What King Of Steel Should Russia Forge?

15.01.2010 — Analysis

The duty on products from Novolipetsk Iron and Steel Corporation (NLMK), the leading producer of electrotechnical steel in Russia, has been set at 4.6%. This will not break the economics of the company as at the pre-crisis production volumes of 9 million tons the electrotechnical steel amounted about 300 thousand tons out of which 231 thousand tons was made by the Ekaterinburg VIZ-Stal which is a part of NLMK Group. Financial indicators of the holding, however, will definitely decline as the segment on which the duty has been imposed is responsible for up to a quarter of the company's profits.

The falling metal prices in 2009 have forced the Group management to focus on sales of products of high levels of processing. The electrotechnical steel has been ensuring a rather good profitability, up until recently one ton was sold for 3,500-4,000 dollars while the cost was 1,200 dollars. Aleksey Lapshin, the President of NLMK, said in the December interview that the main decline of the demand during the crisis has been for the products made for the electric machine building sector. Export sales have dropped by 60% and prices have dropped accordingly. The Chinese anti-dumping inquiry has aggravated the situation as Russian market is incapable of consuming all the electrotechnical steel made at NLMK.

Soviet industry consumed up to 200 thousand tons of it per year. Russian electric machine building sector, experts claim, today consumes 30-40 thousand tons which is about 15% of the NLMK capacity. It is interesting that those few transformer manufacturers still operating in Russia export a significant share of their products.

At the same time power engineering equipment in Russia has not been replaced for about thirty years. Experts doubt that the modernisation will happen at all as the disaster at the Sayano-Shushenskaya hydropower station demonstrated that the country has enough electricity. Moreover, the authorities are planning to close down inefficient capacities and equip new stations with imported machines exclusively. Products from Russian metal making sector are unlikely to be in demand for this as NLMK does not make anisotropic electrotechnical steel (AES) of the HI-B class.

VIZ-Stal makes this steel mainly of commercial class. However, the company does already make certain quantities of HI-B but this steel is neither the highest quality nor the most expensive. The inability to make the elite products considerably narrows down the sales markets as large electrotechnical companies like ABB prefer contracts with those steel makers who can supply the complete range of AES.

Naturally, it is not easy to make elite class products. According to Mikhail Ghervasyev, the Head of the Department of Metal Sciences of the Urals Technical University, the quality of electrotechnical steel depends not only on rolling and heating but on what it was painted and powdered with, how it was treated. All this affects magnetic properties of the steel which is why the producers carefully keep the secret of the technology of becoming known to the competition. Soviet metal makers have been caught plagiarising but it did not help much.

In the conditions of growing competition the Russians have two choices - either come up with an extraordinary engineering solution or install special equipment for making the HI-B class steel. Experts are convinced that engineers are too late for the original solution as the new technology implementation process in metal making sector is very long and the steel is needed today. This is why NLMK has developed the investment programme the implementation of which would enable them to start making elite transformer steel by 2012. However, Russian metal makers might lose their positions in the global market by that time.

According to the data provided by the press service of VIZ-Stal, they ship to Asia almost a half of their products. China takes a quarter of the export total which means it is one of the largest markets and there is nothing to replace it with in the near future.

China started making accusations of dumping against Russia as early as 2005. VIZ-Stal has managed to win the battle through courts. Today it will be harder to do as at the time of crisis not the market prices rule but contractual ones; it is important for manufacturers to sell their products. The press service claims that VIZ-Stal, however, is planning to continue defending its position in court proving the absence of dumping. The company will have problems in the nearest future as the duty makes the Chinese market less attractive.

China purposefully pushes foreign manufacturers of the transformer steel out of its markets as the country rapidly increases its production. In 2002 Wisco was making about 100 thousand tons of electrotechnical steel, today it makes 300 thousand tons. Another 100 thousand is made by Bao Steel that continues increasing its capacities. China cannot provide for own needs yet which is why they import products. The requirements are higher than those in Europe. According to experts' estimates in time the Chinese will be making world's best transformers out of own AES. Russian metal makers with their class HI-B steel in 2012 will be far too late.

Some analysts reckon that in about thirty years transformer steel will not be in demand at all so there is no point in purchasing equipment for the production of AES of the HI-B class. It would be longer-sighted to just jump to more state of the art products. Amorphous (nanocrystalline) ribbon will most likely replace the transformer steel, this ribbon is made by using just two processing stages which seriously reduces costs. This kind of steel is already made in India; in China, production capacities are being built. In Russia JSC Ashinskiy Metallurgical Works, the Chelyabinsk Oblast, only makes the narrow ribbon in rather insignificant quantities.

The transition to the innovation products will require the renovation of all the industry in Russia, some of the plants will have to be closed down, some will have to be modernised. Naturally, this will affect interests of great many people and require serious investment. Since in Russia all interests in industry are tight tied to interests of officials the decision to start the modernisation can only be made by the charismatic leader of the country. The situation is rather opportune for it today so the only question remaining is whether the current Russian leaders have the political will to shake up the industry. Besides, there is no alternative to this measure, because if metal making and electric machine building sectors do not start making new products, they will be pushed out of the global market soon enough. 

Vladimir Terletski