Developments in metals and mining
Companies in the metals and mining sector in CEE, which is dominated by Russia but with major production in Ukraine, Kazakhstan and elsewhere, are global players. Consequently, they are affected by trends at a global level. The dominant issue in the post-2008 period has been a significant decrease in prices for many hard commodities and over-capacity in metals and mining.
By Julia Chekrygina, Head of Metals, Structured Metals and Energy Finance at ING
While most CEE companies restored their investment programmes cautiously following the 2008 and 2009 financial crisis, their plans were nevertheless predicated on a continuing commodity boom. In particular, there was an assumption that growth in China, which had fuelled the commodity boom, would continue and it would seek an ever-larger quantity of metals and mining products for its growing manufacturing sector.
In reality, China’s growth has slowed and it is now trying to shift to a consumption- based economy – there is no immediate prospect of metals and mining demand meeting previous expectations. Falling prices and lower than expected demand mean that companies have been forced to reconsider their capital expenditure given over-production. Planned projects are being put on hold or scaled down, inefficient capacity is being closed and non-core assets are being sold.
In the pre-2008 period (and also in 2010 and 2011 when there was a brief recovery), there was significant M&A activity in the metals and mining sector: many companies assumed that prices would continue to rise and achieving scale and raising volumes would be critical to future success. Falling prices and demand mean companies are now concentrating on low-cost producing assets and divesting assets rather than acquiring new ones (while also focusing on controlling expenses and decreasing their working capital requirements). For example, Mechel, the leading Russian coking coal producer, bought assets in the US, Ukraine and Kazakhstan during the M&A boom. Now, struggling with its pre-2008 debt burden, the company has sold off Romanian plants and some assets in Russia and Kazakhstan.
Crucially, the buyers of these assets are not global metals and mining groups. In Turkey, for example, Mechel sold several ferroalloys assets to Turkish diversified industrial group Yildirim. Similarly, assets in Romania have been sold to domestic buyers.
Financing conditions for high quality metals and mining companies have improved markedly as the eurozone crisis, which severely affected some European banks’ ability to serve the sector, has subsided. Actions by the Federal Reserve and European Central Bank have provided banks with plentiful liquidity. Moreover, contrary to some expectations banks’ preparation for Basel III, which will increase the amount of capital they must hold for certain risk assets, has not decreased banks’ appetite for good quality metals and mining assets.
Pricing has fallen for high quality metals and mining companies and terms have become more attractive to borrowers. Indeed, for the first time leading companies in the sector have been able to access unsecured funding (previously competition was solely on price). For example, in September Magnitogorsk Iron and Steel Works, which is non-investment grade, was able to borrow $500 million over four-years on an unsecured basis from a group of fi ve banks, including ING. Similarly, Russian nickel and palladium giant Norilsk Nickel was able to borrow $2.35 billion over five-years on an unsecured basis from 16 banks, including ING.
While the best pricing and terms are only available to the strongest companies, buoyant liquidity conditions have allowed companies facing challenges to restructure their debt. For example, ING was a coordinator (together with Unicredit) for a $500 million three and five-year loan that refinanced Ukrainian steelmaker Donetsksteel – Iron and Steel Works’ debt following a restructuring that began in 2008. The success of the deal despite the difficult backdrop – including the rating downgrade of Ukraine – highlights the strength of bank liquidity.
Currently, the only restriction on bank lending to high quality metals and mining companies is banks’ country limits, which – in some instances – have been filled by huge deals such as $22.5 billion raised by Rosneft through several syndicated facilities to finance its TNK-BP acquisition.
During the first half of 2013, metals and mining companies also enjoyed strong conditions in the bond market. ING acted as joint lead manager and bookrunner for a $1 billion seven-year eurobond offering from Russia’s large steelmaker Evraz in April. However, conditions in the bond market have become weaker since the Federal Reserve indicated that it would begin to taper its asset purchases and supply has dried up. Consequently, metals and mining companies have sought funds from their relationship banks instead.
ING’s metals and mining strength
ING has a well-deserved reputation in the metals and mining sector in CEE having supported many of the leading companies from the region since their inception in the early 1990s: few banks can claim 20 years of experience in structured metals financing in CEE. As a result, ING has a deep understanding of the operating models of the region’s companies and their needs.
Moreover, throughout its long history of activity in CEE, ING has built up knowledge of the sector and created capabilities that rival any bank in the world. Using its network of local offices, ING offers comprehensive relationship coverage on the ground. This is combined with teams offering global capabilities in equity capital markets, debt capital markets and mergers and acquisitions advisory, which have an excellent track record in serving the metals and mining sector.
ING’s strength across lending, structured finance and corporate finance in metals and mining in CEE fits perfectly with the bank’s approach to working with clients on a relationship basis – taking a holistic view of their needs – rather than focusing on individual product offerings. ING’s event finance team, based in Amsterdam, coordinates all product activity so clients get the right solution for their specific requirements. This approach also better reflects the changing needs of the sector, following widespread restructurings in recent years.
ING’s long track record serving companies in the metals and mining sector in CEE is different to its competitors because the bank stands by its clients throughout the cycle – regardless of commodity price volatility or liquidity problems in the banking sector. ING provides not just products and services but also guidance and advice on balance sheet structuring and hedging that are only possible as a result of a deep and long-term relationship.