Oleg Kalinsky

H

igh prices encourage export
As in 2002, favorable conditions in foreign markets and high world prices for metal products were the principal factor of the metal production growth. It is also important to note a significant – by 25.6 million tons or by over 15% - increase in consumption of steel rolled stock in the domestic market. This increment came about because of the production growth in the main metal-consuming sectors of the Russian economy. The especially dynamic development took place in the instrument-making (144.8%) and railroad engineering (135.8%) industries. The production index in the automotive industry, which is the biggest metal consumer, amounted to 106%.
The major problem of the Russian export is still the high share of products, above all, of blanks (Table 1), of lower process stages. Besides, trade restrictions on Russia’s metal were effective in many markets throughout the whole year. This reduced companies’ market activity. In January 2003 China’s authorities announced the introduction of protective duties on cold-rolled steel from Russia. For leading suppliers of this product these duties were: 9% for Severstal , 7% for NLMK, 18% for MMK. They amounted to 29% for others. As a result, according to estimates of the Russian Ministry of Economics, companies’ total losses came to $80 million.
Dynamics of the Russian metallurgy development in the foreseeable future will obviously be determined by rates and efficiency of the technical modernization at enterprises, which should lead to reduction of production costs, quality improvement and greater diversification of products. The main directions of this policy are set forth in the program "Complex of measures to develop the metallurgical industry in the period up to 2010" adopted by the Russian government in September 2002. The following pressing tasks still are:
– protecting national producers;
– promoting domestic consumption of metal products;
– creating conditions for innovation development;
– developing raw material base;
– controlling tariff policy of natural monopolies (railroad transport, electric power industry and Gazprom);
– cutting down inefficient production capacities.

Products of all process stages are in demand
The positive dynamics is true for all segments of the steel industry (Table 2). The biggest growth increment – 5.2 % - was achieved in production of finished steel. In 2003 the output of sheet products increased 8.6% and in many respects that was the result of favorable conditions in foreign markets. For example, in 2003 export prices rose 40% for cold-rolled sheet and 30% for hot-rolled sheet.
As much as 22.3% of the growth of producing coated sheet and plate resulted from commissioning new plate production capacities at MMK in 2002 as well as from introducing import duties on Ukraine’s cold-rolled sheet metal with corrosion-resistant coatings in April 2003.
The increase in the steel pipe production was stimulated by a higher demand for them in the oil and gas industries as well as in the engineering and construction industries. The relative increment of producing large-diameter welded pipes amounted to 160% and the similar index for casing pipes and tubing strings equaled 112 %.
The raw material sector was developing with a stable domestic demand and the growth of iron ore export shipments by 25.8%. The production of the concentrate and sintering ore was up 6.8% reaching 91.8 million tons. The main raw material base of the Russian steel industry is still made up of ore mining enterprises in the Kursk magnetic anomaly basin, which accounted for 56.3% of the total volume of iron ore raw material.
The output of metalware rose 8.2%. The increment of producing metal cord was the most noticeable one amounting to 19.9%, the steel wire production increased 12.6% and the production of ordinary-quality wire was up 13.6 %.
In value terms, export shipments of steel industry products rose 30% in a year amounting to $10.6 billion. The physical volume of export shipments was nearly the same: 27.7 million tons in 2002 and 28 million tons in 2003. It is worth mentioning that export shipments of high process stage products were up. In a year exports of cold-rolled sheet rose 9% , of coated sheet - 31%, of bar and steel pipes - 15.5%, of metalware - 17%. At the same time there was also an increase in exporting raw materials: cast iron – 8%, ferroalloys - 40%, iron ore raw material - 25%, coke – 9.5 %.

