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Norvik Research 06.10.2016

06/10/2016 14:38

Global developments

The dollar continues to appreciate, supported by stronger market perception of a US policy rate increase later this year. The dollar index gained 0.2% today and is up 0.9% so far this month. Implied probability of a rate hike rose to 23% for November and to 62% for December, from 17% and 53% a week ago, respectively. Euro Stoxx 600 is 0.1% lower. S&P rose 0.4% yesterday, S&P futures are marginally lower today. US 10y yields are flat at 1.70%.

A weekly drop in US crude inventories was below projections, sending oil prices slightly lower. The EIA report show oil inventories down 3.0 mn bbl in the previous week against the API’s estimate for a 7.6 mn bbl contraction. Brent prices are down 0.1% today at $51.9/bbl.

Russia and CIS area developments and market colour

Russia’s inflation was steady in the week to 3 October at 0.1% WoW. On the year-on-year basis, inflation is estimated at 6.4%, on par with 30 September.

The rouble is marginally weaker at 62.4 against the dollar. OFZ yields rose a further 2-3 bps today after widening 5-11 bps yesterday. Russia and Kazakhstan sovereign Eurobond yields are flat and 5-6 bps wider today after widening 7 and 3-5 bps yesterday, Ukraine yields are 2-5 wider after widening 5-11 bps yesterday, Armenia-25 and Belarus-18 are 2-3 bps tighter.

Corporate news

Uralkali reduced potash production further in Q3 2016. Output totaled 2.8 mn t, down 6.7% YoY, extending the slide in production for the 7th consecutive quarter. In the first 9 months of 2016 production declined by 9.2% YoY to 7.9 mn t. The weak production results reflect sluggish demand in global fertilizer markets, high inventories and low agricultural crops prices. At the current level of production, the company will need to produce 2.9 mn t of potash in Q4 to reach the lower bound of its 10.8-11.3 mn t production target set for 2016 which now looks unlikely given the need to sell inventories accumulated in H1 2016.

Uralkali was in the news this morning, after President Putin instructed the Prosecutor General’s office to verify compliance of Uralkali’s mines with safety regulations, by 1 December. This somewhat belated instruction comes nearly two years after the latest accident (at the Solikamsk-2 mine) in November 2014.

Eurochem has placed a 3.5-year $500 mn Eurobond. Yield guidance was cut from 4.25% initially to 3.80%, thanks to strong demand (in excess of $1.5bn). The size of the new issue will not cover the outstanding $750 mn principal of2017 maturity. In our view, the yield on the new bonds (rated BB- by S&P) is not attractive given that a substantially stronger credit Norilsk Nickel (BBB-/Ba1) is currently trading at 3.5% YTM for its October 2020 maturity.

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