The icy hand of the financial crisis has gripped the Russian metallurgical industry

22.12.2011 — Analysis

The European Union has cut its quotas on steel imports from Russia. Experts believe that this will be less than devastating for the steelmakers, since they long ago purchased factories abroad and thus have little to fear from protectionist measures. However, this does not mean that Russians have no cause for concern. The analysts questioned by this columnist for RusBusinessNews predict a decline in production if the EU countries and especially China are unable to come to grips with their economic crises.

The European Union lowered its quota for the purchase of Russian flat-rolled steel by 4%, and 0.1% for steel bars. However, these steps will not cause the steel industry any distress - in the first 10 months of 2011, Russian steel producers filled only 50% of their EU quotas for mill products. Valentina Bogomolova, an analyst for URALSIB Capital, LLC, claims that all the leading Russian metallurgical companies long ago took the prudent step of purchasing factories in Europe. Therefore, the reduction in import quotas is not a significant issue for them. In addition, they are trying to diversify their markets - for example, by selling to Africa, Turkey, or Asia, although this is not always profitable. It is even possible that the domestic Russian market might revive.

According to the predictions made by URALSIB Capital, demand for mill products will not arise before the spring of 2012, when the Russian construction market revs up. It is this market that is the traditional consumer of metal in Russia - due to the undeveloped automotive industry and the limited demand for pipes from the oil and gas sector. The market for mill products will be sluggish in the first half of next year.

This could affect companies like EVRAZ Nizhny Tagil Iron & Steel Works, OJSC that sell the bulk of their products on the domestic market and depend on exports to developed countries. In the third quarter of 2011, Nizhniy Tagil Iron and Steel Works sold 60% of its products within Russia and the rest was exported. Approximately 5% of the total (mostly rails, girders, and channel beams) were purchased by CIS countries, while 35% of the products were shipped to Europe, Southeast Asia, North America, and the Middle East. The majority of the exports (94%) to non-CIS countries were slabs, which are the semi-finished goods used in the manufacture of mill products.

By late 2011, global demand for slabs had fallen sharply. According to analysts from Rusmet.ru, there is clearly a surplus of semi-finished steel products on the Southeast Asian markets, because milling companies are holding back and not placing new orders for slabs. The number of sellers has multiplied - in addition to the CIS countries and Latin America, Japanese and Korean plants also have slabs to sell.

In Europe the situation is even worse than in Asia, because real demand for flat-rolled steel has fallen. Prices are dropping because of significant unsold surplus, which is also making the outlook for new slab orders quite hazy. Local companies are cutting back on production, but prices haven't stabilized since metal dealers from Ukraine, Turkey, and China have brought specialized products to the market. This glut of traders leads to price hikes and market confusion. Experts predict further declines in the price of hot-rolled steel.

Nor does the US market for slabs look very promising. American mill operators are trying to order semi-finished steel products from local manufacturers. Timid hopes for an uptick in the price of mill products in early 2012 are expected to be dashed by cheaper iron ore and coking coal. Experts are confident that the price of slabs has not yet bottomed out, which is hardly a pleasant prospect for steelmakers.

Vladimir Krysanov, the commercial director of Steel Industrial Company, CJSC, claims that Russian factories have learned to survive economic "black holes" by closing their mills from time to time for preventive maintenance. But no one can yet say how the situation will unfold in 2012. Obviously a decline has begun in Europe, some signs of which are the imposition of strict austerity measures and a reduction in business lending, as banks stockpile their cash reserves in order to minimize future risks. Russia is a classic example of a country that focuses on the export of raw materials and which will be heavily affected by the extent of the downturn in the European economy.

According to Vladimir Krysanov, if the trends in Europe continue apace, there could be a 10-15% decline in the second quarter of 2012 in the production of Russian mill products. Or the situation could play out another way, with moderate growth of 2-3%, but that's assuming that Europe manages its problems. This expert holds out little hope for the Russian domestic market - 2009 showed that only India and China, where economic growth was stimulated by the government, have countered global trends by continuing to grow. Nothing like this has been done in Russia and thus the country is doomed to be tossed about on the waves of the so-called global market. In other words, Europe is going to drag Russia down with it like a needle pulling thread.

Konstantin Selyanin, the director of the financial markets department at Ural Interregional Bank, believes that Europe will not be able to escape the crisis. The only question is when the most severe phase of it will begin. This will be a forestalled reappearance of the 2008 "inferno", which was extinguished with cash infusions. As a result, the Russian metallurgical industry is condemned to its downward slide. However, the magnitude of that slump will depend more on China than Europe. Experts are increasingly concerned that the Middle Kingdom will not be able to maintain the rate of growth it has demonstrated for the past 10-15 years. A sharp drop in consumption will cause a collapse in the market for mill products, thus causing Russian steel to lose popularity. Steel makers have no way to make up for the lost income, since the Russian construction industry, the primary consumer of mill products, has seen a dramatic slowdown because of declining demand for new housing. There is no question but that stagnation in the Chinese economy will result in a reduction in the physical output of Russian steel.

Experts are confident that nothing good awaits in 2012. And it's unlikely that the stagnation will last only a year. The global economy is responding to the recession with a drop in oil prices. The international business community is reacting to all the uncertainty by steadily withdrawing its capital from countries dependent on the production of raw materials. According to the Russian Federation Central Bank, $10 billion was pulled out of Russia in November alone.

Vladimir Terletsky