Brian Levich Head of Steel Consultancy, Metal Bulletin Research, UK

"RUSSIA IS CONFIDENTLY MOVING TO BECOME A LEADING STEEL POWER"

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n the last three years the Russian steel industry has been developing very dynamically. There are several factors that are determining its status:
– the series of anti-dumping investigations, which are being conducted in many countries of the world, especially so following the Asian crisis;
– the change of the domestic price structure, problems of growing tariffs, particularly the transport tariffs, which are increasing very fast with every passing year;
– the instability of export in world markets;
– problems of attracting long-term investments in the industry;
– and, of course, the problem of protectionism, which in 2001 resulted in a significant reduction of export volumes.
At the beginning of 2002 China’s role and importance as the main export market increased. Taking into account this factor and because of the rise in demand in other Asian markets, Russia managed to significantly ramp up its export shipments. But such a situation will not last forever. Russia itself encounters the competition from producers of CIS countries and China. CIS countries account for almost 56% of all Chinese import of hot-and cold-rolled products. The predicted growth of making hot-rolled products in China can also create problems for the Russian export shipments. The demand in China for imported products will be falling down. And precisely because of it we see a necessity to reconsider the strategy and that is exactly what many Russian companies are doing now.
With few exceptions, Russia is still focused on producing raw materials, such as billets, for example. But by contrast with its East European neighbors it quite successfully attracts Western investors and customers. Russia has also an opportunity to ship its products to Western markets and compete with local producers.
For example, we can see that Severstal is actively engaged in acquiring assets in the West. Lipetsk Iron & Steel Works is successfully supplying slabs to the Scandinavian market. According to rumors, Magnitogorsk Iron & Steel Works is going to acquire a number of enterprises of Detroit Steel and enter the American market. The Mechel Group has its own companies in Romania and Croatia or, in other words, it is expanding its presence in Central Europe.
What are the strategic prospects for the forthcoming years? There is, of course, a matter of consolidating the domestic market. Russia, of course, is getting similar benefits from consolidation that we are witnessing in the West. It permits to make savings on expenses with respect to the size of production facilities, to help ensure the entry to new markets, both in a sense of geography and range of products, to get an access to new technologies, to influence political and corporate decisions.
As our analysis shows, Russia’s steel consumption will be increasing. The growth trend can be traced by annual volumes of making finished products: from 25 million tons in 2002 to 29 million tons in 2005 and to 35 million tons in 2010. The Russian economy is consuming approximately 55% of section products. Taking into account the significance of the domestic market and the fact that there is a large potential of raising the demand there, we are coming to the conclusion that Russian companies will be developing dynamically.
The situation that is taking shape in Russia’s steel industry allows companies to coordinate their efforts in the struggle with competitors. This trend will determine the industry’s development for the nearest 10 years.
This lets Western investors strive for reducing expenses. However, the reduction of both costs and prices provokes new anti-dumping investigations. But since the domestic consumption is growing, then, during the period of intense consolidation Russian companies can secure a necessary margin in the domestic market despite restrictions in the Western export market, which Russian producers are facing. So, Russia is confidently moving to become a leading steel power of the future. 

David Faktor Managing Director, Stemcor Holdings Ltd, UK

"RUSSIAN ENTERPRISES ARE MAKING HIGH-QUALITY PRODUCTS. WE HOPE THAT THEY CAN BECOME RELIABLE SUPPLIERS"

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ome time back Stemcor withdrew from the largest German company. We decided to do other busineses beside selling steel. We started to provide raw materials to our producing partners and, then, switched over to the commision basis of operation. Stemcor managed to find its niche and became one of the largest rolled stock trader in the world.
We are ensuring shipments of Russian steel products to such regions as South America (Argentina), Western Europe, America. It is obvious that the role of a trader in Russia will be changing. We believe that we could work in more transparent conditions, offer direct services right to producers and operate more on the commision basis. We will operate as if we are an extension of steel-rolling mills to the market. We will begin to make more efforts for attracting funds necessary to secure shipments of products, to provide long-term financing, which is paid up with supplies of finished products, to operate more directly in regions and to ensure transportation of large batches as well as storage services.
In order to get a fair pricing it is necessary to organize supplies of small batches of products. Appropriate credit lines and financing mechanisms are needed. We believe that as a trader we have all abilities and we are ready to provide specialized services in this respect by ensuring a trade turnover between Western and Russian producers.
We are selling a lot of products to enšusers but we are also providing storage and warehousing services. Our clients are trying to buy products from reliable suppliers. And it should be noted that Russian enterprises make high-quality products. We hope that they can become reliable suppliers.
Some think that, as the volume of our business increases, we will not be able to do our best in representing interests of the highest-quality producers, particularly in time, when there is a competition between them. On the contrary, we think that we could not develop normally, if we do business with only one producer. In other countries we are frankly saying to our clients that we are working with their competitors as well: for example, in Singapore we are selling American, German and French section rolled stock. Our clients have nothing against it because they understand that they should have competitors so as to be successful.
And there is one more question: quotas, tariffs. We believe in the fair trade and promote it. We represent interests of not only European clients but of Russia’s producers as well helping them cope with a situation, when trade barriers emerge. We also think that it is not fair to use dumping of subsidized products.
And, finally, there is a matter of consolidation. Just recently I took part in a discussion about prospects for the Russian market of steelmakers. We were trying to evaluate market players. I do not think that, if there is less large producers around, then, it will automatically make the industry profitable. I understand that there is a need to revise some of the existing production methods and that restructuring is necessary. However, after having watched the situation in the West for many years, I can state that subsidizing steel-rolling and metallurgical mills did not bring too many benefits. 

