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Stress test for Severstal: demand down 14%, RUB 112 bn of capex and no buyback

In the "Shareholders. Business" podcast by T-Investments on 11 July 2026, Irina Butenko, head of the treasury department, and Nikita Klimantov, director of investor relations at Severstal, discussed the state of the steel market at the height of the demand cooldown. The moderator was Irina Akhmadullina. The conversation was about how Russia's key steel producer is coping with demand down 14% y/y, a collapse in construction and the launch of its largest capex cycle in 20 years.

Recording of the broadcast: [https://www.youtube.com/watch?v=ToITOzDO9fI](https://www.youtube.com/watch?v=ToITOzDO9fI). The summary was prepared by Enhanced Investments (t.me/eninv).

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The steel market: the scale of the cooldown and investment decisions

2025 results: Severstal's revenue was RUB 712-713 bn, EBITDA RUB 137.6 bn, and the EBITDA margin about 19%. According to Klimantov, steel demand in Russia in 2025 fell by about 14% y/y, which puts the company in the position of "one of the first industries" to feel the consequences of tight monetary policy. Despite these conditions, the company managed not just to hold but to slightly increase its sales volume of rolled steel.

The key achievement of 2025 was the completion of the largest investment project in the first stage of production: a full technical re-equipment of blast-furnace and converter production. All converters and all blast furnaces have been repaired, and the hot rolling mill partly so; the first stage is fully re-equipped.

Fresh figures for 2026: in the first 5 months demand fell by a further 13% y/y. Severstal's base scenario for the whole year is a demand decline of 7-9%, which means the rate of decline should slow in the second half. The internal forecast assumes a gradual cut in the key rate to about 13% by year-end, "perhaps a bit tougher than consensus". The latest central bank decision, Klimantov remarked, was "in many ways unexpected".

A separate theme is the arithmetic of a rate that would "revive" lending. Average return on sales in the Russian economy, on 2024 data, is about 12-13%. The cost of credit must be noticeably below that bar: the borrower's risk premium puts the loan rate 1-3 pp above the key rate. So for business lending to make economic sense, the key rate has to fall to around 10% or lower.

Prices and China: the worst case and regional gaps

As Klimantov stresses, a global steel market effectively no longer exists: the regionalisation of world trade over the last 15 years has reached a "limit point". Europe and the US have closed themselves off with prohibitive measures, and many countries protect themselves from China with anti-dumping investigations. The Russian market is cut off from the international one: the price inside the country does not depend at all on export quotes, while export prices are a derivative of what happens in China.

For 3-4 years, against the background of the real estate crisis in China, domestic demand there has been falling while smelting has not been cut at a comparable rate. The surplus goes to export markets and pushes prices down. At the same time, Severstal is a top-3 producer in the world by cost level, and "any price the market gives is in principle acceptable". The company earns even where the others are already losing money.

The worst case: if profitability in the industry proves persistently below 20% over a long horizon, companies will not be able to "properly finance their future development", which has long been happening in Europe and China. A five-year scenario with the current margin level would be a serious shock given the scale of the ambitious investment programme.

Another thesis: steel is an investment good. Falling demand for it means less is being invested in fixed capital in the Russian economy. This is already visible in the statistics: talk at the country's leadership level about the need to restart the investment cycle is a direct consequence of the situation in the basic industry.

Customer debts, the fuel crisis and bonds

According to Butenko, about two years ago, at the first tightening of central bank policy, Severstal began to record signals from customers that borrowing costs were critical for them. Since then the company has built synergy with banks, factoring and insurance companies. Receivables have indeed grown and turnover has lengthened slightly, but the situation "is manageable" and to a significant degree secured.

Klimantov assessed the fuel crisis through the logic of vertical integration. The share of fuels and lubricants is highest at the top of the chain, at the mining and processing plants with their quarry dump trucks and excavators. Further down the process, the share of fuel in cost is already low. A big impact on the consolidated result is hardly expected, but operational decisions will have to be taken in some areas.

The logic of the upcoming bond issues: Severstal traditionally keeps debt at 0.5x EBITDA, a policy unchanged for more than 10-15 years, with an A credit rating. The company has not been in the public debt market for more than 7 years. Two issues are planned, one with a fixed rate and one with a floating rate. The company has no specific need for money; the aim is to make itself known to a new generation of investors and to return as an anchor investment-grade issuer.

Demand fluctuations and adaptation

The company's strategy is being fine-tuned towards greater product differentiation. The aim is to make the cost of a customer switching to alternative products either economically unjustified or technologically inconvenient. Severstal is developing its engineering line: not just supplying rolled steel but acting as a project partner, calculating and creating new steel grades for the customer's needs.

Asked whether it is ready for a sharp reversal in demand, Klimantov answered unambiguously: the company is ready to redirect into the domestic market about 30% of sales that now go to export. Capacity utilisation is 100%, and is planned to stay there. There is no extra volume reserve, and all the flexibility comes down to redirecting flows between the domestic and external loops.

