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Russia Metals Report Q3 2009
Business Monitor International, July 2009, Pages: 52
Russia Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Russia's metals industry.
A deep Russian recession will have a damaging effect on the country’s steel and aluminium industries, but the latest Russia Metals Report is positive that output will stage a rapid recovery from mid- 2010, while intervention from the government and state banks has ensured that metals producers have overcome the worst effects of the international financial crisis. In the first five months of 2009, Russian crude steel output fell 32% year-on-year (y-o-y) to 21.94mn tonnes. While monthly output was up 7.1% y-o-y in May at 4.68mn tonnes, it was still down 31% y-o-y overall. The steel industry saw large cutbacks in Q109. Russia’s largest producer of longs products, Evraz, reported that its production of construction steels in the quarter dropped by around 36% y-o-y to 960,000 tonnes. Average monthly consumption from the automotive industry, which is a major user of steel flat products, fell to just 6,500 tonnes, compared to an average of 170,000 tonnes in 2008, as a result of a collapse in the car industry. However, in Q209 there were signs that more capacity was coming back online, with NLMK bringing its Lipetsk works up to full 8.3mn tpa capacity by May. If steelmakers ramp up production there is a risk they could saturate the market, leading to a return of the conditions seen in Q408, with high inventories leading to massive destocking. Meanwhile, Russian aluminium producer RUSAL has faced criticism for failing to make output cuts fast enough – of the planned curtailment of 500,000 tonnes per annum (tpa), Russia had only made cuts of 63,000tpa by May.
In spite of the signs of a recovery or stabilisation in Q209 the Russian metallurgical industry will decline in 2009, with crude steel output undergoing a 20% contraction to 55.1mn tonnes owing to the state of the economy and serious weaknesses observed in the automotive industry. While the domestic market looks dismal, the export market shows no sign of relief with more exposed steelmakers likely to fare worse. Most analysts believe that NLMK, which relies on exports for two-thirds of its sales, will perform worse than MMK, which sells two-thirds of its output within Russia. The export markets will be crucial to the recovery in Russian steel, particularly in the Middle East and China. While we expect a 20% fall in export volumes to 23.38mn tonnes in 2009, exports are set for a solid recovery in 2010 when they should rise by over 7% with continuing growth over the rest of the forecast period. Indeed, steel is likely to lead exports as Russian steelmakers devote more output to external markets amid sluggish domestic demand. By 2013, steel exports should exceed pre-recession levels at 31mn tonnes.
Meanwhile, product diversification with more added value to output should limit the growth in imports, with imports rising by less than 4% in 2010, after collapsing by over 29% in 2009. By 2013, imports should total around 5.2mn tonnes – 12% of domestic consumption – compared to 6.1mn tonnes in 2008 when imports accounted for 16% of consumption. Predictions indicate a rise in the value of net exports from an estimated US$16.1bn in 2008 to US$17.9bn in 2013, an increase of 11% over the period.
The financial crisis was a major blow to Russian steelmakers, many of which had become overleveraged due to expensive acquisitions at a time of high steel demand. State banks responded to the crisis by helping prop up the sector, with Evraz, Severstal and Mechel applying for and receiving loans of RUB8-15bn. Moscow’s rescue measures which include extending credit by state banks have largely worked. While Mechel, Evraz and Severstal endure high levels of debt of US$5bn, US$8bn and US$4.7bn, respectively, due to recent foreign acquisitions, they have been able to roll on short-term loans, while NLMK and MMK have low leverage and now have no major debt problems after state intervention overcame concerns regarding their short-term debts.
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