Steel sector rebound to continue into 2011

RIA Novosti / Pavel Lisitsyn
The rebound in the fortunes of steelmakers over the course of 2010 has analysts seeing further improvement ahead, but with some clouds on the horizon for the sector.

According to Rosstat data Russian rolled steel output increased by 12.7% during the first 9 months 2010. Unicredit Securities metals sector analyst, Marat Gabitov, says that has been accompanied by Russian steelmakers reducing debt, and firming up their underlying finances.

“Companies with high debt burdens, as expected, have successfully restructured their debts, thereby improving the loan portfolios. All companies in this sector are engaged in the placement of bonds. Metchel and Evraz being highly depended on loans have managed to refinance and payoff their debts.”

Renaissance Capital analyst, Boris Krasnojenov, says Russian manufacturers are benefiting from export cost reductions and consumption growth in Russia on the back of infrastructure boom initiated by the government.He adds that sales of high-quality metal in domestic market may bring three times more profits than exports of raw steel products, and says that the Russian steel sector may be back to pre crisis levels in some areas.

“We expect that the total steel production in Russia may be about 65-66 million tonnes in 2010, 10% more than in 2009. Production growth next year is expected to reach about 5%, so production could reach a level of 68-69 million tonnes in 2011. The highest level of production in this decade was recorded in 2007 – 72.4 million tonnes.

The production growth will be mainly attributable to increase in domestic demand. We expect growth in steel consumption in Russia at the level of 10-11% in 2011. The most positive trend is expected in the construction sector and engineering.”

Krasnojenov adds that domestic demand is underpinning the outlook, with a general economic rebound in Russia flowing through to key steel buyers.

“The Russian market has returned to pre-crisis level in the segment of flat-rolled products. According to our expectations of the Russian market may return to pre-crisis levels of production and consumption of steel in 2012-2013.Construction sector, the pipe industry, infrastructure projects and engineering, as well as manufacturers of household appliances will be top consumers of steel in the coming years.”

Bank of Moscow Head of Equity, Yuri Volov, is also expecting the steel sector to put the downturn behind it in the coming year.As with Krasnojenov, he sees the return based on domestic buyers.

“We expect that the Russian steel output in 2011, will reach the pre-crisis level of 2007, yet the increase of performance indicators in metal sector is mainly due to increase in the consumption of the metal from the pipe industry and engineering, but perhaps we see a higher demand from the construction sector in 2011.”

Unicredit Securities metal sector analyst Marat Gabitov says that rebound in demand is likely to be accompanied by continued firming on the pricing side.

“We believe that the price of steel could rise 10% in 2011, as the world's steel consumption is projected to increase by 5.3% compared to 2010 year to a record level of 1.34 billion tons, according to World Steel Association, due to the continued growth of steel consumption in China and India and a recovery in demand in Europe and the USA. The highest demand and highest prices are expected in the 1Q 2011, as consumers began to replenish stocks of materials in advance before the next high season for their own production”

But Bank of Moscow’s Yuri Volov says this may also see exports reduced, as costs pressures on the production side come into play, and as buoyant Chinese demand eases slightly.

“I think we can expect a decrease in exports against the backdrop of rapid growth in domestic consumption. From the mining sector, we expect that pressures on prices and costs may not be as sharp as in the past year and a half since major factor in global growth in commodity prices – Chinese demand – have been gradually eased.”

He adds that another key factor influencing the market will include new production coming on line with recent acquisitions and investment by Russian steelmakers internationally will begin to be felt.

“Russian metal industry giants are planning to realize their pipeline projects during the next years. We can expect the acquisition or construction of rolling facilities by Russian producers abroad. MMK could start full production at Atakashe in Turkey in the next year; Companies are also considering Middle East market expansion. But in general, the Russian steelmakers will focus on organic growth in Russia, in steel production and raw material segment.”