Faced with dwindling stockpiles, Russia's steel traders recently found themselves in the unfamiliar position of struggling to keep their warehouses full. Steelmakers were exporting more to profit from the weaker ruble, leaving domestic consumers to scramble for what remained of the country's stunted output.
Steel prices even started creeping back from a fourth-quarter plunge as traders urged producers to restart facilities they began idling late last year. But with construction firms and carmakers — some of the industry's two largest consumers — still struggling to survive a production slump to levels unseen since the early 1990s, steelmakers say the party won't last long.
The short-lived revival was scant consolation for Russia's enormous steel industry, which accounts for about 8 percent of the economy. Prices for the metal fell a staggering 65 percent from September through December on plummeting demand at home and abroad, leaving most steelmakers with no profit in the fourth quarter and dim prospects for the months ahead.
Companies responded by slashing production, investment plans and jobs. Banks that lend generously to Russia's big five steel firms grew reticent to extend new cash to mid-sized and small metals producers and traders. Some producers say they are working to boost output, but few expect the brief supply deficit to spur a real recovery.
Magnitogorsk Iron & Steel Works, or MMK, the country's No. 3 steelmaker, has restarted one of the blast furnaces it shut down late last year and plans to relaunch another in March. An MMK executive told The Moscow Times that the company planned to boost its production level to as much as 90 percent in March, or 800,000 tons of steel per month, up from 420,000 tons in December.
On Thursday, however, the company said it planned to scale back to 60 percent of capacity, from 70 percent currently.
Novolipetsk Steel, or NLMK, Russia's fourth-largest steelmaker, said it has restarted two blast furnaces in the past two weeks, but one remains idle. Production of slabs and hot-rolled coil, two of its main products, stands at 78 percent of capacity, NLMK spokesman Anton Bazulev said. The figure should rise to 85 percent next month as orders grow, he said.
A spokesperson at Mechel, the fifth-largest steel producer, said the company's smelters were operating at 80 percent of capacity and that the company had restarted a steelmaking workshop and was planning to relaunch a blast furnace in April.
But with automakers and builders showing no signs of recovery and a 16 percent year-on-year drop in industrial output last month — the deepest contraction since 1994 — steelmakers say they aren't holding out hope for a quick return to growth.
"We are feeling an insignificant revival of the demand on the home market, but connect it only to the destocking. We feel no real demand," Dmitry Gorshkov, sales director at the Cherepovetsky Metallurgical Plant, wrote in an e-mailed response to questions. The plant is the main facility of Severstal, Russia's biggest steel producer.
NLMK shared the assessment. "We understand that the current surge in demand is temporary and based on metal traders and steel consumers running out of steel as well as their desire to hedge against the instability of the ruble," company spokesman Anton Bazulev said. "We don't actually call it demand now, as there are no fundamental reasons for consumption to resume."
MMK vice president Alexander Mastruyev told Vesti-24 this week that the company might suspend its blast furnaces again because of unstable demand.
"I think it is all temporary. Car plants are stopped, railcar plants are stopped, pipe makers aren't working at full capacity and the construction industry is at a standstill," Mastruyev said. "We're not hoping to return to the previous levels of production tomorrow or the day after tomorrow. We don't think it will happen."
Viktor Kovshevny, the head of metals market analytical center Rusmet, said things had already begun to worsen. "We see a drop in demand of 10 to 15 percent in February compared with January," he said.
Metal traders' brief shopping spree in January was one of the reasons steel prices grew 10 percent to 50 percent, depending on the product. But the main reason, said UniCredit analyst George Buzhenitsa, was that metals companies were trying to balance their domestic and export prices.
"The metals producers set the prices too high, frightening buyers," Kovshevny said.
The question can be a touchy one for Russian metals companies. Last year, Mechel was blasted by Prime Minister Vladimir Putin for selling coking coal, a key ingredient in steelmaking, for more in Russia than abroad, criticism that halved the company's market capitalization in a matter of days.
The Central Bank's gradual devaluation of the ruble, which lost a third of its value from Nov. 11 to Jan. 22, proved a boon to commodities exporters, whose costs are in rubles but who are paid in dollars. As a result, steelmakers redirected their sales to the hungry markets of Europe and Asia.
Rusmet says Russian steelmakers sell 19 percent of their export volumes to Asia, 40 percent to Europe and another 20 percent to the Middle East.
Alfa Bank metals and mining analyst Maxim Semenovykh said steelmakers exported 68 percent of their products in January. Before the crisis hit Russia in September, just 45 percent of Russian steelmakers' output was sold outside the country.
"The devaluation was the main factor of the rebalancing, which was further encouraged by export prices that were significantly higher than the production costs in Russia," Semenovykh said.
Severstal admitted that it has enjoyed the fruits of devaluation. "We have come to feel more competitive on the foreign market because of the weakening of the ruble," said Gorshkov, the sales manager.
"Vertical integration combined with cheap iron ore and coal resources and the low ruble rate prompted the export growth, while the domestic consumers suffered from lack of liquidity and the high-level of stockpiles," UniCredit wrote in a note last week.
Rusmet, the metal industry analytical center, forecasts that exports will reach 70 percent of production in February.
When contacted for this story, Severstal, Evraz, MMK, NLMK and Mechel declined to reveal the price at which they are selling steel abroad. In December, MMK said it was selling at an average price of $742 per ton in Russia, and $901 per ton abroad.
The five companies also declined to discuss their strategy for production growth through exports.
