Memo from Moscow

Steel News from Russia and Ukraine

Russian Steel in Crisis & Raw Material Supply, April 2009

In 2008 Russia produced ~68.7 mt of crude steel, just 94.9% of the 2007 level. Russian production of finished rolled steel products in 2008 was down by 5.1% and reached ~56.6 mt. All main Russian steel holdings and steel producers reduced their output volumes in 2008 (see Exhibit 1). January 2009 saw further declines, with Russian steel demand also falling some 20% compared to December 2008 consumption levels (and falling up to 62% compared to January 2008).

In February 2009 however, Russian steel sector output picked up - with crude steel production increasing mainly due to growth of semi-finished steel exports. Export of slabs and other semis from Russia in January 2009 was 1.07 mt (about 1.8% less than in Dec 2008). In January 2009 total steel rolled exports from Russia reached ~2.45 mt (19.4% less than in Jan 2008). February 2009 saw Russian rolling mill capacity utilisation increase around 20% above November 2008 levels - from 45-50% utilisation to around 65-70% capacity utilisation. March 2009 capacity utilisation was better still - see Exhibit 1 below.

According to Rosstat, Russian industrial production in February 2009 was 13.2% down on February 2008. Coal production statistics - more relevant to steel - indicate February 2009 extraction of 22.1 mt of coal, some 30.% down on February 2008 output levels.

Iron ore
The Russian interior contains about 17% of the world's iron ore reserves. According to estimations of the US Geological Survey, four countries - Brazil, Russia, Australia and Ukraine - hold about 60% of the world's reserves of iron content. Russia also counts amongst the leading nations with respect to extraction of iron ore and manufacture of iron ore raw materials, with about 6% of the share of world production, after Australia, Brazil, China, and India (Ukraine follows after Russia).

The iron ores mines and concentrating mills (GOKs) are located in several areas of Russia and comprise 12 main iron ore producers and some smaller suppliers. The biggest include producers in the Central District (Kursk and Belgorod regions) on the base of the Kursk magnetic anomaly - Lebedinsky, Mikhailovsky, Stoylensky GOKs, combine KMA Ore; and those in the Northwest District of Russia - Karelian Pellet Plant, Olenegorsky and Kovdorsky GOKs; and in the Urals - Kachkanarsk, Visokogorsk, Bakalsk, Bogoslovsk mines. Large combines are not present in Siberia, except Korshunovsky GOK. The combined share of four of the large Russian combines - Lebedinsky, Mikhailovsky, Stoylensky and КМА Ores covers ~55% of all Russian supply. The largest mine Lebedinsky GOK supplies ~21% of all iron ore, with Mikhailovsky ~20% and Stoylensky ~12% of the total demand.

By international standards, the quality of Russian iron ores is average. It is higher quality than in China and in Ukraine, but is of lesser quality than Brazilian and Australian ores (both with respect to iron content - about 30% in the Russian Federation against more than 50% in Brazil and Australia - and as regards the presence of harmful impurities). The share of iron ores which do not demand enrichment with the contents of iron more than 60% amounts to just ~12.5% in Russia. However, in absolute values this quality segment comes to about 7 billion tonnes - approximately as much as in Brazil but still less than in Australia. The iron ore reserves of Russia as identified to date will suffice about 200 years.

In Russia (in contrast to Ukraine where steelmakers and miners act as independent players in the market) practically all Russian GOKs are parts of large vertically integrated metallurgical groups which are dominated by steelmaking (Severstal, Evraz, Mechel, NLMK). The exception is Metalloinvest, where the iron ore GOKs dominate over the steelmaking division.

Although the majority of Russian iron ore is consumed inside the country, a number of GOKs have a significant export potential. Indeed, the largest combines Lebedinsky and Mikhailovsky of Metalloinvest deliver iron ore to Europe, Asia (China and South Korea) and the Middle East. Despite the exports, Russia also imports iron ore - mainly from Kazakhstan. This is primarily for the Magnitogorsk Iron and Steel Works which buys about 10-11 mt/year of iron ore raw material from Kazakhstan’s Sokolovsko-Sarbayskoe Production Association (a part of the Eurasian Natural Resources Corporation - ENRC). ММК has signed a long-term (ten year) contract with ENRC for iron ore deliveries. From January 2009 the price of iron ore for MMK declined by 40% from $85 to 50 $/t.

Total Russian iron ore extraction in 2008 was 99.9 mt, 5% down on 2007. According to Rossat, February 2009 iron ore extraction was 22% down on February 2008.

Scrap
The ferrous scrap sector has been hit especially hard by the current crisis. Indeed, the scrap market in Q1 2009 has been at is lowest level for a decade. Collection and delivery of scrap in this period were at just 20% of their levels at end-2008.

According to Rusmet, January 2009 monthly scrap consumption in Russia was about 270,000 tonnes (27 % of the January 2008 level). According to the Russian Customs Authorities, January 2009 Russian scrap exports declined to 91,400 tonnes - a level some 4.3 times less than in December 2008.

Total Russian scrap collection in 2008 reached ~28.5 mt (-12% compared with 2007). The volume of scrap delivered by rail to Russian steel producers for 2008 was 25.3 million t (6.2% less than in 2007). Domestic scrap supply by rail fell by 7.9% to 22.9 mt and exports grew by 8% to 2.4 mt. Whilst in Q1 2009 the purchase price of scrap was about 250 US$/t, the price for heavy scrap as at early April 2009 had fallen to ~150-170 US$/t, only. It may be that scrap exports from Russia will cease competely in the coming months. This is because a new Government order has identified just 10 customs points for declaration / registration of scrap trade. The 10 customs stations for scrap declaration include: Novomoskovsk Smolensk custom, Sea Port Murmansk, Gavan in the Baltic, Kaliningrad Port, Rostov-on-Don River Port, Taganrog Sea Port, Samara Customs, Chelaybinsk Customs, Krasnoyarsk Customs, and the Petropavlovsk-Kamchatsky Sea Port. It is thought probable that, in addition to restricting export locations, the Government will shortly increase export duty on scrap from 15 to 20 Euro/tonne, also. This order will totally stop scrap export from the Far East and will help the operation of steelmakers such as Amurmetal as the sea port of Petropavlovsk-Kamchatsky is located ~2,000 km from the main railway stations that are the usual scrap collection points. According to a forecast of the local regional association of scrap collectors, the volume of scrap export will fall by 30% and scrap prices will halve as a result of these measures, but these improvements for steelmakers may not be fully evident until 2010.

Ferroalloys
In spite of falls in ferroalloy sales in the fourth quarter of 2008, total Russian ferroalloy production in 2008 actually grew (Exhibit 2). According to MetalTorg.ru Russian shipments of ferro alloys in 2008 equalled 1.46 mt compared with 1.376 mt in 2007 (+6.3%). During 2008, exports of FeSi and FeTi were down by 12%, and FeNi was down by 60%, but FeMn grew by 15% and FeCr increased by 5% against 2007 production levels. Russia imported FeMn from Ukraine and FeSi from Kazakhstan and China but at end-2008 imports fell some 20-fold compare to August 2008 trade levels.

Readers of this 'Memo from Moscow' column may take note that whilst prospects for the Russian ferroalloys sector may presently seem flat, the reality is that when compared against plant closures in China and the capacity cutbacks in South Africa and Ukraine, the Russian position is actually not so bad.

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