Russian metallurgists, tighten your belts!

23.04.2013 — Analysis

The Russian State Statistics Service reported that the country's industrial growth slowed to a halt in the first quarter of 2013. This likely reflects a decline in mechanical engineering and metallurgy that will continue for the foreseeable future due to unfavorable foreign markets: the growth of GDP is slackening in China and consumption of rolled steel in the Middle East is dropping. The tight domestic market plus the burden of responsibilities to society borne by Russian companies is making their life difficult. The columnist for RusBusinessNews believes that the state is neither helping them through these difficult times, nor meeting its own obligations.

The Federal State Statistics Service of the Russian Federation reported that industrial numbers in the first quarter of 2013 were unchanged from their positions in 2012. Analysts have questioned whether these figures are trustworthy: the production of steel during the latter period fell by 4.6%, gas turbines by 31.1%, tractors by 21.6%, excavators by 17.3%, etc. The situation was already beginning to deteriorate late last year, and there is currently no reason for any change: warehouses are overflowing with steel products, which lowers the price of coking coal, scrap, slabs, and flat-rolled steel. So naturally metallurgical companies are also taking a beating.

Evraz Group smelted 6% less steel in the first quarter and reduced its production of steel products by 2.6%, and the company's revenue had already declined by 10% in 2012. Mechel Group lost $1.7 billion last year. That company's financial figures dwindled and it also had to write off a significant sum due to the depreciation of its assets. Magnitogorsk Iron and Steel Works, OJSC is also in a slump.

The pipe-making industry is doing somewhat better. Mikhail Zuev, the general director of the Seversky Pipe Plant, OJSC, claims that although the company is maintaining its production levels, there is no reason to celebrate - targets are not being met, the price of welded pipe is falling, and the stock market is reeling.

Shares trading on the exchanges is turning into a real nightmare for steel companies. For example, just on April 15 the securities of ChelPipe, OJSC lost 472 million rubles in value. Alexander Dragunkin, the court-appointed trustee, estimated that between the beginning of 2013 and mid-April, the pipe-making company lost 9.4 billion rubles. And the situation is unlikely to stabilize in the near future. Goldman Sachs (ChelPipe OJSC's financial analyst) recommends selling shares of the Chelyabinsk-based firm.

Dmitry Pumpyansky, the chairman of the board of directors of Pipe Metallurgical Co., OJSC (TMK, OJSC), emphatically denies any stagnation in the industry, claiming that it is the chronically ill global economy that is afflicting pipe manufacturers - the global market is beginning to break down into regional segments. This is the context in which the metallurgical industry will have to survive. That billionaire believes that the region that comes out on top will be the one that can offer business a more comfortable environment. The Sverdlovsk region, where many of TMK's facilities are located, cannot boast of such a pleasant business climate.

A sociological survey conducted at D. Pumpyansky's request revealed that bureaucracy, meaning the so-called administrative barrier, is the primary obstacle to business development. Continual increases in the rates for natural gas, electricity, and shipping also take a significant economic toll. Nor can manufacturing firms attract investment because bank loans are so difficult to obtain. The state and municipal authorities have all but saddled the business community with the bill for resolving day-to-day problems in the cities and small towns.

M. Zuev claims that no one is meeting social challenges at the local level. Notably, the Seversky Pipe Plant, in conjunction with other companies in the city of Polevskoy, is buying ambulances and hospital equipment, readying schools for the academic year, and building kindergartens, maternity hospitals, and housing for local residents. Officials have promised to use a public-private partnership to lay in utility lines for the newly constructed buildings, but have not allocated a kopeck toward the cost of that infrastructure.

The companies that form the economic backbone of many cities are literally being held hostage by the state's policy on housing and public utilities. The same Seversky plant has been providing heat and hot water to Polevskoy since Soviet times. Many private citizens aren't paying their share for services: the debt is over 132 million rubles, 22 million of which are uncollectable. The company will have to write off that debt.

Given this picture, Russian metallurgists are hardly pleased with the 10% drop in exports since the beginning of 2013. Mikhail Zuev notes that the domestic market is very tight. The Russian economy is not really developing, and thus the country produces only 67 million tons of steel each year, while China manufactures 2 million tons per day. Metal smelting in the Celestial Empire increased in the first quarter of this year due to greater domestic consumption.

Unlike the Chinese, Russian steelmakers are used to seeing increased production costs rather than growing sales. Alexander Polikarpov, the head of the freight research department at the Institute for the Problems of Natural Monopolies (IPEM), predicts that in 2013, 3% less iron and steel will be shipped via Russian Railways, OJSC. This expert claims that the biggest reason shipments are dropping is that the rising cost of electricity is making Russian steel uncompetitive.

Dr.sc.oec. Mikhail Delyagin believes that Russian industry is sliding down a steep economic slope - and it's quite possible that the Russian government has not even noticed.

Vladimir Terletsky