Russia's TMK sees higher rouble borrowing costs as sanctions bite

By Reuters

Oct 28, 2014 10:40 PM EDT

Russia's largest steel pipe maker TMK (TRMK.MM) is considering an initial public offering for its U.S. unit to help offset an expected 1-2 percentage point rise in rouble borrowing costs over the next few years as Western sanctions bite.

Russia's economy has come under intense pressure this year because of sanctions over its intervention in Ukraine. Its central bank has had to hike rates three times to support the rouble, while its banking system has been starved of dollar funding.

"We expect the cost of financing will increase for us ... in the next two to three years, not dramatically, by about 100-200 basis points, but this could be considered an impact of sanctions," TMK chairman Dmitry Pumpyanskiy told Reuters on the sidelines of a company presentation in London.

Russia's economy is set to stagnate in the next two years, according to World Bank forecasts, as the Ukraine crisis rumbles on, keeping relations between Russia and the West at their lowest point since the cold war.

Pumpyanskiy said the current economic situation has prompted TMK to consider an IPO of TMK IPSCO, its U.S. unit. He also affirmed TMK's plan to decrease its net debt to earnings(EBITDA) ratio to 2.5 by end 2016-beginning 2017 from a ratio of 3.6 to 3.8 currently.


TMK sells about 4.5 million tonnes of steel pipe annually mostly to the oil and gas industry, and is in certain respects benefiting from Russia's frosty ties with the West as work on new pipelines to Asia is fast-tracked.

"International producers of high value-added products for oil and gas exploration and extraction have stopped supplying Russia due to sanctions and fortunately we have additional orders," said Pumpyanskiy.

Following Russia's annexation of Ukraine's Crimea in March, Moscow embarked on a strategic shift towards Asia, signing trade and business agreements, including a 30-year gas supply deal with China, estimated to be worth about $400 billion.

Infrastructure spending on the project, known as the Power of Siberia (PoS), is expected to be over 770 billion rubles ($20 billion).

"PoS will need about 2.5 million tonnes of pipe over 2014-16 and we think we could supply about 20-25 percent of that. The dollar value of that would be about 1 billion roughly," said Pumpyanskiy.

TMK posted a net profit of $60 million in the second quarter from a first quarter $16 million loss thanks to a recovery in the rouble. It sees stronger second half results thanks to the PoS project and to strong steel demand in the U.S. from shale gas producers. [ID:nL5N0QW12U]

Its main client for the PoS project is Russian gas giant Gazprom (GAZP.MM). However, TMK, whose exposure to the oil and gas industry is about 75 percent, is also a key supplier to Russian pipeline monopoly Transneft (TRNF_p.MM).

"We expect Tansneft will need about 500,000 tonnes per year of steel pipe, for the next five to six years. We supply about 25 percent of their demand and our target is to keep our market share in Transneft," said Pumpyanskiy.

TMK competes globally with the likes of Tenaris SA and Vallourec (VLLP.PA). In Russia, they compete with United Metallurgical Company (OMK) METKSV.UL, Severstal (CHMF.MM) and ChelPipe.

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