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Good day and welcome to the EVRAZ Q1 2021 Trading Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Irina Bakhturina. Please go ahead.
Good afternoon, ladies and gentlemen. This is Irina. I'm Head of Investor Relations for EVRAZ. I would like to welcome you to our Q1 Trade Update Conference Call.Before we begin, please allow me to introduce our speakers for today. Nikolay Ivanov, EVRAZ CFO, will present the main highlights and provide an update on the Steel segment; Evgeny Terekhov, Commercial Director of the Coal Division, will provide an update on our Coal business; and then Olesya Afanasyeva, CFO of EVRAZ North America, will provide an update on our business in North America. After the presentation, as usual, we will have a Q&A session.With this, I would like to ask Nikolay to begin. Nikolay, please.
[Technical Difficulty]
Okay. Then I think we should wait for him. Ladies and gentlemen, we have a small technical difficulty, and we're waiting for Nikolay to reconnect. Please stay with us. Thank you.
[Operator Instructions] We now have Nikolay on the line.
Yes. Can you hear me?
Yes, we can.
Okay. I'm -- it always happens at the wrong time. I'm very, very sorry. And good morning and good afternoon to all of you.So let me start. We had a rather mixed first quarter this time. Our consolidated crude steel production declined by almost 2% quarter-on-quarter, mainly due to unscheduled downtime of the sintering machine at EVRAZ ZSMK. Overall, sales of our steel products declined by almost 10% quarter-on-quarter, driven primarily by lower sales of semifinished products following reduced steel availability. It was also impacted by a seasonal decline in sales of construction products and local decrease in demand for rails in Russia.Our raw coking coal production climbed by almost 8% quarter-on-quarter at Uskovskaya mine, finished moving to a new longwall and the Erunakovskaya mine dealt with the impact on its production from high gas levels. Razrez Raspadsky increased its volumes quarter-on-quarter after resuming production in the third quarter last year.Coking coal concentrate production increased by almost [ 7% ] quarter-on-quarter, following increase in coal mining volumes. Our external sales of iron ore products declined by 30% quarter-on-quarter, following the decline in concentrate production at EVRAZ KGOK, which went down due to lower ferrum content in mined ore and severe weather conditions.In addition, we have increased shipments of iron ore products to EVRAZ NTMK in order to restore reserves. Sales of vanadium products declined by almost 20% quarter-on-quarter, mostly due to high base over the fourth quarter last year when sales was supported by destocking. And we were also accelerating oxide sales by shifting to markets with a shorter lead time.Moving to the Slide #6, please. A few words about the market. Restrictions on Australian coal imports, which were imposed by China led to the falling prices on FOB Australia basis. However, Australian coal supply remains high, thanks to take-or-pay agreements with ports and railways. Talking about the second quarter, we believe that the lower price environment most likely will remain.Global iron ore prices were at the high levels in the first quarter, and we believe that a strong sentiment may continue as China's construction season will keep demand elevated. Prices for billet and the slab demonstrated very positive dynamics. Market is getting used to the increased price levels, and we believe could intensify purchases following the beginning of the construction season. Environmental restrictions on steel production, which were introduced by China in the first quarter are likely to support prices for final products, which could remain on elevated levels.Let's move to Slide 7. A few words about our cash cost dynamics. Our cash cost of slabs increased quarter-on-quarter mainly due to higher raw material prices. Iron ore product cash cost increased quarter-on-quarter due to lower production volumes and ForEx effect. And finally, our coking coal cash cost increased quarter-on-quarter mainly due to a change in the product mix.Now let's turn to Slide 9, where you can see the overview of first quarter production results of our Steel segment. Our production volumes of iron ore products decreased by almost 7% quarter-on-quarter due to unscheduled equipment downtime at EVRAZ ZSMK as well as due to reduced production at EVRAZ KGOK amid lower ferrum content in mined ore and severe weather conditions. Pig iron production decreased by almost 6% quarter-on-quarter, mainly due to lower iron ore products output at EVRAZ ZSMK. Another factor was capital repairs at EVRAZ NTMK’s blast furnace #6 in February. Our crude steel output declined by 4% quarter-on-quarter, which was in line with lower pig iron production volumes.Turning your attention to the next Slide 10, just a few comments on Steel segment sales. Total sales of iron ore products declined by 30% quarter-on-quarter, following a decline of ferrum content in the mined ore and poor weather conditions at EVRAZ KGOK. In addition, we have increased shipments of iron ore products to EVRAZ NTMK in order to restore reserves.Sales of semifinished products decreased by almost 18% quarter-on-quarter due to reduced steel availability with lower pig iron production. Sales of construction products declined by 6% and sales of railway products reduced by almost 13% quarter-on-quarter, following a seasonally lower demand and price volatility as well as due to local decline in demand for rail from Russian railroads accompanied with shift of execution deadlines for some other tenders. Now I would like to say a few words about our vanadium business. Let's move to Slide #11. The average ferrovanadium index increased by almost $31 per kilogram in the first quarter, supported by strong demand recovery in Europe and North America. Our gross slag production declined quarter-on-quarter following lower pig iron availability. Sales of our vanadium products declined by almost 20% quarter-on-quarter, mostly due high base over the fourth quarter last year when sales was supported by destocking. And we were also accelerating oxide sales by shifting to markets with a shorter lead time.Now we are ready to move to the Coal segment, which will be presented by Evgeny Terekhov.
