Editor's note: In a special section in today's editions, The Times is examining the U.S. steel industry, what makes it viable and what the industry is doing to remain competitive in the future. To get a glimpse of how industries are faring around the globe, the following story analyzes the Russian steel market. Russia is the fifth-largest steel producer in the world.
An observation point in the center of Magnitogorsk, Russia, provides a breathtaking view of the Ural River, with gray and orange smoke rising above the rows of pipes on the opposite bank.
A city of 400,000 residents in the Ural Mountains about 1,250 miles southeast of Moscow, Magnitogorsk is a cradle of Russia’s steel industry, with the pipes part of the Magnitogorsk Iron and Steel Works, one of the world’s biggest steelmakers, which started production in 1932.
In July, the steelmaker, also known as MMK, launched the second line at its newly built plant called Mill 2000, which supplies cold-rolled steel for the country’s burgeoning car industry.
Among MMK’s biggest customers are domestic automakers such as AvtoVAZ, KAMAZ and GAZ Group, but the government expects the steelmaker owned by Russian billionaire Viktor Rashnikov to partner with foreign car manufacturers, which have set up shop in Russia.
This will make MMK a global supplier of steel sheet for car manufacturing, said Industry and Trade Minister Denis Manturov, who visited the plant in July.
One potential customer, Manturov said, is the Renault-Nissan alliance, which assembles cars on the premises of AvtoVAZ in the city of Togliatti.
Housing market to drive consumption
The country’s developing car manufacturing is expected to support domestic demand for sheet steel, said Moscow-based brokerage Rye, Man & Gor Securities in a survey.
Russia has seen a flock of global carmakers such as Nissan, Volkswagen, General Motors, Hyundai and Toyota setting up local manufacturing over the last few years, as they expect to capitalize on the country’s fast-growing market.
The government requires foreign automakers seeking to assemble cars in Russia to produce at least 300,000 vehicles a year, using primarily locally made car parts.
Although the multibillion dollar commitments by foreign car manufacturers are likely to ensure stable consumption of metal, industry players count primarily on the construction sector and infrastructure development as the major demand drivers for the next few years.
Developing residential construction along with the government’s drive to modernize infrastructure across the country are expected to ensure sustainable growth in consumption of long products, said Evraz Group, the country’s leader by output in 2011, in a presentation for investors in July. Long products include bars, rods and wires, structural shapes and rails, and tubes.
The demand for construction steel slumped dramatically during the 2008 economic crisis, as developers, which account for more than a half in the overall demand structure, had to freeze projects.
Evraz Group — one of the biggest suppliers of steel for construction industry — said demand for long product had recovered and that it expects domestic consumption of that kind of metal to increase over the next three years.
Residential construction in Russia is expected to increase over the next few years, in line with the government’s plans to build a total of nearly 1.1 billion square feet of housing annually by 2016 and more than 1.5 billion square feet by 2020, up from 650 million square feet in 2011.
Consumption of construction steel has increased by 16 percent to 16 million tons in January through August last year compared with the first eight months of 2011, according to Novolipetsk Steel, which supplies more than 80 percent of its steel for construction needs.
Steelmakers also expect a massive infrastructure upgrade ahead of big sports events like 2014 Sochi Olympics and the World Cup, which Russia will host in 2018, to drive demand for construction steel.
The preparations, which include building new stadiums and new high-speed railways across the country as well as building or reconstructing road infrastructure, might require 2.5 million tons to 3 million tons of metal between 2012 and 2017, according to Evraz Group.
A total of 40 big projects to develop the country’s infrastructure, including construction of high-speed railways between Moscow and Yekaterinburg and between Moscow and St. Petersburg, are to be completed by 2020, which might boost consumption of metal by 20 million to 25 million tons over the next eight years, according to the estimates by Novolipetsk Steel, Russia’s fourth-largest steelmaker by output in 2011.
“This is not much, but implementing those projects … might have positive multiplicative effect on the economic growth and increase in steel consumption in related sectors,” the company said.
