The state and prospects of ferrous metallurgy in Russia
The share of ferrous metallurgy in the total industrial output is about 9.8%. The industry comprises more than 1,500 enterprises and organisations, 70% of which sustain the existence of the cities in which they are located. The industry employs a workforce of more than 660,000.
Nine major companies and vertically integrated corporate groups in the Russian ferrous metallurgy sector account for more than 80% of the sector's output (the metallurgical companies: EvrazHolding, Severstal, Novolipetsk Metallurgical Plant, Magnitogorsk Metallurgical Plant, Metalloinvest, Mechel; pipe-producing companies: Trubnaya Metallurgicheskaya Kompaniya, Obyedinyonnaya Metallurgicheskaya Kompaniya, Gruppa Chelyabinskiy Truboprokatnyi Zavod.
Between the early 1990s and 1999 metallurgical output was shrinking due to a fall of metal consumption in the domestic market. Simultaneously much of production was reoriented from the domestic to the foreign market with the share of export of ferrous metals rising to 60%.
Beginning from 1999, due to both domestic and external factors, metallurgical output has been growing. In 2006 the output of the main ferrous metals exceeded the level of the early 1990s.
The production of steel and alloys in the period between 2000 and 2007 was driven by the development of advanced modern methods: electrical steel smelting, processing of steel outside furnaces and the use of continuous casting machines. During this period the production of electrical steel increased by 2.2 times, continuous casting by 1.75 times and processing of steel outside furnaces by 1.8 times. The share of electrically smelted steel in the total steel output increased from 14.7% to 26.7%, steel processed outside furnaces from 3.2% to 5%, pouring by continuous casting machines from 49.7% to 71.1%.
In the rolling industry capacity for sheet metal, metal with protective coating and high-grade and other types of rolled products has increased. Rolling production facilities are operating at over 90% of their capacity. The production of pipes has grown markedly (by 174% over seven years). The pipe manufacturing industry is operating at 76% of its capacity.
In 2007 the production of rolled ferrous metal increased by 2.4% compared with 2006 to 59.6 million metric tons, the production of steel pipes grew by 10.2% to 8.7 million metric tons. The growth of ferrous metal output continued in 2008. In January-May 2008 the production of iron ore increased by 3.4%, coke by 4.4%, steel by 4.7% and rolled ferrous metals by 6.1%.
An exception from the overall upward trend was the drop in the production of steel piping. Because the deadlines for the completion of major fuel and energy projects have been put off, internal consumption of pipes and consequently their output dropped by 8.1% and 6.7% respectively in January-May 2008 compared with the same period of 2007.
In 2007 the cost of the export of ferrous metals and goods from them increased by $26.5 billion (up 18%) and in five months of 2008 by an estimated $11.7 billion (up 30%). The main ferrous metallurgy export items are raw materials and semi-finished goods (ore, metal scrap, coke, wrought iron, ingots, blanks and slabs), which account for about 60% of all export. The main reason is restrictions on the supply of high-added-value products to the foreign markets.
In 2007 internal consumption of finished rolled ferrous metal products stood at 38.2 million metric tons, an increase by 13.7% (4.6 million metric tons) on 2006, the supplies of domestic rolled stock to the internal market stood at 32.8 million metric tons, an increase by 9.8%. Simultaneously the import of rolled steel rose by 44.8% bringing its share in internal consumption in 2007 to 14.1%, an increase of 3% compared with 2006.
Internal consumption of steel pipes in 2007 increased by 15% (1.1 million metric tons) in 2007 compared with 2006 to 8.9 million metric tons. Supply of domestically produced pipes to the internal market increased by 14.4% or 1 million metric tons.
Beginning from 2003 the favourable world prices for metal and the growth of domestic prices enabled the metallurgical enterprises to improve their financial performance significantly. The profitability of sales by metallurgical enterprises in 2003-2007 ranged between 25% and 40% depending on types of economic activities. The net financial result of ferrous metallurgy increased by 15 times in 2007 compared with 2001to about 460 billion roubles, and in the ferrous metallurgy sector to 350 billion roubles.
Favourable conditions have been created in the Russian Federation for the development of the metallurgical industry. As a result of the use of cheap energy, raw materials and manpower resources the metal production cost in Russia is among the lowest in the world. Considering that metal products are sold both in the external and the internal markets at world prices, the Russian metallurgical companies are among the most profitable in the world.
