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. Last Updated: 07/27/2016

Steelmakers Told to Join Forces and Raise Quality

Steel experts Friday urged Russian steelmakers to seek greater consolidation and lift the quality of their produce by upgrading to high-end technology if they are to avoid a head-on battle with China's red-hot steel industry.

Domestic steel mills should invest more in research and focus on high-profit finishing products, thermal technologies and advanced smelting methods to compete successfully with China, which is emerging as a net exporter of the metal, said Luigi Iperti, industrial plants and machinery president at Italy's Techint steel and oil group.

"Russian producers need to get into high-end products to get higher margins to avoid a direct fight with China," Iperti said at a Moscow conference.

With steel-plant construction in China 60 percent cheaper than anywhere else in the world, Russian steelmakers need to battle on the grounds of quality and not quantity, said Peter Marcus, managing partner of research agency World Steel Dynamics.

China largely produces the lower-margin crude steel and semifinished products. Last year, Chinese steelmakers produced 349.4 million tons of steel, three times as much as nearest rival Japan, and 30 percent of the world's output, according to International Iron and Steel Institute data. Russia produced 65 million steel tons in 2005, a figure much unchanged from the last 2 to 3 years.

In February, China's steel exports grew larger than the country's imports, although the Beijing government has hinted it may curb exports to feed booming demand at home.

Although domestic steelmakers enjoy the highest profitability worldwide alongside Brazilian firms, their efficiency could be reduced after Russia enters the World Trade Organization, Iperti said.

"The price of production factors, especially energy, could increase," minimizing Russia's advantage from having a low-cost and large gas supply, Iperti said.

To gather greater profits, domestic steel firms will need to invest in their own rolling mills to process semifinished products and introduce the latest smelting techniques, experts said.

Despite increased competition, however, the Chinese growth factor may yet play to Russia's advantage, Marcus said. Cash-rich Russian steelmakers have looked to expand abroad, with top producer Severstal's bid to merge with European giant Arcelor the latest and biggest example of their ambitions.

"Within a couple of years, Chinese mills are going to be participating in the global consolidation," Marcus said. Given that the top 6 Chinese steel firms produce nearly double that of Russia's top 6 players, the latter would need to consolidate to pose as potential takeover bidders, he said.

Arcelor senior executive vice president Roland Junck said Thursday that he expected a merged Severstal and Arcelor to lead global consolidation, with a particular focus on China.