Domestic market underpins outlook for Russian steelmakers

Russian steel producers are concentrating on domestic demand, with tax breaks for key users, including the carmaking industry, boosting their bottom line while global demand remains subdued.

Severstal has opened two new Moscow region plants to supply car manufacturers with processed steel, with Evraz is upgrading its Urals plant, while MMK President and Chairman Victor Rashnikov says his company plans to invest up to $3 billion in the country to boost capacity.

“We are planning to produce ten million tons of rolled metal this year. We are going to increase the output by some 20% by 2011 and by another 20% the year after. Our aim is to restore the pre-crisis output."

Recent changes in tax law have made it more profitable for Russian companies to sell processed metal to domestic consumers rather than exporting it. In addition, the state has offered tax breaks to foreign carmakers if they buy supplies from Russian producers. It's part of the government's plan to encourage manufacturers to produce cars from start to finish with locally sourced materials.

Dmitry Kolomytsyn, executive director at Morgan Stanley, says that is bolstering the position of local steelmakers.

“The Russian market is recovering, has recovered enough, and will show enough strength next year to consume more finished steel, and therefore make the Russian steelmakers more competitive compared to the global steelmakers.”

Selling processed steel in Russia can be three times as profitable as sending it abroad. But the market is being distorted by government intervention. Worldwide the demand for steel has yet to recover from the financial crisis and prices remain weak. So producers here have little reason not to take advantage of the situation.