Breaking through redoubts of protectionism
In the opinion of some experts, the trends that have emerged in world market in the second half of the 1990s are still active. It goes, above all, for an excess of supply over demand resulting from the abundance of production capacities. As analysts from the company MEPS Ltd. estimate, in order to ensure a long-term balance of demand and supply, it is necessary to cut down the annual volume of steel melting by at least 10 %, i.e. by 90 million tons. A considerable growth of world prices is caused by the economic boom in China, where in 2003 the consumption of steel rolled stock amounted to about 215 million tons (from 160 to 170 kg/per.) and it is expected to reach 300 million tons by 2010. China continues constructing actively its own metallurgical capacities so as to significantly reduce import shipments.
Another important trend in world steel industry is processes of consolidation and regrouping of forces, in which Russian companies are starting to participate as well. In 2003 there was a deal made by the Severstal Group to acquire Rouge Industries Inc., the U.S. fifth largest steelmaker and the main supplier of sheet for American automobile corporations. It is obvious that such operations allowed to get through redoubts of tough protectionism that distinguish the American market. By the data of the law firm Ìàyer, Brown, Rowe and Maw, in 1999 to 2001 the U.S. initiated almost 45% of all investigations in the steel market, including over 70% of the antidumping nature. And this trend has not changed since then.
In 2003 several measures were taken to strengthen positions of Russian exporters. They included two supplements to the Agreement between Russia and the U.S. on trading certain kinds of steel products: quotas for cast iron and steel semifinished products were raised. In connection with the expansion of the EU negotiations were conducted on increasing shipments of Russia’s steel products to European markets. The EU Commission decided to stop the antidumping investigation of supplies of hollow sections from Russia. In Argentina the investigation of sheet shipments was also stopped. Brazil and Columbia officially recognized the market status of the Russian economy that made it possible to review antidumping investigations.

Deficit of raw materials limits companies’ opportunities
In 2003 the non-ferrous metallurgy showed good dynamics: as a whole, production volumes rose 6.2% (relative indexes of the growing production of certain kinds of metals and items are listed in Table 3).
The increment of the primary aluminum output was ensured mainly through technological modernization. For example, the introduction of an additional set of electrolyzers at the Ural Aluminum Plant (incorporated in the SUAL Group) in 2002 allowed to raise the aluminum production by 12.5%, the output of this metal at the Sayanogorsky Aluminum Plant (the company RUSAL) was up 10.5% thanks to the increased capacities at the foundry division. As a whole, the load of capacities at the largest aluminum plants exceeded 99%.
As much as 81% of the total volume of the primary aluminum production went to export. Because of price growth companies’ earnings increased from $1,389 a ton in January to $1,560 a ton in mid-December. The average annual price equaled $1,432 a ton or was 6.1% higher than the settlement price in the previous year. Aluminum reserves at LME rose from 1 242,7 thousand tons at the end of 2002 to 1 423,3 thousand at the end of 2003.
Russia’s copper output decreased 3.2 %. Norilsk Nickel, which is basing operations on its own raw material resources, reduced production by 0.7% while the Urals’ enterprises cut it down by 7.2%.
Reduction of copper production at the Urals’ plants was caused by the limited capacities of the raw material base in that region as well as by the practically full stoppage of copper concentrate supplies from Mongolia and Kazakhstan. Russian raw materials were used to produce 99.6% of copper (in 2002 the figure was 96.6%), including 13.7% from secondary raw materials (in 2002 it was 20.7%). The use of production capacities was reduced by 4.8% and equaled 89.3% (91.3% in 2002). In 2004 the deficit of raw materials still remains.
The decrease of copper production was taking place against favorable price conditions. By LME quotations throughout the year prices for spot deliveries increased 31% exceeding $2,200 a ton.
In 2003 the increment of the nickel production volume was quite significant amounting to 8.9 %. The increase was 8.5% at Norilsk Nickel and 23.2% at the Urals’ plants. The production growth was stirred up by the increase in demand for stainless steel as well as by good prices. In December 2003 prices for nickel at LME exceeded the January level by 93% amounting to $15,800 a ton and setting a record for the last five years. Enterprises’ reaction was the increase in loading of production capacities that averaged 9.6%, up to 90.2%. The loading at Norilsk Nickel enterprises came close to almost 100%.
There was a significant gain in production of copper rolled stock (+26.2%) as well as of titanium rolled stock (+8%).

Growth of profits did not remove old problems
On the whole, the financial state of the Russian metallurgy in 2003 improved. According to the accounting data on October 1, as compared with indexes on October 1, 2002, profits of companies in this sector increased 2.3 times. In three quarters of 2003 the profit index in the steel industry amounted to $2.8 billion, it was $2.6 billion in the non-ferrous metallurgy or, respectively, 3.5 and 1.7 times higher than the similar index in 2002.
Problems of the Russian metallurgy are, mainly, of the chronic nature. They are the following:
1. The high degree of wear of active production assets (70%). The share of equipment with the service life of over 20 years (80%) is especially high.
2. The low efficiency of production resources’ utilization. For example, the average specific power consumption to produce 1 ton of steel rolled stock in Russia amounts to 1.24 tons of equivalent fuel as compared with 0.9 to 1 ton in countries of the EU and Japan. The labor intensity to produce 1 ton of rolled stock averages 14.6 man-hour as compared with 5.6 man-hour in countries of the EC and 5.45 man-hour in Japan. A rather high share of open-hearth melting remains at the steel-melting process stage. As a result, the level of waste for every ton of finished rolled stock reaches 250 kg as compared with 100 kg when producing rolled stock from converter steel with continuous casting. Specific power consumption in the aluminum production is by 10% to 15% and by 15% to 20% in the copper production higher than in the industrially developed countries.
3. The high level of atmospheric discharges that account for 15% to 20% of the general industrial pollution of the ecology. The share of neutralized and reprocessed waste at enterprises of the steel industry does not exceed 63.4% of their total volume, the index for the non-ferrous industry is 25%.

