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Russia Metals Report Q4 2011
Business Monitor International, Oct 2011, Pages: 65
The Russian steel industry is not faring as well as BMI expected, with lower rates of output and consumption due to falling exports and deteriorating domestic consumer sentiment, according to this latest Russia Metals Report from BMI.
In the first seven months of 2011, Russia registered a 5.8% year-on-year (y-o-y) increase in its crude steel production to 40.58mn tonnes, according to the World Steel Association. At the same time, its iron ore output grew 7.9% to 59.3mn tonnes and coal output rose 1.2% to 184mn tonnes, according to Russtat. The Russian statistical authority also reported that rolled steel output grew 4.5% to 34.5mn tonnes and pipe production rose 22% to 6.1mn tonnes. Output was largely stimulated by domestic industrial production, which grew 5.3% y-o-y in the first seven months of 2011.
As BMI had anticipated, the rouble is undermining the competitiveness of Russian steelmaking in external markets, although this is made up for by the improving domestic market. In the January-July period Russian exports of semi-finished steel products fell 24% y-o-y to 7.17mn tonnes; flat steel exports fell 17% to 4.56mn tonnes. BMI forecasts a 15% drop in year-end finished and semi-finished steel exports to 23.27mn tonnes in 2011.
While BMI maintain their finished steel consumption growth forecast of 6.0%, BMI do not anticipate much higher rates of growth due to the steady decline in Russia’s industrial growth rates. As such, for 2011 BMI expect just 4.8% growth in crude steel output to 70.14mn tonnes, down from 72.02mn tonnes forecast in the previous quarter with growth unlikely to strengthen significantly until exports pick up, which BMI expect some time in H212. Pre-recession output levels will not be achieved and exceeded until then. Nevertheless, long-term prospects are good as Russia will leverage its advantage in costs of production to boost investment and in light of progress in expansion BMI have raised their 2015 crude steel forecast from 96.90mn tonnes to 98.65mn tonnes and hot rolled output from 72.28mn tonnes to 76.56mn tonnes.
Domestic aluminium production is set to follow the trend seen in the steel industry. Around 600,000 tonnes per annum (tpa) of capacity was idled as aluminium prices dropped below the cost price of US$1,950 per tonne. With aluminium prices forecast at an average of US$2,550/tonne in 2011, the global market is tight enough for RUSAL to be confident of bringing more capacity back online and offsetting slow growth at home with export growth. Nevertheless, Russia’s largest aluminium producer RUSAL reported a 20.5% y-o-y drop in net profit to US$1.09bn in H111 due to higher debtservicing costs and smaller returns from its partial holding in Norilsk Nickel. Its aluminium output grew 1% worldwide. Rusal’s CEO Oleg Deripaska predicted sector volatility over the medium-term, although demand remains strong – Rusal forecasts 10% worldwide demand growth in 2011 and 2012.
Despite good progress on debt restructuring, there are significant downside risks associated with future aluminium prices and cash costs. Aluminium demand from the automotive sector continued to drive the sector, although construction has faced difficulties due to declining new home sales.
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