Thank you, Nikolay. Good morning and good afternoon to all of you. In my opinion, this time, we have the self-explanatory report and figures because it was a very normal quarter when raw coal output and shipments were as usual, as I say, in -- I'll say normal. We slightly increased raw coking coal production volumes due to some changes and just schedules of longwall moving, and we managed to deliver everything we want to our clients.In terms of sales, the same story was very usual and very normal quarter when we managed to deliver everything to the port to our EVRAZ steel mills and so nothing to add to these figures and maybe you can ask some questions later. But yes, as I said, very self-explanatory report. Thank you.And I want to give the floor to the next speaker, Olesya Afanasyeva.
Thank you, Evgeny. Good morning and good afternoon, everyone. Let's turn to Slide 16 of the presentation for the update on the North American segment. In Q1 of 2021, our crude steel production increased 15.4% compared to the fourth quarter of 2020. This increase was primarily driven by a quick recovery of demand for slag products from the last year's market downturn caused by the COVID-19 pandemic. This market environment drove up the output of our steelmaking operations at EVRAZ Regina in Canada.In addition, we saw an increase in the steel output of EVRAZ Pueblo, our steelmaking facility in the United States, which was also attributed to improved market conditions and the resumption of operations after planned maintenance outage in the first quarter -- in the fourth quarter of last year.In this environment, sales of flat-rolled products surged by 48.8% quarter-over-quarter as market conditions strengthened in Q1. Similarly, sales of construction products increased 12.3% in the first quarter of the year, driven by improved market environment. Given our seamless OCTG operations we made idle in the first quarter of the year, we were able to utilize the additional available steel capacity to fill the needs of our construction products customers. Railway product sales have also grown by 8.2% compared to the fourth quarter of 2020, supported by improving market demand from our major railway customers.The only product group, which demonstrated a decrease in sales volumes quarter-over-quarter was our tubular products. The decrease in volumes was primarily driven by the completion of 2020 orders, which were finalized in the beginning of this year. However, in the first quarter of 2021, we have started seeing signs of improvement in the small diameter pipe and OCTG market, which will allow us to restart some of our idle OCTG capacity in the second quarter of this year.This concludes my remarks for EVRAZ North America, and I would like to turn it over back to Nikolay. Thank you.
Yes. Thank you, Olesya. So now I would like to talk about our operational outlook for the second quarter. So let's turn to Slide 18. For Steel segment, we expect that pig iron production volumes will slightly increase, following the completion of equipment downtime, which took place in the first quarter at EVRAZ ZSMK. Our iron ore pellets and sinter production are expected to remain flat.For Coal segment, we expect that raw coal production will decrease quarter-on-quarter as we will have longwall moves at the Alardinskaya and Raspadskaya mines. This will be partly offset by favorable mining and geological conditions at the Esaulskaya mine as well as a production increase at the Razrez Raspadsky. For Steel North America segment, we expect that steel production will remain flat quarter-on-quarter as we have scheduled a maintenance outage at EVRAZ Regina. As for the market, we believe that sentiment will remain strong and most likely improve in the product segment which we serve. For tubular products, the recovered market demand for OCTG will allow us to restart some of the OCTG facilities that have been idled in 2020.With that, that's the end of our presentation. And now I think we are ready to switch to your questions. Thank you.
[Operator Instructions] We have a question from Dan Shaw from Morgan Stanley.
Just a couple of small questions. Can you give us any detail on what you're seeing in terms of inflation? Of course, raw material costs in steel production are rising, but outside of this, what impacts are you seeing?And then sort of following on from that, some of your peers, not necessarily in steel, but in other commodities are sort of flagging construction costs, inflation and as a result of the CapEx budgets potentially moving up a little bit. So the question is, do you confirm your CapEx budget for this year? And do you see any upside risks at this stage?
Okay. Thank you. Let me take this one. So speaking about the cost inflation other than raw materials, we have expected inflation in the range of approximately [ 3.5% to 4% ] overall in Russia with the inflation for railroad tariffs, electricity and natural gas, also being somewhere in the same range. Currently, we do not see that our forecast is changing. So we believe we will be, I think, approximately in this range for the 2021.Answering your second question, yes, we also see some inflation in terms of the capital construction activities. But I don't think it will significantly influence the overall CapEx number for the current year. Our expectations for the CapEx remain the same, approximately in the range of approximately $1 billion for 2021.
Our next question comes from Nikanor Khalin, VTB Capital.
Actually, one question from us, please. Recently, we've seen rising spreads between flat and long steels in the Russian domestic market. Could you please briefly elaborate on the reasons that -- why do we see it, in your opinion? And also whether we should expect contraction of the spreads in the near term, would flat prices remain flat, of course?
Irina, could you take this one?
I think I will have to answer that after the call. I will take this one, and I will get back to Nikanor.
There are no further questions in the queue. I would like to turn the call back over to today's speakers.
Yes, we see that there are no questions. No further questions on the queue. So we would like to thank everyone for joining us today and have a great weekend ahead. Thanks a lot, and goodbye.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.