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Weakening demand hits top Russian steelmaker NLMK's Q3'19 profit

Furnace renovations hurt Russian steelmaker PJSC Novolipetsk Steel's profit for the third quarter as demand and prices weakened amid a global economic slowdown, the company, known as NLMK, said Oct. 24.

Profit for the period plunged 47% year over year to US$343 million as revenue fell 18% to US$2.58 billion while cost of sales declined to US$1.75 billion from US$1.93 billion. EBITDA was down 36% year over year to US$654 million.

Net debt more than doubled year over year to US$1.74 billion, driven by cash outflows toward dividend payments and higher capital expenditure, which grew to US$316 million from US$183 million.

Sales fell 9% by volume year over year due to blast furnace repairs at NLMK's Lipetsk operations.

Overhauling the blast furnace and basic oxygen furnace operations reduced steel product sales by 6% compared to the previous quarter, according to CFO Shamil Kurmashov. However, the work should enable an additional 1 million tonnes of steel to be produced by 2021.

In North America, which accounted for 17% of revenue in the quarter, U.S. steel consumption fell 2% year over year as demand from the machine-building, automobile and energy sectors ebbed. European demand was flat year over year but fell 0.5% from the previous quarter due to weak automobile and machine-building consumption.

Market prices for flat products dropped between 26% and 35% year over year in the U.S. and 16% to 21% in Europe.

In Russia, steel product prices rose 2% year over year in dollar terms due to seasonal demand and limited supply. The ruble also weakened over the past year.

NLMK's fourth-quarter financials will be materially lower than the third quarter, according to BCS Global Markets. An expected output rise of 5% will not be enough to offset an estimated fall of 20% in average realized prices, the Russian stockbroker said in an Oct. 24 note. BCS has a SELL rating on NLMK with a price target of US$15 per global depositary receipt.

The company's board recommended a dividend of 3.22 rubles per share for the period, equivalent to 50 U.S. cents per global depositary receipt, according to BCS. The previous year's third-quarter dividend amounted to 6.04 rubles per share following a jump in net profit. However, NLMK cut its second-quarter 2019 dividend to 3.68 rubles per share after profit tumbled 29% year over year.

Kurmashov was appointed to the company's management board Oct. 24, NLMK said in a separate release.

As of Oct. 23, US$1 was equivalent to 63.89 Russian rubles.