.5mn buildings - will bolster the residential and non-residential sector. Overall we expect Turkey to become Europe's second largest steel consumer, at 42mntpa in 2017, marking average annual growth of 8.3% .

Looking East For Growth
Europe - Incremental Steel Production (LHS) & Consumption

Russia will also see strong growth in steel demand, again due to the country's construction-heavy growth. Steel consumption will be boosted by the country being awarded a number of large-scale events to host in the country, which has brought with it substantial investment into construction. These events have included the announcement of Russia hosting: the 2018 FIFA World Cup, where 16 existing sports venues will be renovated and 13 new venues will be built, estimated to require more than 3mnt of steel; the 2014 Sochi Winter Olympic Games, which will see the construction of 15 modern sports venues; and the 2013 Summer Universiade Student Games, with 36 new sporting venues are to be built.

Steel Demand To Reflect Macro Picture
Europe - Real GDP Growth % y-o-y

Domestic Producers To Benefit

Given our bullish outlook for steel demand in the country, we highlight Turkish steel producers as relatively insulated from weak prices and the flood of Chinese exports. In addition, Turkey is a negligible exporter of steel and thus is relatively unaffected by weak demand in Europe. S teel's relatively low value to volume ratio reduces the attractiveness of long distance trade, thus making domestic producers more appealing. We highlight three domestic steel producers , Eregli , Kardemir and Borusan , which could bene fit from rising domestic demand . All three companies have sound profit margins despite low steel prices. In addition, their price to earnings ( P/E ) ratios are broadly in line with their historical averages. On a technical level, Kardemir is in a clear uptrend but the strength of recent gains leaves us wary of initiating a bullish view just yet . Meanwhile , the technical picture s for Eregli and Borusan are neutral. Given that , our C ountry R isk team believes sentiment towards Turk ish equities is overdone at present, we prefer to wait for a pullback before placing a bullish position in our macro-industry strategy .

Russian steel companies are far larger than their Turkish counterparts and thus equity prices are likely to be less volatile. However, we see few catalyst s for widespread share price gains in the coming months as valuation are slightly above historical averages and we have a bearish outlook for steel prices. As a results, we see more value in Turkish steel producers than their Russian counterparts.

Russia & Turkey - Key Steel Producers
Source: BMI, Bloomberg. Note: All data refers to latest financial year
Company Country Market Cap (USDmn) Employees Revenue (USDmn) Net Income (USDmn) Profit Margin (%) PE Ratio
Eregli Demir Turkey 3,979 13,045 5,317 236 4.4 19.5
TMK Russia 2,496 46,273 6,688 277 4.1 8.3
VSMPO-Avisma Russia 2,094 20,825 978 26 2.7 79.3
Kardemir Kara Turkey 921 3,984 937 108 11.5 8.1
Korshunovsky Russia 448 3,747 436 173 39.7 4.4
Borusan Yatirim Turkey 224 16 14 19 139.3 11.9
This article is tagged to:
Sector: Metals
Geography: Turkey, Turkey