The ratio of net profits to the proceeds of major Russian ferrous metallurgy plants in recent years has been 0.15-0.3, which is substantially higher than the similar indicators of leading world companies (0.02-0.07).
Given such favourable conditions and good financial indicators, the rate of development of the sector in 2000-2007 was relatively low: the output of the main products (rolled ferrous metal, iron ore) has grown by an average annual 2-3%. That is due to the high load on the production capacity and the long period of construction and the capital-intensive nature of new capacity. On the other hand, in recent years 25-35% of the total financial proceeds in the ferrous metallurgy industry have gone into investments, and a large part of the profits has been used for other purposes, including the acquisition of assets in other sectors abroad and the payment of dividends.
According to the Financial Academy under the Russian Government, in 2003-2007 the metallurgical industry, on the one hand, accounted for 30-40% of the net financial results of the industry, and on the other hand for 6-9% of the total tax revenues from the industry. About 75% of the metallurgical industry's tax revenues were in the shape of the profit tax, about 6%, the tax on the mining of minerals. In 2003-2007 the total tax revenues in metallurgy amounted to 7-8% of the volume of output compared with 40-63% in the extraction and refining of oil.
Beginning from 2008 prices for metal products and raw materials in the world have been growing rapidly mainly due to the increased prices for iron ore and coking coal as a result of the rapid development of China's metallurgy. Between January 2006 and April 2008 world prices for these types of raw materials increased by between 2 and 3.4 times. The world market of the ferrous metal scrap in 2008 also experienced an unprecedented price rise. From the beginning of this year the average prices of ferrous metal scrap rose by 80-100% to an average $700 per ton on FOB terms depending on the destination.
An important factor shaping the world market of metal products and raw materials in recent times has been the growing price of energy, the worldwide inflation and the fall of the US dollar against other world currencies. All this has increased the costs of metallurgical companies and pushed up the prices of rolled ferrous metals.
Being integrated into the world economy, the Russian metallurgical industry has in many ways experienced the same trends as the world at large. Considering the world trend, Russian enterprises have also raised domestic prices for their goods. The period from January to June 2008 saw soaring prices. But the prices and the rate of their growth in the domestic market have been somewhat lower than in the world markets. Thus, beginning from 2008 ex-works prices of the main Russian metallurgical companies have been growing by an average 1.5 times and ex-works prices of pipe-making enterprises connected with long-term contracts with consumers have grown by just 10%.
The main factor pushing up domestic prices in 2008 is the policy of Russian metallurgical companies, whereby supplies into the foreign and domestic markets should yield equal benefits and the gap between export and domestic prices should be narrowed.
In setting their prices the Russian metallurgical companies proceed from the fact that external prices are soaring, although 50% of their finished products are sold in the Russian market. However, if necessary they can cut supplies of finished products to domestic consumers and export semi-processed steel products, which eliminates feedback from consumers.
The current growth of prices for metal products in the world markets favours the increase of Russian exports, above all of semi-processed goods. In the first quarter of this year exports of ingots increased by 9%, pig iron by 7.7%, coke and semi-coked coal by 6.4%, whereas supplies of high-added-value products - flat rolled stock - dropped by 4.5% on the same period last year.
The second factor behind the rise of domestic prices is the growing production costs of metallurgical companies. The soaring domestic prices for ferrous metal scrap, iron ore, fuel, coking coal, transport services and wages all conspire to increase costs.
The share of ferrous metals in the production cost and sales is 13-18% in machine-building, 7-12% in the construction materials industry and 7% in the industry on average. The fact that the prices of metal products outstrip those of other products leads to a redistribution of incomes between sectors of the economy, increasing the costs of metal-working enterprises and affecting their financial and economic performance. The biggest sufferers from the growing metal prices are the sectors in which prices and tariffs are regulated and controlled by the state: railway and pipeline transport, the power industry and to a significant degree the gas and oil industry.
For example, the financial plan of RZD for 2008 proceeded from the assumption that the inflation factor, according to the Ministry of Economic Development, would amount to a 1.07% rise of the metal product prices. However, the procurement prices of RZD for metal products increased by more than 23% for the main grades of metal products in the first five months.
