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By John Helmer, Moscow

Magnitogorsk Metallurgical Combine (MMK), owned by Victor Rashnikov (left image), released its second-quarter operational report today, several days behind schedule. The report confirms the Russia-wide trend, already reported here, of cutbacks by the steelmaker for most types of its domestic production.

The news may be awkward for Rashnikov, because a fortnight ago he assured Prime Minister Vladimir Putin that he was producing more steel, especially auto steel sheet, to feed growing Russian demand; because the only obvious sign of growth in production at Rashnikov’s enterprises is not at home in Russia, but across the water in Turkey; and finally, because Rashnikov’s balance-sheet is going to show that he’s making more profit on less production by driving Russian steel prices upward.

That is not what Putin said he understood to be the situation when he was at MMK on July 15. At the time, criticism of the company for its production cutbacks was voiced by MMK steelworkers. Reassuringly, Putin replied: “I am sure that as the global and Russian economies improve, this market will only expand, there is absolutely no doubt about it. No doubt about it.”

Putin was at Magnitogorsk to inaugurate the new Mill-2000 cold-rolled steel production line for Russia’s automobile plants. But as he did that, Rashnikov’s accountants were reporting that MMK’s production and shipment of cold-rolled automobile sheet was being cutback, not expanded, on Rashnikov’s order.
According to the latest MMK report, released today, cold-rolled steel output in the second quarter came to 209,000 tonnes, a production cut of 23% from the first quarter of this year. The first-half volume for this year was 481,000 tonnes, down 14% on the same period of 2010.

The aggregates for MMK’s Russian operations were mostly down in the most recent quarter. Crude steel output fell 10%, quarter on quarter to 2.8 million tonnes; finished products fell 7% to 2.5mt; slabs and billets fell 78% to 10,000t; long products were down 6% to 313,000t; thick-plate from the new Mill-5000, intended for pipemaking to serve Russia’s oil and gas industries, was cut 21`% to 243,000t; and galvanized steel dropped 21% to 111,000t.

MMK reports that the fall in galvanized (zinc-coated, anti-corrosive) steel production was “due to output growth of more expensive colour-coated steel. Galvanized steel output and output of other types of steel products used in construction are expected to continue to grow with the beginning of active growth in the Russian construction sector. This growth is expected to begin in 2012 when preparation for the 2014 Olympics will be approaching its final stage and another wave of construction of sports and infrastructure facilities begins in preparation for the 2018 World Cup.”

In the recent quarter, colour-coated steel volume came to 61,000t, up 9% on the quarter. For the first half, galvanized volume was 251,000t (down 9% on the year), while colour-coated steel amounted to 116,000t, up 29%.

The extent of the second-quarter collapse in domestic Russian demand for steel is indicated by MMK’s report of its domestic shipment volume at 1.7mt, down 13% from the first quarter. Export shipments, by contrast, rose 7% to 867,000t.

Given the focus of the Kremlin on protecting the domestic steelmakers and stimulating domestic demand for their products, it is noteworthy that the MMK report reveals that Rashnikov has increased steel production at his Atakas plant in Turkey by 199%. A company statement says the recent output growth there “was driven by the completion of MMK-Atakas construction and subsequent ramping up to full production capacity. MMK-Atakas should produce more than 700 thousand tonnes of steel products in 2011 and reach full production capacity (2.3 mtpa of finished steel products) by 2012.”

The company’s projection for the end of the year is that it “intends to increase finished steel output by 10-15% in 2011 compared to 2010. Such growth is driven by the recovery of the world economy and increasing demand for MMK products from major steel-consuming sectors in Russia.” But that’s wishful thinking — if the report of what the company has been doing in the second quarter is the more reliable guide to its planning.

But here’s the good news for Rashnikov’s pocket:

This shows that MMK’s financial performance and profitability are likely to have been improving in the second quarter, as it paid out less to produce less, but charged more for its sales. The table confirms that the average price per tonne reported for domestic sales jumped 10% on the quarter to $911/t; the export sales price grew by just 2% to $616/t. There was thus an enormous premium between the pricing of MMK’s steel sold at home, and the steel sold abroad. That premium – and the higher profit margin on domestic steel sold by Rashnikov — was what Russian steel consumers were complaining of bitterly at the start of this year.

Through to June 30, every category of MMK’s domestic steel output has gained in average sale price, the company reports, led by formed steel sections and steel bands (up 15% and 18%, respectively, to $1057/t and $1117/t). Thick-plate gained 13% to $1219/t, while flat cold-rolled products jumped in price to $846/t, up 14% on the quarter.

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