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By John Helmer in Moscow

Deep cuts in steel output at Russian mills have been exaggerated by some steelmakers and the press and reflect attempts by some Russian proprietors, like Alexei Mordashov, owner of Severstal, to sustain profit margins, according to industry sources.

“Although the market is not in the best mood right now, and there are real problems, I think the cutback announcements are part of a PR campaign as well,” said Lev Chesalov, an analyst at the Russian steel market monitor, Rusmet.

“The proprietors may regard the push-down on the falling share price as an opportunity to buy back their own shares. I don’t believe MMK will oust 3,000 people as has appeared in the press, or that Severstal may cut 30% of its production.”

Mordashov has ordered a 25% cut in crude steel at Severstal’s Cherepovets mill in Russia, and a 30% cut in output for October at the group’s US and Italian mills.

By contrast, Mechel told CRU Steel News it is not planning to review production plans “for now” but may reduce the length of the working day. It added: “We are making all effort to save all working places and our employees.”

An MMK spokesman said it will lower production by 15%, starting this month, and cut jobs. MMK had earlier reported a plan to reduce steel output in October to 850,000t; this amounted to a cut of 25% on September’s output level of 1.14mt.

Alexander Mastruev, head of personnel at MMK, said: “It is not necessary to dramatise the situation, and to panic.” MMK is considering a furlough of employees, not dismissal and job cuts, he said.
Novolipetsk Steel said it is studying the market situation and “does not exclude the possibility of a production cut”, but referred to its market and trading prognosis, issued just before the September crisis began. The steelmaker, owned by Vladimir Lisin, said then it expects to produce 11.6mt of steel by year-end, 26% more than last year, counting the acquisition of Maxi group; 4% more on a like-for-like basis.

According to Chesalov of Rusmet, “this is a good time to start repairs and construction at mills. The claim [by MMK] that export has become loss-making is definitely exaggerated. Margins are contracting, and there is just not the 50% profitability that the Russian steelmakers have gotten used to. Now it is 10%. That’s absolutely fine for European companies. I think Russian companies must just trim their appetites.”

Igor Konovalov, head of service centre company Inprom told CRU Steel News that the cyclical trend had been predicted by his company.

“During a shrinking of demand, there are two factors. The end-consumer is not stockpiling and buys only for today. During a period of price decline, there is an underlying rule – wait till tomorrow and it will be cheaper.

“Whereas, when prices are growing, the rule is, buy now, because tomorrow it will be more expensive. In these conditions there is no need to pump the market with extra volumes. We were forecasting this, and we will have smaller sales. Inprom is ready to sustain the trend.”

Michael Kavanagh, steel analyst at UralSib Bank in Moscow, forecasts that the cuts at Severstal’s North American mills will not staunch the flow of red-ink on the group’s balance sheet.

“Severstal’s North American business, which had an Ebitda margin of 7% in 2Q08 – steel prices in the US peaked in June-July – is likely to be loss-making again in 4Q08 following the production cuts.”
While the news is clearly negative for Severstal and the Russian steel sector, “Russian steelmakers could have a positive impact on domestic and global steel prices in the medium term by following the world’s largest steel companies, including ArcelorMittal and Chinese producers, in lowering supply,” Kavanagh added.

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