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mitry Tarasov, Deputy General Director, Oskol Electric Steel Works (OESW):

- The rapid growth of China’s economy backed up by foreign investments led to the increase of the Chinese share of the world steel consumption up to about 36%. It is quite reasonable to state that an economy with so much a consumption inevitably sets prices and volumes of supplies. One can feel confident saying that today China determines the vector of the world trade and respective flows while Chinese prices serve as an indicator and a guidepost for the global ones. The country demonstrates the phenomenally high rates of growth of GDP that for the current year come to 8%. Meanwhile, it is well known that, as a rule, each percentage point of GDP growth results in boosting consumption of steel rolled stock by 1.5 to 2 %.
Now I would like to directly consider the question of billets for rerolling. The price for square billets has always been one of the major price indicators for all steel products. China’s billet boom started after the Chinese New Year holidays. In the first two weeks of February of 2004 prices in China for billets grew up by almost $100 a ton. Many producers of bars redirected their efforts so as to make billets for this market. We, by the way, were pursuing a somewhat different policy. Anyway, the supplies to this market went up sharply causing, in fact, a deficit in other markets, though prices there were also on the rise. Due to the enormous supply during February 2004, considerable reserves were stored as the supply went on increasing. In these conditions customers stopped making further purchases and prices stabilized.
These processes resulted in the chain reaction causing billet deficits in the U.S., the Middle East and Europe. These regions also experienced price increases. By the end of March prices for billets around the world reached their maximum levels and the demand went down. In order to maintain their volumes of sales, suppliers started reducing prices. By the end of April offers of billets in China were in the range of $380 to $400 a ton and in Vietnam billets were being bought for approximately $400 a ton. Being worried about the overheating of the metallurgical sector the Chinese government has been introducing lately financial limits on deals related to trading in metals and, accordingly, it has been taking measures to cut down rates of the rapid development of the country’s heavy industry.
In the beginning of 2004 prices for reinforcement and rod in China and the Far East were almost equal to the billet ones. That is why the volume of supply was not that high. In early February imported reinforcement and bar were being sold in countries of the Pacific region for the average price of $380 to $400 a ton. In March, when prices for billets reached their maximum, prices for imported reinforcement and bars in the region grew up in a month by $100 and in mid-April they reached already $470 and sometimes even $520. At the same time, these prices outrun domestic prices in China, which by then started importing reinforcement for $450 to $470 a ton. Thus, we happened to be witnessing the beginning of China’s export program.
Today, many experts tend to believe that steel prices in China will be declining due to the reduction of the government investments as well as because of building roads and bridges. Pundits note that steel traders have already started limiting the steel stock since the demand turned out lower than expected and the growth of the domestic production was going faster than planned. So, like in the case with the imported billet, it is quite reasonable to forecast a reduction of the demand and some decrease of prices, accordingly.
By our estimates, the market of the European community ranks second by costs after the Chinese one. Besides raw material problems, European producers encountered the negative macroeconomic conditions. In our opinion, that is precisely the reason of the relative calm in the market, Price splashes, if they happen, are, most likely, to be of special nature.
It is worth mentioning the interrelation between Europe and China. From the beginning of this year, due to the sharply increased demand in China, prices for scrap and billet in Europe also started to grow up and in the first quarter they were practically equal to the price for reinforcement. The further increase in prices for raw materials as well as expenses on energy and transportation brought about the rise in prices for finished rolled products. But in the first quarter their level was lower than in other regions of the world. That, essentially, explains the sharp decrease of imports in Europe and the flow-out of raw materials and finished rolled stock to more expensive markets. As a result, by the beginning of the second quarter there was a deficit of metal rolled products, prices grew up to such a level, when it became profitable to export to Europe both reinforcement and rod.
In the beginning of the second quarter the deficit of bar in Europe was so high that prices for it kept growing despite declining prices for scrap metal. In Germany the demand for metal rolled products in the first quarter was up by 19%. The country’s stored reserves went down to the amount of being sufficient for just a month and a half. This implies reserves’ replenishment and a consumption growth. It makes sense to regard the bar market in Europe as the most promising one for supplies in the third and fourth quarters of the current years.
The absence of import duties in the U.S. as well as a high demand for bar rolled stock resulted in an increased supply by their own producers and producers from other regions. The market became sated, contracts running through July were signed and this also implies that, as a consequence, prices for bar rolled stock will be stabilized.
Summing up everything mentioned above, it is obvious that China will remain the key indicator of market conditions. Since the decision of the Chinese government is directed at cooling off the growing economy, limiting investments and financing deals, prices are not simply falling down but they are, at the same time, being stabilized. Against the background of the general global reduction of prices, the American and European markets of bar rolled products are becoming the most attractive in terms of the expected steady demand and price growth.
As far as the activity of OESW in this market is concerned, I can tell that, as a whole, its deliveries to markets of the European Union account for 73% of the total shipments. We, of course, have shipped supplies to countries of Southeast Asia and the Far East as well but, nevertheless, we believe: the achievement of our strategic marketing department is that it has correctly predicted the market situation and prevented losing our traditional markets in Europe.

Olga Naumova, General Director, Cherepovets Steel-Rolling Mill:

- First of all, I would like to describe the production group, which I work for: SeverstalMetiz, the sundry metal items company of the Severstal Holding. This independent business unit includes the Cherepovets and Orlovsk Steel-Rolling Mills and it manages sales as well as procurement by the Volgograd Steel-Wire-Rope Plant. Our enterprises are the largest producers of sundry metal items in Russia’s European part. They account for a third of the Russian market of sundry metal items and over the half of the Russian export shipments. The enterprises manufacture high carbon steel products: wire and items made of it, including steel cord, calibrated rolled stock and its items (various kinds of construction fasteners) as well as items made of ordinary wire.
According to different estimates, sundries account for 18% to 30% of the market of bar products amounting to about 65 million tons in the world. Russia’s share of this market is not big: our sundries consumption comes to only 3% of the world market. But if compared with such saturated markets, as Europe and North America, which, while consuming almost half of manufactured sundries, in fact, do not grow (by estimates, in the nearest 5 years their annual growth rates will not exceed 0.2%), the Russian market is developing quite dynamically.
The Russian export is also significantly expanding with rates of up to 20% a quarter. The major exporters are the three companies: our group, the Mechel Steel Group and ÌÌÊ Metiz (the group of sundries enterprises belonging to the Magnitogorsk Iron & Steel Works).
So far, the Russian sundry industry is experiencing the low loading of its production capacities. With respect to manufacturing a number of items, in particular, calibrated steel, this index does not exceed 30%. Such a situation leads to the strong price competition as well as to the desire of the industry’s enterprises to form alliances either with metal suppliers or among themselves so as to survive and to get an opportunity to maintain their development. As a result of mergers, mostly through acquisitions of sundries enterprises by steelmakers, there are six major players in the Russian market (for comparison: the same number of sundries enterprises in Europe control no more than 25% of the market).
The clear advantage that the sundries market gets from the vertical integration with steelmakers is the stability of raw material supplies. But, on the other hand, through lower prices for raw materials sundries enterprises get subsidized and the uncontrolled dumping takes place. These raw material supplies turn out less efficient than sales of these same raw materials in the market. I think that the problem will be gradually recognized since it does not make sense to develop production that gives negative financial results. Indeed, the banal idea that there is a need to earn money in your own business comes to our main rivals: other vertically integrated companies are also making attempts to single out the sundries production into a full-fledged business unit that is fully responsible for its financial indexes.