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Ukraine Metals Report Q3 2009
Business Monitor International, July 2009, Pages: 45
Ukraine Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Ukraine's metals industry.
Ukraine is among the economies worst affected by the international financial crisis, with the country reliant on US$3bn of foreign loans just to avert bankruptcy. Without credit, most construction has stopped and the price and volume of steel, which accounts for over 40% of exports and is Ukraine’s main export product fell sharply in H109, according to the latest Ukraine Metals Report. In the first five months of 2009, crude steel output was down 39.2% year-on-year (y-o-y) to 11.31mn tonnes. Meanwhile, domestic metal consumption fell 56.1% y-o-y in January-May to 1.79mn tonnes and imports plummeted 78% to 197,243 tonnes, according to a report by Interfax quoting the Ukrainian Metal Traders Association. While demand for Ukrainian semis on emerging markets showed signs of revival in Q209, and there is sufficient sustained domestic and external stimulus to lift output above 30mn tonnes.
Moreover, demand growth in emerging markets such as Egypt has been volatile and there are signs of over-supply with the distinct possibility of a cut in orders in Q309 as inventories are cleared. Much of the demand growth can be attributed to the mid-year construction season, which is expected to diminish from September. Ukrainian producers have had to slash prices to win relatively small orders from Middle Eastern buyers. Arab buyers in the Gulf were reportedly ordering Ukrainian billet at US$390-400 per tonne in June, largely to replenish inventories that had been drawn down in previous months. On the upside, there are signs of stability on the domestic market, with rebar and flats products stabilising. Consequently, the Ukrainian market appeared to have reached or passed its nadir by June, although it is unclear whether the reports of modest growth in output are related to a genuine increase in demand or short-term stock building; this report suspects it is the latter. Our research suggests that exports will decline by 22% to 21.56mn tonnes, but will stage a recovery from 2010, rising by 18.1%, with Ukrainian steelmakers enjoying a competitive advantage as the global market revives.
The report forecasts monthly average crude output of around 2.5mn tonnes per month in the June-December period, which is an improvement on the levels achieved in the first five months and supported by a moderation in the contraction in exports. On the downside, domestic consumption of finished steel will fall by over 30% – to just under 6.08mn tonnes – due to a slowdown in construction, caused by a fall in fixed capital formation and the credit crisis combined with a collapse in output from the automotive industry. As such, we forecast total crude output at 28.9mn tonnes for the full year, a fall of 22% y-o-y and towards the lower end of the forecast range of Ukrainian steelmakers. However, by Q409, quarterly output should be growing on a y-o-y basis. Gloomy prospects are also in store for the relatively small aluminium sector, which is expected to see production halve to just 50,000 tonnes.
As such, finished steel consumption is set to grow by 11% in 2010 to 6.4mn tonnes and a further 21% to 7.7mn tonnes in 2011. Beyond that, while there is a risk that the ongoing financial market instability in Ukraine may result in Kiev losing its right to host the UEFA European Football Championship, our forecast for real GDP growth ticking up to 4.3% by 2013 assumes a best case scenario, if the tournament proceeds as planned. As a result, we forecast crude steel output reaching 43.8mn tonnes, a 2.3% increase over the industry’s 2007 peak while hot rolled production is expected to approach 35.2mn tonnes, which is 3% less than 2007 but still a rapid turnaround from the 2009 low point of 21.5mn tonnes.
Although we expect a full recovery in aluminium by 2013, this is dependent on RusAl maintaining operations in Ukraine. RusAl indicated even before the financial crisis that it may close the 130,000tpa Zalk smelter as it was unprofitable to keep it running. With output set to nosedive and the debt-ridden company already facing severe financial problems, it may consider permanent closure and sale. If RusAl can find a way to improve efficiency then the smelter can be returned to full capacity after the recession, assisted by a recovery in supplies to the automotive industry. However, until RusAl announces that it will close Zalk, the forecast is for a return to full capacity within five years.
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