Vladimir Tsukrov Chief, Moscow’s office of ARCELOR

"WE WOULD LIKE TO ESTABLISH LONG-TERM RELATIONS WITH RUSSIA"

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ussia is our most important partner. Together with Severstal we have a JV to produce galvanized sheet. To us Russia is a source of raw materials and semi-finished products. We conduct major trade operations, provide help with auditing, consult on management activities and financing, sell equipment and participate in research studies.
It should be noted that our first joint investment project with Severstal dealt with finished products, with the transfer of know-how, upgrading the stock of our partners’ equipment. The remaining part of the project will be continued in the second half of 2004. We are proceeding from the assumption that galvanized sheet will be in high demand by Russia’s regenerating automotive industry. Right now the consumption of galvanized sheet in Russia amounts to between 50,000 and 60,000 tons. At some point in the long term the industry will require 4 million tons of galvanized sheet. We are supplying our products not only to the automotive but to other industries as well.
As for purchases, we are especially interested in supplies of raw materials from those markets, which have lower production costs. That is why our attention to Russia remains strong. We would like to establish long-term relations with Russia.
We understand that now the situation in Russia has changed and in this connection there is a need for us to change our approaches as well. Right now the situation with prices is not clear enough due to overproduction. Suppliers are conducting their own global policy. But consumers also have the same policy. That is why there is a need to balance these two policies.
There are two possible options to ensure such a balance: it is either to raise production volumes and subsidize ineffective production facilities or stick with a more successful policy, which provides for privatization, mergers and closures of ineffective enterprises. In other words, to follow the market way. We are glad that Russia is following the second route and that it wants to avoid misfortunes of steel industries in other countries. The Russian privatization is practically over. This is the illustration of a firm adherence to the real progress. 

Giancarlo Lavaroni Vice-president, Danieli & C. SpA, Italy

"HOW RUSSIA CAN BETTER SAVE THE DEMANDING NEEDS OF THE INTERNAL MARKET AND EXPORT PRODUCTS AT THE LEVEL OF COMMODITIES"

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ussia has the potential to become a "European Brazil/Venezuela" in terms of competitiveness to produce steel because of the abundant availability of natural resources: ore, coal, gas, energy. The advantages deriving from this availability is often compromised by the location of the plant or by obsolete production technology which increases the consumption of energy and materials. Plant location is important because of transport costs which in Russia are still high and which will probably have to be rationalized in the future.
Thus, there are plants in Russia where semi-finished products such as billets and slabs can be produced at a cash cost of 90 – 110 USD/ton, which is an extremely competitive range for successful export. Therefore it is our opinion that the typical Russian export product should be semifinished products, such as Quality billets and slabs to be exported to markets such as Europe, Middle and Far East and USA, mainly because these countries don’t have the ore, coal and energy available at competitive costs, consequently it is inevitable that they will significantly and progressively reduce their production of semifinished steel and purchase it as a commodity, whereby the demand for semifinished quality products, such as clean and IF grade steels will increase significantly.
A major effort must be made in terms of operating methods and mentality for quality control and customer service to supply the local market which is definitely growing. Obsolete plants must be closed, together with those located too far away from raw materials/energy and markets.
Presently, a total production of 70–80 Mio ton/year is probably a balanced starting point for medium-term demand. In some cases the concept of the regional minimill could be applied, this type of mill produces from 0.6 to 1.0 Mio tpy to supply the local market by exploiting local resources of raw materials and energy (scrap or gas for DRI, EAF, rolling). With these guidelines we definitely feel that the Russian iron and steel industry has a prosperous future. 

Andrei Torgashev Hatch, Canada

"IF THE RUBLE IS DEPRECIATED BY 6 % A YEAR, RUSSIA WILL KEEP ITS LARGE COMPETITIVE ADVANTAGES IN COSTS"

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ussia has a considerable advantage in availability of raw materials. Its advantages are even bigger as far as energy and labor costs are concerned. Workers’ wages amount to approximately 7.5 % of workers in the U.S. At the same time a number of workers at Russian enterprises is 4 times bigger and the labor costs amount to approximately 30% of labor costs in the U.S. A lot of plants in the U.S. (and in other Western countries) do not have so many auxiliary production facilities and services as Russian enterprises have.
Gas prices in Russia are approximately 10 times lower than prices for gas in the U.S., while the price for electric power amounts to almost 50 % of prices in the U.S. It is interesting to note that the cost of iron ore and coal equals almost 50 % of the prime cost of producing hot-rolled coils in Russia. With such a big share of these two components in the prime cost structure it becomes more understandable why there is a trend towards integration of Russian producers with iron-ore and coal-mining companies.
There is no doubt that the status of the national currency has an influence on the country’s competitiveness in the world. The impact of the ruble devaluation as regards the U.S. dollar is quite significant: if the ruble is depreciated by 6 % a year, Russia will keep its large competitive advantages in costs. The recent events, such as the war in Iraq and the recession of the U.S. economy after September 11, 2001, resulted in weakening of the U.S. dollar. If by 2010 the ruble exchange rate with respect to the U.S. dollar remains unchanged, then, the prime cost of production in Russia may exceed the prime cost of production in the U.S. However, such a scenario is not likely.