Cars, Builders Feel Need for Steel

MTA worker directing traffic in the electro-steel-melting complex at the Magnitogorsk Iron & Steel Works last week.
MAGNITOGORSK, Chelyabinsk Region — Amid computer screens and sparkling floors, billionaire Viktor Rashnikov showed off the new galvanized steel unit at his giant Magnitogorsk Iron & Steel Works, designed to churn out 450,000 tons of the metal annually for the country's burgeoning car and construction industries.

After Rashnikov disappeared into a control room, a huge roar could be heard, and a silver waterfall of zinc-covered steel rose up from the ground.

It was a far cry from the Inferno-like scene elsewhere at the 120-square-kilometer factory's steel-melting workshops on a recent company-organized press trip. There, huge cauldrons with molten metal of 1,600 degrees Celsius towered overhead, as workers kitted out in protective suits dodged sparks that belched out of traditionally operated furnaces.

A key catalyst behind the investment in the new technology is the soaring price for steel, up 45 percent to 50 percent over the last year, and the even-hotter prices for semifinished and construction steel products, which have shot up by 60 percent to 70 percent over the same period, according to Lehman Brothers metals analysts.

Given the expensive nature of imports, Russian steelmakers, such as Magnitogorsk Iron & Steel Works, or MMK, and its main rivals Evraz and Severstal, are rushing to cash in on demand in the country's auto and construction industries, where the consumer-led boom is still in full swing.

The switch to investing in more value-added production is in line with the often-stated policy of President Dmitry Medvedev and Prime Minister Vladimir Putin, who have stressed the importance for the economy of industry being overly dependent on raw natural resource wealth.

MMK said that Friday it would more than double the investment in building new production capacities this year to $2.3 billion, from about $1 billion last year.

Talking to reporters outside a newly built hospital for the plant's steelworkers Friday, Rashnikov insisted that the hot competition among steel producers was not about to lead to any big mergers or takeovers.

"Each of [the steelmakers] can be profitable on its own," Rashnikov said, smiling broadly.

The country's largest steelmaker, Evraz, which is 41 percent-owned by former Chukotka Governor Roman Abramovich, announced in May that it would invest $1.8 billion over the next five years to supply 3 million tons of additional rolled products to the domestic market.

"An increase of rolling capacity is the primary solution to satisfy the [country's] growing demand" in construction and infrastructure, an Evraz spokeswoman said in an e-mailed statement Tuesday.

Severstal, country's second-largest metal producer, plans to invest $8 billion through 2011 to increase its domestic sales 25 percent to 13 million tons per year by 2011, a company spokesman said Wednesday.

Rashnikov predicted that Russian steelmakers would be able to fully satisfy the auto industry's needs for various metals in the next 2 to 2 1/2 years.


Vladimir Filonov / MT
A statue of Soviet leader Vladimir Lenin in front of the Magnitogorsk Iron & Steel Works, which opened in 1929.
Some industrial consumers questioned the efficacy of steelmakers pushing for quick increases in the volume of domestic sales, saying they should also pay close attention to raising quality.

"Now matter what the deficit is, the steelmakers should not forget about quality," said Vladimir Zhuravlyov, production manager at the Lykhachyov plant, which supplies the car bodies and spare parts for the Renault factory in Moscow.

"[Russian-made] galvanized steel for use in many car parts often stratifies and peels off, unlike the Western-produced materials," Zhuravlyov said. He added that his company's Western partners demanded high quality, which could not always be met due to the low quality of locally sourced metal.

"Soviet and Russian carmakers used to be satisfied with the quality of the auto-sheet, but the foreigners and Russian carmakers [making] new models who came to our market couldn't come to terms with it," said Valentina Bogomolova, a metals analyst at Lehman Brothers.

"The high-quality auto-sheet [niche] could be filled by Severstal and MMK," Bogomolova said.

Russian prices for galvanized steel sheet currently go up to about 43,500 rubles ($1,860) per ton, while girder is priced at about 40,000 rubles per ton and reinforcing bar, or rebar, goes for about 37,000 rubles.

With foreign carmakers racing to ramp up production at new car assembly plants in Russia, the country is expected to surpass Germany for the spot of Europe's largest car market by the end of this year. Already in the first half of 2008, 1.645 million cars were sold in Russia, ahead of Germany's 1.63 million, according to PricewaterhouseCoopers.

MMK announced Monday that it would begin production by late 2009 at a 270 million euro ($420 million) plant in St. Petersburg that would supply 250,000 tons of auto body sheet annually to foreign carmakers in the area.

Severstal plans to double production at its $85 million galvanized steel production unit to 400,000 tons per year, the company said Wednesday.

Severstal is also ramping up output of common construction materials, with thermo-resistant rebar sales jumping 75 percent from 2005 to 2007. Likewise, Evraz's domestic sales of construction steel products increased last year by 35 percent to 3.6 million tons.

Players in the construction market have expressed dissatisfaction with the quality of domestically produced steel for their industry but said they often had little choice.

"Generally, the quality is OK, but even though we understand that Western products' quality is higher, it is several times more expensive," said Raisa Bokataya, chief designer at the Kireyevsk Light Steel Structures Plant, the country's biggest industrial and commercial construction hardware producer.

Amid the supply shortages, the steelmakers realize that they have the whip hand — and are setting their prices accordingly, she said.

"The metals producers dictate their own terms of supplies and payments, while they understand that we have no one else to buy from," Bokataya said. "The economy is booming crazily, so we need the metal to build everything — from shopping centers to pigpens and cowsheds."