Industry Shows its Metal in a Tough Climate

Gazprom

Pipes for the second line of the South Stream pipeline offshore section are produced by Severstal and United Metallurgical Company OMK a manufacturer of large diameter pipes. Japanese companies are also suppliers.

Steel companies are unlikely winners from the ruble's tumble but competition from China is adding to the impact of the market's cyclical downturn.

While many sectors struggle to adapt to the slowing economy, the ruble's slide against the dollar makes domestic steel exports more profitable, allowing the steel industry to fight back against cyclical pressures.

According to the state statistics agency, Rosstat, in the first six months of 2014, Russia's crude steel output rose by 1.7 per cent, steel sheet by 1.3 per cent and steel pipes by 2.6 per cent, from the same time a year ago.

Over the same period, Russian steel exports rose by 52 per cent† in volume terms and by 38 per cent in ruble terms, compared with the first half of 2013. There was an especially substantial surge in exports to non-CIS countries.

"Russian steelmakers have traditionally been competitive in export markets thanks to lower production costs, and the ruble's devaluation has made them even more competitive," said Dmitry Glushakov, a senior analyst at Alfa-Bank.

"And although market conditions in most of Russian exporters' traditional territories are gradually becoming less favorable due to steel exports from China, which increased by 50 per cent† this year, Russian steel exports are sure to remain significant."

Increased export revenues have allowed Russian mills to dramatically improve their stock market performance.

Against the backdrop of Russian stocks' overall poor performance, major domestic steelmakers' stock has risen substantially since the beginning of this year.

Since January 2014, Russian stocks have lost 31 per cent of their value; steelmakers' stocks have been doing well. Novolipetsk Steel Plant increased by 21 per cent , Severstal by 41 per cent† and Magnitogorsk Steel Plant by 17 per cent† between July and November.

"We are optimistic about growth prospects for Russian steel companies," said Glushakov. "Exporters' revenues are linked to the dollar, while their production costs are in rubles. So, the ruble's loss in value is set to increase steelmakers' profits, which, in turn, should be appreciated by the stock market."

Historically, Europe, Central Asia and South East Asia have been priority markets for Russian steelmakers. They have been exploring other territories, as well, but prospects there could be limited.

"In 2014, because of high prices for steel in North America, Russian mills stepped up exports to that region," said Glushakov. "But as import duties on Russian steel are expected to be introduced in the United States, next year, Russian mills are likely to focus on Europe and Central Asia."

He added that prospects in South East Asia are unclear because of tough competition on the part of Chinese steelmakers.

Financial sanctions are unlikely to have a major impact on the Russian steel industry, experts say. However Russian banks are exposed to the sector. Coking coal producer Mechel accumulated $8 billion of debt as the price of coal used for steelmaking collapsed.

The continuing problem is the glut of supply that hit the market hard at the end of last year. Steel producers are expected to continue efficiency measures and efforts to shed loss-making assets, especially if European and Chinese demand continues to decline.


Doing Business in Russia 2014
Doing Business in Russia 2014
The СCEO of the Year Russia 2014Т awards come at just the right time. They celebrate the achievements of the best CEOs. They are a lesson in the possible, a benchmark to aspire to and something to be proud of.
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