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. Last Updated: 07/27/2016

A Bigger EU Threatens Russian Steelmakers

For MTTo avoid future EU steel quotas, Novolipetsky metals factory has bought Denmark's Dansteel as a precautionary measure.
With European Union expansion planned in less than six months, the domestic steel industry is fighting to retain its markets in Eastern Europe.

When seven countries formerly in the Warsaw Pact join the EU next spring, Russia stands to lose a significant share of its steel exports.

As a precaution, some Russian steelmakers have gone as far as buying factories in countries that soon will be located in Europe's expanded market.

According to a 2002 agreement, Russia will be allowed to sell 1.3 million tons of steel roll to the EU next year.

But this figure does not include the 500,000 tons of steel roll Russia currently exports to Eastern Europe.

Moscow is trying to persuade Brussels to modify the agreement and increase the volume of steel that Russia will be able to export to the enlarged EU.

A delegation from the Economic Development and Trade Ministry took the Russian case to Brussels last week. But officials are refraining from commenting on the results of the talks, citing the illness of the head of the delegation.

Interfax quoted an unnamed ministry official as saying only that the EU promised to "consider Russia's interests."

There have already been signs that EU quotas will be adjusted.

"Quotas will be adjusted to take into account traditional trade flows between new European members and countries such as Russia," said Arancha Gonzalez, spokeswoman for European Trade Commissioner Pascal Lamy.

High-level talks in May resulted in the EU saying it would consider raising quotas by 495,000 tons, almost as much as the Russian side requested, said Vasily Varyonov, head of the department for the protection of foreign markets at Magnitogorsk metal works, the country's largest steelmaker.

"If things continue moving in this direction, I don't foresee any problems for us," he said.

Not all steelmakers are so certain, and some industry players are preparing for the worst.

The Novolipetsky metals factory has purchased Dansteel in Denmark, an EU member, and Severstal has bought a stake in SeverstalLat in Latvia, a candidate country.

Foreign holdings serve as a sort of insurance, giving Russian companies the option of skirting quotas altogether.

In the future, domestic steelmakers could export steel slabs -- which unlike steel roll are unregulated -- to their EU plants for further processing.

Severstal is currently bidding for the purchase of Hungarian steelmaker Dunaferr.

"You've seen a move [by Russian companies] to buy Eastern European steel assets," said Renaissance Capital's Rob Edwards.

"They are trying to hedge themselves out of marginalization on the market."

But there are also drawbacks for Russian companies, analysts warn.

Domestic companies have little experience working the European market from the inside.

"The managers of Russian companies are not familiar with these markets. They will have to learn to work with more stringent regulation and higher costs then they are used to," said Vladimir Savov, a senior analyst at NIKoil.

"[Buying companies in Eastern Europe] doesn't guarantee instant and easy market shares."

Since the United States lifted tariffs on steel earlier this month, the global market for the metal is in flux.

Part of the EU's rationale for keeping trade barriers was to stem the flow of imports redirected to Europe after being blocked from America, said Vladimir Pechik, executive director of the Russian Union of Metals Producers.

Russian producers, he said, hope EU regulations will be softened now that the U.S. market has opened.

Nevertheless, domestic steelmakers are not overly optimistic. Some believe that even with adjustments, the EU will try to keep Russian steel off its markets.

"There is a difference between getting quotas and fulfilling them," said Andrei Selenyuk, executive director of one of the country's largest steel producers, Yevrazholding, which reported $2 billion in sales last year.

"Just as the United States did, [the EU] will use anti-dumping laws to block as many imports as possible. And even if those cases are unfounded, they drag on for a long time."

U.S. anti-dumping measures have cost some Russian steel producers stiff tariffs of 167 percent, Selenyuk said, and he expects to see Europeans use similar tactics after EU expansion.

After nearly two years of high U.S. steel tariffs, only 7.5 percent of Russian steel products are bound for North America.

With just under 10 percent of global steel production, Russia is one of the world's largest producers, making nearly 60 million tons of steel per year.

Twenty-seven million tons, or about half of total production, is exported to Asia, followed by Europe, which accounts for 32 percent of Russian steel exports, according to Pechik.

If the European market follows the American trend, Russian steel has a lot to lose.

"Europe is not a prospective market for Russia, and although I see some room for semi-finished products over there, I don't see the overall situation changing for the better," said Selenyuk.