By John Helmer in Moscow
Russia’s steelmakers have a better chance to lift output and revenues on a recovery in export demand, especially in the China market, than on reviving domestic demand for steel. This forecast, issued in a steel sector report of March 24 by Troika Dialog investment bank in Moscow, flatly contradicts the consensus of Russian steel analysts a year ago. At that time, they told investors they were certain Kremlin spending on public works would sustain demand for steel for domestic construction and infrastructure, and so buffer the domestic steel industry against external shocks.
What a canard that turns out to be.
“Now that demand for steel is falling,” the new Troika report claims, “international trade is going to decline dramatically as well, but we think that Russian players are well positioned to claw back at market share thanks to the cost advantage, and hence protect export volumes from falling massively…On the domestic front… we expect demand to drop by around 40% in 2009 from its peak 2007 level…At the same time, we do not entertain illusions about a possible positive impact from the government economic stimulus program, which seems to be growing smaller by the day.”
The report predicts that the protectionist option may also grow in importance, as Russian mills and pipemakers apply to the Trade Ministry in Moscow for domestic injury or anti-dumping relief, primarily to keep out Chinese steel imports. “Russian producers could partly offset the drop in demand by squeezing out imports, which averaged 13% of Russian consumption last year (the same as during the entire previous decade), but this might be difficult without official support. The Russian government took the first step in January, imposing import duties on certain types of long products and pipes ranging from 15-20%, thoughthis may not be enough to put a barrier in the way of imports.”
The paradox for Moscow policymakers is in the double-sided importance of China. If Beijing retaliates tit-for-tat against protectionist measures being imposed by Moscow against Chinese imports, then the sustainability of Chinese demand for Russian steel exports will fail. According to the Troika report, “the biggest question is whether China is going to ramp up exports again now that the domestic recovery is running out of steam. Production costs currently seem to limit participation of less efficient Chinese steelmakers in international trade, so the moment of truth will probably come in April, when new annual contracts for iron ore and coking coal should come into force.”
The Russian Trade Ministry is backing local applications for protective duties, but industry sources have told CRU Steel News the prime ministry is reluctant, so far, to agree. In February, Prime Minister Vladimir Putin charged that protectionism was “unrestrained economic egotism.” But he also conceded that the pressure from the Russian steel industry for protection from Asian imports is difficult for him to resist. “True, we are increasing import duties of certain ready-made equipment to promote Russian manufacturers-but I don’t think we are extremists in this respect. We are also reducing and even abolishing import duties for technical equipment, especially of the kind Russia is not manufacturing, thus promoting Russian industrial advancement.”
A source at Novolipetsk Metallurgical Combine (NLMK) says the biggest threat to Russia’s export position in the Chinese market is “the possibility of a serious decline in prices for raw materials — coking coal and iron-ore — by the main global suppliers, BHP, Vale, Rio Tinto. This would lead to a further decline in the cost of steel production in China, which, when added to the difference in transportation cost, would make Russian imports non-competitive.”
At present, NLMK is selling between 15% and 20% of its output to China, pricing slabs at between $400 and $500 per tonne. The weakening rouble has also enabled such exports to remain competitive internationally.
The Troika report warns that “the recovery in demand for CIS steel from Far East customers was doomed to be over very soon, which is exactly what we are seeing happen now. Russian export prices have visibly weakened in the last two weeks, with billets and slabs falling through the psychological barrier of $350/tonne. We estimate that $250-$280/tonne on an FOB basis should be the break-even point, even for low-cost integrated producers like Novolipetsk Steel.”
But will Beijing counteract the Russian initiative by duplicating it, raising support for exports, and protection against imports?
Russia’s Trade Ministry has begun an anti-dumping investigation of polymer-coated steel imports from China, a ministry source has told 21st Century Business Herald. But the Russian official denies reports last week from China that the investigation also covers stainless steel imports. A Chinese Ministry of Commerce publication that nickel-bearing steel from China is the target of Russian anti-dumping enquiry is categorically denied by Moscow.
The Russian trade ministry says that between March 21 and April 1, official investigators from Moscow will visit metal-rollers in China and South Korea, and gather information on costs and prices. The target date for completion of the investigation and report phase of the inquiry is July 21, the source said.
The Trade Ministry also told 21st Century Herald that an investigation of imported corrosion-proof pipes, also from China, that have been the subject of an domestic injury application by Russian pipemakers, was concluded on December 12. Pipes from Brazil were also targeted. The report made a recommendation for a 28.1% protective duty for a three-year term. However, there is opposition to this in the cabinet, and the prime ministry has yet to approve the new protectionism.
Thus, the Russian pipemakers are not getting everything they demand; and some Chinese fears have proven unfounded.
Alexander Deineko, head of the Russian Fund for Pipemaking Industry, a lobbying group, confirms that “as yet we have no measures against Chinese pipe producers, while they are continue aggressively to press on our market’s stability. We are working on imposing some anti-dumping measures. but this stage doesn’t allow me predict when we may see positive results.” According to the pipemakers, Chinese exporters are pricing their pipes for Russia at one-third to one-fifth the level of the domestic market.
Import data for Chinese pipes, provided by Deineko, do not appear to substantiate the domestic complaints. Deineko said that 240,000 tonnes of Chinese pipes, including large-diameter, were imported in 2007. This volume fell to “around 200,000t” in 2008, Deineko said. The trade ministry report had focused on much earlier import data from the period between 2004 and 2007, and had not considered the impact of the global crisis in steel demand and protection, which began in the third quarter of 2008.
There were reports from the fair trade bureau of China’s Ministry of Commerce in December that the Russians had begun an anti-dumping investigation into imports of bearing steel tubes from China. This was then denied by officials at the trade ministry in Moscow, and by Deineko, who claimed the import volumes were too small to justify government action.
According to the Troika forecast, Russian steel exports this year should amount to 28 to 30 million tonnes; aggregate output of steel products to 52 to 55 million tonnes; and the production level at 65% to 70% of capacity. Capacity utilization so far this year, in aggregate, has been below 64%.