Steelmakers to Benefit from China Focus

The strained relations with western governments may have a silver lining for steel companies as Russia accelerates work on new pipelines to Asia.

Because of sanctions, some western producers of technical equipment have stopped supplying Russian energy companies. In addition, the shift towards Asia, including a 30-year gas supply deal with China, requires heavy investment in new infrastructure. Siberian projects are reported to include about 770 billion rubles ($16.5 billion) of expenditure, about a quarter of the value representing steel pipes. Most of the pipes used in construction of the 4,000 kilometer Power of Siberia gas transmission system will be manufactured domestically.

The domestic market produces higher margins for Russian steelmakers but producers are ready to capitalize on the international spot market.

It is not yet clear how sanctions will affect demand from the oil and gas industry. The restrictions on some Russian companies raising finance in Europe and the U.S., combined with the high cost of borrowing in rubles, are likely to further depress growth in the Russian economy.

Severstal has said it may compete head-to-head with more expensive Chinese producers. The company is looking for overseas markets with the best margins, particularly after the U.S. in October declared that it would scrap a deal exempting Russian flat-rolled steel producers from high import duties. The deal had been in force for 15 years. U.S. steel producers had complained to the U.S. Commerce Department that Russian prices were lower. Severstal argues that the quality of its mining assets, modern operating practices and its investment in technology allow it to produce more efficiently.

The company has just sold two U.S. plants that it had modernized extensively: Columbus, Mississippi and Dearborn, Michigan. In September Severstal sold its U.S. operations, collectively known as Severstal North America, to Steel Dynamics and AK Steel Corporation, respectively.

In 2004 Severstal acquired Dearborn in its $285 million takeover of Rouge Industries, and acquired the Columbus operation three years later. It invested about $1 billion in each plant.

Analysts said Severstal had no pressing financial need to sell the international plants, which accounted for about 17 per cent of Severstal's earnings in the first three months of 2014. However the cyclical downturn in the steel industry has led many companies to focus on cutting costs.

The largest pipe maker TMK may consider an initial public offering for its U.S. unit, TMK IPSCO, to raise funds, the company told Reuters. Reducing debt is a theme for many of Russia's biggest companies that expanded strongly in recent years, some of them making acquisitions as the global markets boomed up until 2008.

However the ruble's weakness is a bonus for those companies that sell their output in dollars. Steelmaker NLMK reported a 77 per cent increase in third quarter net income and it expects sales in this quarter to rise by two to five per cent. Exports contribute more than 50 per cent of revenues, while 80 per cent of its costs are in rubles.††

Doing Business in Russia 2014
Doing Business in Russia 2014
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