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Ukraine Metals Report Q4 2009
Business Monitor International, Oct 2009, Pages: 47
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.
Ukrainian steel and aluminium producers are likely to quickly pull out of crisis in 2010 as demand growth returns to both domestic and external markets, but it could take five years before output returns to pre-recession levels, according to this latest Ukraine Metals Report.
In the first seven months of 2009, Ukrainian crude steel output fell 37.2% y-o-y to 16.28mn tonnes, as the country was gripped by an economic crisis. However, the situation began to show some improvement from Q209 and monthly output in July was up 15.5% (though down 27.7% y-o-y) to 2.66mn tonnes on the back of a 5% month-on-month (m-o-m) rise in exports. This came in the context of a 4.9% m-o-m growth in Ukraine’s industrial output in July, although it was still down 26.7% y-o-y. The situation has improved as the government has introduced a series of measures intended to support the steel industry amid the growing crisis. In March 2009, legislation was finalised to boost the construction industry – the government plans to buy up unfinished construction projects, targeting those that are 70% complete in 2009 and 50% complete in 2010. If carried out, the programme would accelerate demand for construction steel, which represents around 15% of domestic steel consumption.
The increase in steel production from May has caused another set of problems, namely a deficit in coking coal availability, with the Ukrainian Coke Association estimating it at 1.4mn tonnes for H209. It could take up to six months for the coal industry to return to 2008 production volumes. In the mean time, the deficit will have to be plugged by more expensive imports, thereby pushing up the cost of production. The situation is worsened by the continued depreciation of the Ukrainian hryvnia. It is still 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 when they will rise by 18.1% with Ukrainian steelmakers enjoying a competitive advantage as the global market revives.
This report forecasts a 19% drop in crude steel output to 30.1mn tonnes in 2009, but predicts a rebound in 2010 when output should grow 15%. Based on low capacity utilisation rates in H109, hot-rolled production is likely to fall by 24% to 23.6mn tonnes, with a higher proportion of steel exported in crude form. According to figures from the Ministry of Industrial Policy, roll production fell 34% y-o-y in the first seven months of 2009 to 14.6mn tonnes. Domestic consumption of finished steel will fall by 29% to just under 6.25mn tonnes. This is 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. However, by Q409, quarterly output should be growing on a y-o-y basis.
As such, finished steel consumption is set to grow by 11.2% in 2010 to 6.9mn tonnes and by a further 13% to 7.9mn 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 2012 UEFA European Football Championships, 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 42.6mn tonnes, just under the industry’s 2007 peak while hot rolled production is expected to approach 36.9mn tonnes, which is 2% more than 2007 and a rapid turnaround from the 2009 low point.
Gloomy prospects are also in store for the relatively small aluminium sector, which is expected to see production halve to just 50,000 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, the authors believe 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 authors will forecast a return to full capacity within five years.
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