By John Helmer in Moscow
Russian steel proprietors are showing their anger at negative market reports, and share price cuts, following recent disclosure of their heavy investment spending on North American assets. But there has never been a time when the future growth and profitability of Russian steelmaking has depended less on the United States — or more on decisions being taken in China. How long it will take the Kremlin to deal with this contradiction between the national interest and the self-interest of the steel oligarchs is anyone’s guess.
The outcome of the Chinese government’s new stimulus programme, and of contract negotiations between Australian, Brazilian, and South African coal and iron-ore suppliers, are being closely watched in Moscow. That’s because the Russian steelmakers believe their future depends on Chinese demand for low-priced Russian steel. If Chinese buyers do no better than a 20% to 30% cut in spot and contract prices for these raw materials, Russian steel will still be better priced for Chinese importers.
Novolipetsk Steel (NLMK), Russia’s third largest steelmaker and slab specialist, says that a recent surge of sales of its steel slabs to China may enable the company to increase mill capacity and steel output next month. But the steelmaker also warns that this increase in steel production may not prove to be sustainable, because Chinese buying depends on the relative low price of Russian steel in the current international market. This price advantage for Russian exports in the Asian market could be lost, Novolipetsk believes, if competing steel producers benefit from significantly lower iron-ore and coking coal supplies from Australia, Brazil, and elsewhere.
A report of the Novolipetsk assessment has been issued by Uralsib Bank in Moscow. “Currently”, the bank says, “the Russian steel industry and NLMK in particular have a cost advantage over those steelmakers around the world who use expensive Brazilian and Australian iron ore and Australian coking coal. This has enabled Russian steel producers (who produce more than domestic consumption) to find an attractive export market for their semi-finished and low value-added finished steel products, particularly in Asia.”
NLMK reported that, following what it believes was an end to destocking among China’s steel importers in February, it was able to raise its operating rate in February to 75%, and in March will operate at 87%.
However, the Russian company noted that steel prices remain under pressure. As such increased operating rates may not necessarily turn into increased profits, . NLMK cautioned that it is prepared to reduced production again if its competitive position in the global steel industry weakens following new international iron ore and coking coal settlements, which are expected to be negotiated by the end of next month.
If iron ore and coking coal price settlements are down only 20%-30%, reports Uralsib analyst Michael Kavanagh, “the Russian steel industry will still be competitive. However if iron ore and coking coal settlements are down 50%-60% or more, then the Russian steel makers will lose their competitive cost advantage in the international industry.” From the Russian point of view, Chinese buying of Russian slab is not so much driven by increasing Chinese demand for steel, but rather a shift in opportunity for the Chinese buyers toward the lower priced Russian product.
NLMK’s cost of slab is currently estimated to be just $210 to $220 per tonne. NLMK is also benefiting from the lower Russian coking coal price of around Rb1700 ($47) per tonne.
The last production report from NLMK, issued in January, indicates that in the final quarter of 2008, the company turned out 591,000t of slab, 43% of the crude steel produced for the period. The volume was down 40% from the slab volume in the third quarter, when it also comprised 43% of the crude aggregate. Total slab production for the year 2008 was 3.7 million tonnes. The NLMK group, owned by Vladimir Lisin, is self-sufficient in iron-ore, producing 10.6 million tonnes of concentrate last year. The group operates its own coke batteries, but currently does not have its own coking coal mines.