Russia Metals Report Q2 2010 - New Market Report Published

New report provides detailed analysis of the Agriculture, Farming & Raw Materials market

Bolstered by capacity expansion, Russian metals producers will experience a strong export-led recovery in 2010 and beyond, which should counteract the effects of a lacklustre domestic market, according to this latest Russian Metals Report .

Russian metals producers suffered from a massive decline in orders from the construction and automotive sectors as a result of the global financial crisis. According to the data issued by the Ministry of Industry and Trade of the Russian Federation, in 2009 the country domestic consumption of rolled steel products went down by 22.1% year-on-year (y-o-y) to 25.7mn tonnes. While domestic demand remains weak, Russian steel mills were able to return to pre-crisis production levels late last year by increasing export sales. In 2009, Russian crude steel output plunged 14.2% y-o-y to 58.78mn tonnes according to the World Steel Association (WSA). However, H209 saw a steady improvement in output. In Q409, crude production rose 6.8% quarter-on-quarter (q-o-q) and 42.8% y-o-y to 16.51mn tonnes. The fall in the Russian demand hurt imports more than it hampered the sales of local producers. Russia imported 3.64mn tonnes of steel in 2009, down 30.8% y-o-y. In terms of value, it steel imports were worth US$3.31bn, down 48% y-o-y.

Russian steel exporters raised prices by 5% to 10% in January, the first price increase since November, highlighting steel traders and producers' upbeat expectations, which do not currently correspond with the weak demand from various end markets, including construction, autos, machinery and pipes. The optimistic outlook has prompted Novolipetsk Steel to plan an increase in steel output at its main production site in Lipetsk by 10-14% y-o-y to 9.3-9.7mn tonnes in 2010, having reported flat growth in 2009 with average capacity utilisation rates at 93%. Growth in 2010 is part of its target of 12.4mn tpa output by 2012, through the implementation of the second phase of its the technical upgrading programme. Producers are also stepping up their investment programmes. In 2010, Evraz subsidiary Nizhnetagil'skii Metallurgicheskii Kombinat (NTMK) plans to increase investments in its expansion projects to RUB5bn (US$167mn) from RUB3bn in 2009. Meanwhile, Severstal is to invest about US$1.4bn in its operations in 2010, an increase of around 40% on 2009 levels of investment. Severstal aims to invest US$685mn of the total spending plan in its Russian steel operations. In Q110, Estar subsidiary Zlatoust Metallurgical Works (ZMZ) planned to commission a second furnace at its electric smelting shop No 2, thereby raising output by about 11%. Currently, ZMZ's electric smelting shops 1 and 2 operate with one furnace each.

In the aluminium sector, Russia's leading primary aluminium firm RUSAL produced around 3.9mn tonnes of aluminium, down from 4.4mn in 2008 and in line with its plan to cut output by 500,000 tonnes. Alumina output decreased by 31 % to 7.8mn tonnes, of which 5.8mn tonnes were used by RUSAL. Aluminium output is expected to increase in 2010 by 7.5 % to 4.3mn. In Q110, RUSAL insisted that aluminium prices were at a level that would allow it to re-commission 100,000 tonnes per annum (tpa) of mothballed capacity. With aluminium prices forecast at around US$2,000/tonne in 2010, the global market is tight enough for RUSAL to be confident of bringing more capacity back online and offsetting slow growth at home with export growth. Nevertheless, RUSAL's ability to increase production depends on electricity supplies to the 520,000tpa Sayanogorsk smelter and the 297,000tpa Khakassia plant, which have faced disruption due to a serious accident at a turbine room at the Sayano Shushenskaya hydroelectric plant in mid-2009.

Overall, crude output should grow 8.8% y-o-y to 63.97mn tonnes in 2010, on the basis that Q409 output should stay roughly the same throughout the year. Output will rise strongly over the rest of the period, with us forecasting crude production rising around 23mn tonnes in 2009-14 to reach 81.79mn tonnes (up nearly 10mn tonnes over the 2007 peak), while hot-rolled output with grow by around 25mn tonnes in the period. This will be assisted by additional capacity and growth in exports which should reach around 38mn tonnes by 2014, a rise of 18mn tonnes over 2009 and up 6.5mn tonnes over the 2006 peak. Domestic finished steel consumption is set to rise over 42mn tonnes by 2014, up by around 1.6mn tonnes over 2009 estimates. Domestic demand growth will remain very low on a historical basis, weighed down by a weak labour market and tentative recovery in credit growth.