Even though big infrastructure projects are likely to ensure sustainable demand, Russian steelmakers said they have no intention to increase capacity beyond the existing commitments and prefer to focus on reducing costs.
Among the projects companies have in the pipeline is the launch of the first line of Novolipetsk Steel’s rolled steel mill in Kaluga, slated for the first half of this year, with the second line to be launched in 2014. Novolipetsk said it doesn't intend to increase capacity over the next few years after the Kaluga mill is launched.
Severstal, the country's second-largest steelmaker in 2011, with assets in the U.S., is set to launch a long product mill in Balakovo, the Saratov region, this year and the second line of its mill in Columbus, Miss.
“The steel market is oversaturated both in Russia and globally, so we focus on the existing capacities and reduce costs on them,” the company stated.
The expansion plans by Russian steelmakers mean the country might see a 16 percent increase in output to 80 million tons a year by 2015, according to the estimates by Rye, Man & Gor Securities. The brokerage expects total output by Russian steelmakers to show a modest increase to about 72 million tons in 2012, said the company’s metals analysts Andrei Tretelnikov in October.
With the crude output of 68.7 million tons in 2011, Russia is the world’s fifth-larges producer of steel after China, Japan, the U.S. and India, according to the World Steel Association.
Rye, Man & Gor Securities said it expects annual domestic consumption to reach 45 million tons to 50 million tons by 2015, up from 38 million tons in 2011, with the rest going for export.
Russian steelmakers remain heavily dependent on exports, which poses risks amid the current uncertainty in Europe. Consumption remains weak there, putting pressure on prices, Tretelnikov said, adding that Russian steelmakers' focus on domestic supplies is a wise decision.
In one example, Severstal said it had increased the share of domestic sales to 59 percent in 2011 compared with 54 percent in 2010, with the figure expected to reach 74 percent by 2015.
But the domestic market poses some risks as well, as supply of the metal already exceeds consumption, which is likely to show a moderate growth of 5 percent to 7 percent in 2012, said Igor Chepenko, chief executive of Moscow-based steel trader Brok-Invest-Service.
“This is a real demand: our customers are cautious and don't take obligations that they can't fulfill. They learned the lesson of the previous crisis of 2008-09, which made them more sober, and don't buy more metal than needed," he said.
WTO expected to give impetus
Chepenko, whose company supplies a wide range of steel products for construction and manufacturing sectors, also said customers had become more demanding, which gives steelmakers an additional impetus to improve the quality of metal.
He complained Russian steelmakers yield to Western rivals in the quality of some product categories like I-beams for construction needs currently bought from ArcelorMittal.
Russia's accession to the World Trade Organization might affect the quality of domestically produced metal positively, as opening the market is likely to results in increasing competition, Chepenko said.
Shortly before Russia became a full-fledged WTO member in August, President Vladimir Putin called for domestic steelmakers, most of which are global companies, to make use the country's membership in the trade club.
He pointed out due to trade barriers in some countries, Russian metal producers lose $1.5 billion to $2 billion a year.
“To change the situation, you should use the WTO potential more actively,” he said at a meeting on developing the ferrous industry last year.
After Russia's entry to the WTO, the European Union terminated import quotas for the country's steelmakers starting this year. Steelmakers could supply only 3.4 million tons of the metal to Europe last year.
“The end of steel quotas enables Russian producers to gradually increase exports of crude steel products, mainly hot-rolled steel, to the EU,” Moody's Investor Service stated in its August survey.
But steelmakers are unlikely to benefit from the removal of import quotas, as metal producers weren't filling them anyway, analysts and industry players said.
Russian steelmakers have been supplying only 80 percent of the total volume of flat-rolled products that they could export to the EU, while the figure for rolled steel stood at 30 percent of the regulated export volume, Novolipetsk Steel said.
Moody's said it might take at least two years before the cancellation of quotas affects the financial results of Russian steelmakers.
"We expect Russia's steelmakers to limit their export to the EU, not only because of Europe's recession-dulled demand, but also because of WTO members' anti-dumping and protective measures," Moody's said.