Cooperation with the State is useful
Experts believe that ministries and other executive bodies could cooperate more closely with owners of metallurgical enterprises in solving problems of this industry that plays a key role in the Russian economy. The following areas of their cooperation are recommended:
– developing an active external economic policy based on the universally accepted practice of taking protectionist and protective measures providing for the use of tariff and non-tariff methods of regulating import shipments;
– encouraging technical modernization as the main condition of improving ecological safety of production, reducing prime costs and increasing competitiveness of metal products;
– continuing liquidation of excess unprofitable capacities (the Ministry of Industry has already sent to enterprises its "Methodic recommendations for assessing efficiency of production capacities" aimed at developing a mechanism of their liquidation);
– promoting domestic demand, especially in the main metal-consuming industries, including signing long-term agreements on deliveries of metal products;
– developing an optimal mechanism to regulate changes in prices and tariffs for products and services of natural monopolists in the mid-term perspective as well as drafting long-term agreements between subjects of natural monopolies and their major customers.
So far Russia does not have an effective system of supporting national exporters, although debates about it have been going on for ten years already. Specialists are recommending federal authorities to take several, not particularly difficult and expansive steps, which namely are:
– providing metallurgical companies with timely information from trade missions on changes in market situation and possible new restrictive measures;
– interacting with administrative bodies of foreign countries in an attempt to ensure the review of existing restrictions and prevention of passing the new ones;
– expanding the practice of training metallurgical companies’ personnel on questions of antidumping laws in foreign countries and rules of the WTO.

According to forecasts, in 2004 the growth of metallurgical production in Russia will continue and its rates will amount to no less than 2.5% in the steel industry and 3% in the non-ferrous metallurgy.
This dynamics will still be subject to the decisive influence by the situation in world metal markets but the domestic market expansion will significantly strengthen the positive trend.


Table 1
Structure of steel products’ export from the Russian Federation in 1998 to 2003, %

1998 1999 2000 2001 2002 2003
Blank 32.8 45.4 42.7 45.8 42.2 38.2
Sheet 47.1 37.9 40.2 34.7 40 39.1
Bar 18.7 15.1 14.5 16.2 14.5 16.8
Steel pipes 1.4 1.6 2.5 3.3 3.3 3.6
TOTAL: 100 100 100 100 100 100
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Source: Russian Federation State Committee of Statistics

Table 2
Products by the steel industry in 2003

2003 % to 2002
Mining & concentrating ore raw materials for steel industry: 108.1
iron ore, million tons 91.8 106.8
iron ore pellets, million tons 32.9 110.5
Steel production 107.3
Finished steel rolled products, million tons,
including: 51.1 105.2
bar 27.7 102.1
sheet 22.7 108.6
coated sheet and plate, thou. tons 2,072 122.3
Production of steel pipes, thou. tons 6,102 118.2
Production of electroferroalloys: 126.5
ferrosilicon, thou. tons 760 108.2
ferrochromium, thou. tons 357 153,9
By-product-coke industry 103.9
Coke, million tons 32.7 103.9
Production of refractories, thou. tons 1,995 111
Making of metalware for production purposes 108.2
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Source: Russian Federation State Committee of Statistics


Table 3
Products by the non-ferrous metallurgy in 2003, % to 2002

Non-ferrous metallurgy 106.2
Aluminum 103.9
including primary aluminum 103.8
Copper 96.9
including pure copper 96.8
Lead-zinc 98.7
including
lead 100.3
zinc 98.5
Nickel-cobalt 105.3
includingí nickel 108.9
Tungsten-molybdenum 90.8
Tin 97.6
Electrode 108.1
The industry of hard alloys 85.1
Other industries, 107.1
including aluminum rolled stock 96.1
titanium rolled stock 108
copper rolled stock 126.2
gold mining 106.1
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Source: Russian Federation State Committee of Statistics