On the reliability of returns from investment projects, Klimantov stresses that it is hard to imagine a scenario in which they fail to work: they aim to cut costs, and that works in any market. The only speculative threat is a collapse in the iron ore price to a level at which the market alternative becomes cheaper than own production.

How Severstal cuts its costs

The key components of competitiveness:

The key cost-reduction project is a pellet plant in Cherepovets with a capacity of 10 mn tonnes. According to Klimantov, it is the largest project since the construction of the Cherepovets steelworks itself, a "plant inside a plant", with a budget of RUB 116 bn. Total pellet capacity after the launch effectively doubles: 10-11 mn tonnes in Karelia plus 10 mn tonnes in Cherepovets. The switch to pellets makes it possible to give up a significant part of coal and replace it with cheaper natural gas. The full effect comes from 2027.

Construction, the strong rouble and dividends

The blogger Investor of the XX Century asked a two-part question: about demand from construction, and about the rouble exchange rate that is comfortable for the company from the point of view of a return to dividends.

On construction, Klimantov stressed that over 2 years the decline was spread across segments, but the fundamental factors have not gone away. Housing space per person in Russia is still low, and the base demand has not disappeared. The constraints are purchasing power at a high mortgage rate and the cutting of subsidised mortgages. In early 2026 there was a sharp collapse in new construction starts; if end demand turns and no new projects were started, a shortage is possible in the market. The host rightly recalled the Chinese scenario of uncontrolled development: the caution of Russian developers protects square metres from losing value.

On the exchange rate, Butenko described the logic. The metals industry in Russia is in structural overproduction: domestic demand is roughly half the volume of production. A weaker rouble raises the appeal of the export alternative. The second channel is import substitution: a large number of customers have projects tied to replacing imports, and a strong rouble slows them. However, there is no direct correlation between Severstal's FCF and the rouble rate; the export alternative does not weigh as heavily as in the pre-sanctions years. The determining factor for positive FCF is the completion of the investment programme. On dividends: the mandatory condition is positive FCF, and the second is confidence in the sustainability of the financial position over the foreseeable horizon.

Buyback and export

The blogger Alexey Midakov asked a direct question about a buyback with the share price at multi-year lows. Klimantov's answer was concise: "No". Butenko gave the detailed reasoning: Severstal has no reason to announce a buyback because the company is instead investing in its own assets and increasing value through fundamental factors. Buyback events are one-off, while investment in the base is lasting.

Klimantov added a second logic: about 90% of companies on the Russian market that announce a buyback do so to provide long-term management motivation. Severstal has an LTIP, but it is not tied to shares directly: the motivation is linked to the share price but paid in cash. From a capital allocation standpoint, dividends are preferred, as shareholders decide for themselves what to do with the money. The company also wants to preserve its free float and liquidity.

On export (a question from Yuri Kozlov of "Invest or Lose"): at the moment the split is 70/30, 70% to the Russian market and 30% to export. The main destinations are friendly CIS countries and a number of regions with fast demand growth. According to the worldsteel forecast, world steel demand will grow only 0.3% in 2026, but excluding China the other countries, especially developing ones, show decent growth. Profitability under pressure from China is low, but it exists. In addition, export helps keep production at 100% utilisation, lowering the unit cost through economies of scale. The priority remains the domestic market.

Plans for 2026, the return on investment and growth drivers

Severstal does not give public guidance, but Klimantov outlined the trends. The 2026 production plan is about 11.2 mn tonnes of steel at full utilisation, with sales at about the same level. The product mix will not change materially. Revenue dynamics will be determined by price; at the time of the broadcast the company sees a steady but gradual rise in prices.

On profitability, the key steps were taken back in March: significant cuts in both operating and investment costs were announced. The operating measures include the repair fund, payroll (including targeted staff cuts) and administrative expenses. By the end of the year no deterioration in profitability should be seen.

The 2026 investment programme has been cut relative to the original guidance: the original reference was RUB 149 bn, the current forecast is RUB 112 bn (minus 24%). For 2027 the preliminary reference is about RUB 85 bn. Still, RUB 112 bn in 2026 is a substantial sum, so free cash flow for the year is most likely to be in negative territory. The logic: 2026 is a year of continued large investments, and 2027 is the year of moving to positive FCF.

The growth drivers named by Klimantov:

All projects are completed in 2026, with the full effect on EBITDA from 2027.

Tickers mentioned

CHMF is Severstal. The context included mentions of the real estate market (PIK, Samolet, LSR), competing steelmakers (MMK, NLMK), as well as the context of monetary policy and the bond market. Extended issuer cards are on our portal frontier.eninvs.com.

Conclusion

Severstal enters the stress cycle with fresh capex efficiency but comes out of it with negative FCF in 2026, a "no" on a buyback and a bet on a return to dividends in 2027, after the largest investment project in the history of Cherepovets is completed. The company does not pretend the crisis does not affect it, but it does not panic either: Klimantov's thesis that it is "hard to imagine a scenario in which the investment projects fail" is a direct signal for a long-term investor.

Full recording of the podcast: [https://www.youtube.com/watch?v=ToITOzDO9fI](https://www.youtube.com/watch?v=ToITOzDO9fI).

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