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. Last Updated: 07/27/2016

Steel Plants Cut Output as Market, Prices Drop

Russia is on pace to report its first drop in annual steel production since 1998 as a result of global oversupply.

The nation's rolled-steel output dropped 0.9 percent to 11.38 million tons in January to March as leading exporters — Magnitogorsk, Novolipetsk and Severstal — cut volumes 5.4 percent, 4.6 percent and 10.8 percent, respectively, as overseas demand sagged.

"We had to cut production," said Viktor Obukhov, Magnitogorsk steel mill's chief statistician, on Thursday. "Bear markets take their toll."

Although the company plans to keep its output unchanged at 8.6 million tons in 2001, its revenues are expected to plunge 30 percent.

Severstal expects this year's total output to drop 3 percent to 8 million tons, selling products worth $1.9 billion, down 15 percent on an annual basis.

Novolipetsk will lower output 7 percent in 2001, using the pause in exports to upgrade its facilities.

"Reconstruction of production facilities was intentionally planned to be carried out when demand is low," a company spokesperson said. "We want to make best use of the recovery that may take place sometime in 2003."

NIKoil estimates show that the national-production drop will amount to 1 percent or 2 percent compared with last year, when production grew 14.8 percent to 46.9 million tons, the highest level in eight years.

Despite the bad start, however, Russian firms are faring better than their U.S. counterparts.

Year-to-date production through April 21 in the United States dropped 11.8 percent to 31.02 million tons, according to the American Iron and Steel Institute.

Last year, global steel production hit an all-time high of 843 million tons, while imports in the United States surged to just under 38 million tons, the second highest import level in U.S. history, according to the AISI.

At the same time, prices are plunging.

Since May 2000, steel manufactured in the United States, the world's largest market, lost about a third of its price with hot-rolled sheets being offered for $225 per ton and cold-rolled sheets being sold for $310 per ton.

Severstal officials say excessive stocks will be wiped out only by 2003.

"We expect prices to recover in the second and third quarters, but by the end of the year they are likely to drop again," says Olga Yezhova, spokeswoman for Severstal.

Adding fuel to the fire, domestic producers resolved to derail a 1999 intergovernmental agreement that limits Russian steel deliveries to the United States through 2005.

On Monday, Novolipetsk, Magnitogorsk and Severstal urged the government to bail out of the deal.

Within 60 days after the official decision is made, local steel makers will be able to jack up exports.

Russia exported 128,000 tons of steel to the United States in January to February this year, or about 1.6 percent of its output.

Under the agreement, Russian companies are not allowed to sell hot-rolled steel on the U.S. market below $309, almost 40 percent above current prices.

Russian companies, however, are keen to extend an agreement with the European Union that expires at the end this year. Europe has been urging its eastern neighbor to join the World Trade Organization in 2002 and not regulate its steel exports, but local companies fear that the transition period during which Russia's status will remain undefined may last longer.

The national steel industry, including steel mills, pipe plants and other downstream companies, makes up about 3 percent of the gross domestic product.