Memo from Moscow

Steel News from Russia and Ukraine

Impact of Credit Crisis on the CIS Steel Sector, January 2009

In 2008 - for the first time in this decade - full-year results for world steel production will show a decrease in output. The CIS countries show especially prominent collapses in production. Indeed, during November 2008, month-on-month CIS crude steel production declined by 43% compared to a worldwide fall of around 20%. The monthly fall was over 30% in Russia, ~55% in Ukraine, with a fall of almost 59% in Kazakhstan.

Ukrainian crude steel production for the 11 months of 2008 declined by ~10.3% in comparison with the 11 months of 2007. With the recent steel production decline, the full year outturn may reach 38.3 mt of crude steel versus 42.8 mt in 2007.

According to Ukraine's Metallurgprom, there were in December 2008 25 blast furnaces operating from a total of 41, 14 open-hearth furnaces operating from a total of 42, with 12 BOFs from 21, 7 EAFs from 14 and 14 rolling mills from 64 also in operation in December 2008. Readers should note that 45% of crude steel in Ukraine is still produced by OHFs, so closure of 28 OHFs is a major shock to the country's metallurgical sector. According to pessimists the Ukrainian steel sector will in 2009 operate at just 50% of rated capacity.

Source: Rosstat

In Russia during November - December 2008 the steel sector also witnessed closure of a number of out-of-date open-hearth furnaces, shut-down of 7 blast furnaces at NLMK, MMK, ZapSib and Severstal; with about 10-20% of all metallurgical workers laid off on temporary leave of absence.

The credit crisis saw a number of oligarchs hit hard also. Equity valuations of all Russian metallurgical holdings fell considerably. Indeed, the top 5 billionaires in the metallurgical sector (Deripaska, Abramovich, Lisin, Mordashov, Potanin) together lost over $100 billion in a matter of weeks. All Russian steel holdings have huge foreign debts and are having to tighten up their cash flows considerably. Some of the larger holdings will supposedly even need stock splits just to enable them to meet their dividend payment obligations.

The Russian Government has earmarked up to 10 trillion Rubles for crisis prevention measures, with around 320 billion Rubles allocated for refinancing of external debt. The Russian Government is also assisting the sector by pledging securities and by involving State representatives in business management. Rusal received ~$ 4.5 bn from VEB. Russia's VTB Bank covered a special credit line of 30 bn Rubles in support metallurgical plants in the Chelyabinsk region (MMK, Cheliabinsky Iron and Steel Works of Mechel, ChTPZ Group). VTB Bank also assisted the Evraz Group with special credit arrangements and just before the New Year Sberbank allocated a 3 billion Ruble credit to MMK in Magnitogorsk for the construction of the Plate Mill 5000.

In recent days the Russian Government published a List of enterprises that would be elegible for State support during the credit crisis. This List includes 256 enterprises from a broad range of sectors in the Russian economy: transport, energy, oil and gas, coal, metallurgy etc. The objectives of this Government intervention are to support stability in operations and to minimise any negative socio-economic consequences of the crunch. Support instruments are to include credit arrangements as well as more direct state support in the form of guarantees, state purchasing involvement, export facilitation and trade support, restructuring of tax debts and relaxation of customs tariffs.

In metallurgy and mining, the List includes 32 main Russian metallurgical enterprises from the non-ferrous (Norilsk Nikel, Rusal, Alrosa) and the iron and steel sectors. The list of steel producers includes about ten of the largest steel holdings: Severstal-Rossiyskay Steel, Evraz Holding, ESTAR Group, Mechel Management Company, Metalloinvest Management Company, Magnitogorsky Iron and Steel Works, Novolipetsky Iron and Steel Works, UGMK Holding, Amurmetal Group, Electrometallurgical Plant Electrostal, as well as the three main tube and pipe producers OMK, TMK and ChTPZ Group. Energoprom Management and Magnezit Group as electrode and refractory producers are included also on the List.

According to a number of industry observers, the peak of the credit crisis will not be evident until February or March 2009. It is thus around the end of Q1 2009 that the worst should be expected. A number of Russian and Ukrainian steel plants risk outright closure at this point due to shortages of orders, non-availability of raw materials and a total absence of working capital. Even with the Government support outlined above, full recovery of the CIS steel sector can be expected to take at least two full years.

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