"We forecast a 5 percent drop in the industrial output this year, which transforms into a 17 percent drop in steel production at an annual rate, compared with 2008. That would mean demand for only 75 percent of the steel mills' capacity," Semenovykh said.
The sudden preference for exports left some domestic consumers and traders unsatisfied as they woke in January from a three-month hibernation to buy steel.
Russian steelmakers had lowered their production by an average 40 percent in November and December and did not have supplies to meet traders' demand while still exporting in full swing. As a result, steelmakers brushed off domestic consumers with unreasonably high prices, the MMK executive said, speaking on condition of anonymity to discuss the market freely.
"We are only a third full and ready to buy the metal now, as demand has somewhat revived," Oleg Tyurpenko, chief executive of the MetallServis, the country's biggest metals trader, said in a recent interview.
The trader had seen its stockpiles fall threefold, to 90,000 tons, from September to November. "At that time, to have stockpiles at your warehouse was equal to death because demand had stalled and prices were sinking in the blink of an eye," Tyurpenko said at his office, located in the company's warehouse complex in southeast Moscow.
A ton of rebar — the main steel product for the construction industry — cost 36,800 ($1,023) rubles in August. By September, it had fallen to 27,990 rubles and in December dropped as low as 12,500 rubles, according to MetallServis. A ton of rebar currently costs about 20,000 rubles.
"Production costs here are among the world's lowest because of vertical integration," Kovshevny said. "Steelmakers can sell at a lower price abroad than their foreign competitors."
When asked about the current import-export ratios, most of Russia's Big Five steelmakers kept mum. MMK said it was now selling 48 percent at home in February, down from 60 percent to 65 percent in the fourth quarter of 2008.
The government has allocated more than $200 billion since September in rescue measures for the economy, which is heading into its worst year in a decade. The Economic Development Ministry this week cut its economic outlook for 2009, estimating a 2.2 percent contraction from the previous forecast of a 0.2 percent fall.
If the government doesn't support the construction sector, the percentage of exports may grow, said Kovshevny, of Rusmet.
"The export figures may rise to as much as 75 percent of production as metals producers see miserable demand at home in the short term," he said. "Helping the construction sector is the best way the government can help metals producers."
Questions e-mailed to the Industry and Trade Ministry about its plans to help the metals industry remained unanswered.
Even the high profits from steel exports could weaken by the second quarter.
"Foreign producers of steel and raw materials will set lower prices in April, when their yearlong contracts expire," Semenovykh said. "So, Russia will lose some of its raw-materials pricing advantages."
The sudden attention to the export market was also rooted in foreign clients' better payment discipline. In a poll of 113 metals producers and traders conducted by Rusmet from late January through Feb. 11, nonpayment was ranked as a "major concern."
Half of all respondents said they expected further growth of nonpayments this year. Kovshevny estimated the overall industry receivables at "dozens of billions of rubles."
The lack of financial liquidity after the banking sector seized up left the entire industry struggling to meet obligations. Builders fell behind on payments to traders, who along with pipe makers, had debts to steel producers. As a result, the steelmakers were racking up major debt with their suppliers of coal and iron ore.
Earlier this month, MMK asked Mechel whether it could repay an 801 million ruble ($22.3 million) debt through a barter arrangement. An MMK executive said it had offered to send steel to Uralvagonzavod, which supplies train cars to Russian Railways, and that Russian Railways would in turn provide transportation services to Mechel. The offer was declined, however.
Tyurpenko said MetallServis receivables stood at 70 million to 80 million rubles, mostly owed by big construction companies.
"The construction companies don't pay us because if we go to court they will have to give us the money back in only a year," Tyurpenko said.
The problem is aggravated by the tightened access to the bank loans. While Russia's steel majors were able to get billions of rubles from state-run Sberbank, VTB and state-influenced Gazprombank, midsized and small producers and traders couldn't find a kopek.
Kovshevny, of Rusmet, said banks had a "blacklist" of borrowers, which included metals industry producers and distributors. Fifty-nine percent of those polled by Rusmet said they saw a decrease in banks' willingness to credit the industry, even compared with October and November.
Sberbank and VTB, the country's biggest lenders, denied having "blacklists."
Another problem with banks was their desire to "over-hedge" risks, as some metals traders put it.
"The board of MetallServis had to sign papers saying we would offer everything we have as collateral," Tyurpenko said, showing a thick stack of papers containing a report prepared for Sberbank on his company's anti-crisis measures. "They just wanted it to make sure we will still be able to make payments on the loans they have already given," he said.
"We expect the prices to go down in spring, then to slightly go up in summer and then drop in autumn again," Tyurpenko said. "We just took the usual forecasts, including the seasonal factor, and turned it upside down.
"There are no rules working in terms of prices now," he sighed.
Rusmet expects rebar to cost 15,450 rubles ($430) per ton in March, down from the current 20,000 rubles.
"In our base-case scenario, we expect average sales volumes to be down 20 percent year on year in 2009 and average prices to be down 50 percent year on year," UralSib metals analysts Dmitry Smolin and Michael Kavanagh wrote in a note earlier this month.
Semenovykh, of Alfa Bank, said the steel market won't revive until at least next year. "It is highly unlikely that we will in the next three to four years come back to the sky-high steel prices that we had in 2008," he said.
The steel market participants polled by Rusmet, however, showed no signs of giving up. Only 13 percent of those asked said they were ready to sell their businesses. Nonetheless, some of them were looking to diversify.
"You can't put all your bets in one sector, especially one so volatile as the metals industry," said Tyurpenko, of MetallServis. "If you work in metals, you should diversify."
SourcE: Moscow Times
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