Ferrexpo makes progress of sorts as war rages

On the release of Ferrexpo’s (FXPO) half-year figures, the group’s executive chairman, Lucio Genovese, said that “with the war approaching the middle of its second year, Ukraine continues to demonstrate an incredible resilience”. The same could be said for the iron ore pellet manufacturer on the production front. Although pellet production was down by 59 per cent year on year to 1.967mn tonnes, it was up by 57 per cent on the last six months of 2022. Those contrasting fortunes were repeated across metrics linked to sales volumes and operating net cash flow.

Iron ore prices contracted by 5 per cent during the period under review, while the outlook for the third quarter deteriorated due to increased supply from Australia and Brazil. Prices were also held in check due to tightened monetary policy, which has dampened demand for steel products, particularly in China. Management notes that “a sharp increase in Chinese demand was anticipated, however, this has failed to emerge”. Traditional assumptions linked to inventory levels may have to be recalibrated because “new patterns in Chinese demand have been observed, with steelmakers transitioning to a low-inventory operating model to manage working capital”. Ferrexpo is now operating two out of its four pelletiser lines, but end-market developments suggest that industry players will need to take a nimbler approach on production levels.

No one would have been overly surprised by the dire financial comparisons. And while operational performance has improved over recent months, the Ukraine-focused group is still operating under wholly abnormal trading conditions. ArcelorMittal, the world's second-largest steelmaker, recently lowered its steel shipments forecast, adding to uncertainties within the sector. For now, however, any deliberations on Ferrexpo’s embed value are completely overshadowed by events in Ukraine. Hold.

Last IC View: Hold, 126p, 15 Mar 2023