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. Last Updated: 07/27/2016

Steelmakers Pinched by Prices

Russia's steel companies will take a hit this year from rising costs and falling steel prices but are still better positioned than many foreign competitors, executives and analysts said Tuesday.

"The second quarter will be tough," Vladimir Iorich, general director of Mechel Steel Group said at a conference organized by the Renaissance Capital brokerage.

Iorich's comments come as prices for steel decline, and while the cost of the industry's vital raw materials -- coking coal and iron ore -- are spiralling.

European benchmark steel prices have fallen by about one-fifth this year, while global coal prices have doubled. In Russia, the cost of iron ore concentrate is up by around 50 percent in the first quarter, according to the Troika Dialog brokerage.

The increase in raw material prices is not likely to abate any time soon, said Alexander Abramov, owner of Russia's largest steel producer, Evrazholding. Steel prices will rebound as early as this fall, he added.

Among the most vulnerable in the sector are Novolipetsk and Magnitogorsk Iron & Steel Works, analysts say, because they have to buy in the bulk of their raw materials.

"Magnitogorsk is the ... example of how bad things can get," said Yevgeny Nikolayev, metals analyst at Troika. It could see its core profit margin reduced to 22 percent this year from 35 percent last year, Nikolayev said.

Neither Magnitogorsk nor Novolipetsk has its own coal supplies, and Magnitogorsk is self-sufficient for 10 percent of its iron ore needs, according to Troika.

Despite higher costs, Russian steel companies remain competitive, said Rob Edwards, metals analyst at Renaissance Capital.

"Their balance sheets are in great shape," he said. "They'll survive anything."

Evraz, Mechel and Severstal are in a stronger position. They have access to 100 percent of their own coal and from 70 to 80 percent of iron ore, either from their own reserves or those owned by their shareholders, according to Troika.

Earlier this week, Evraz won a Czech government auction for 99 percent of Viktovice Steel with a winning bid of $286 million.