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2 Sochi: Let the gains
begin By John Helmer
MOSCOW - Russia's come-from-behind
achievement last week in securing the 2014 Winter
Olympic Games for Sochi is the mid-point of a
US$12 billion wager by the Kremlin that it can
successfully sustain domestic economic growth
through the first term of President Vladimir
Putin's successor.
The figure of $12
billion is the capital commitment by the federal
and regional governments to construction of the
Games' facilities
and
supporting infrastructure. But that's only the
start of the big money flow.
It is a
demonstration of how effectively Putin has managed
state-controlled gas monopoly Gazprom's cash to
pull off an international accolade of high order.
And it is the opening of one of the biggest
betting opportunities for those global hedge funds
looking for that rare combination of accelerating
growth rates, low visibility and stable
competition.
In global steel, everyone
knows the story of the China behemoth. Its output
and demand volumes have been driving not only the
international crude-steel and steel-product
market, but also prices for iron ore, coking coal,
nickel, ferro-alloys and the charter rates of
vessels to deliver their cargoes to the Chinese
mills.
Less known is the Russia story -
fourth-largest steelmaker in the world (after
China, Japan and the United States);
second-largest exporter (after Japan); and
third-fastest in growth of steel consumption
(after South Africa and Hong Kong).
Sochi
itself, on the Black Sea coast, below the Caucasus
mountains, and just north of the Georgian border,
has a relatively short ancient history, and an
even shorter modern one. Russian writer and
playwright Anton Chekhov, who depended on the
Black Sea climate to relieve his tuberculosis,
once described the area as so torpid, even the
bacilli were asleep.
Josef Stalin made
Sochi fashionable for the Russian elite to summer
there. The mild heat and cold make it attractive
to Russians with a year-around hankering for the
sea; and Putin has now made the drowsy town of
less than 330,000 souls an object of international
investment interest.
To beat the
front-running bids by Salzburg, Austria, and
Pyeongchang, South Korea, and surmount a lukewarm
preliminary report from Olympics inspectors,
Gazprom pulled a leaf from the US playbook.
In 1988 that enabled a cash and
underwriting offer from Coca-Cola to pull the 1996
Summer Games from Athens to Atlanta. This year,
Gazprom's sponsorship offer to the International
Olympic Committee (IOC) dwarfed Coca-Cola's for
Atlanta. It was then polished by Putin's virtuoso
performance in English, French and Spanish (Putin
usually speaks Russian or German) ahead of the
delegate vote in Guatemala City.
According
to Gerhard Heiberg, head of the marketing
committee for the IOC, he will visit Russia to
investigate possible global sponsors for the
movement, including from Gazprom, the Associated
Press confirmed.
Steel is the first of the
winners at Sochi. Alfa Bank reports that total
investments for Sochi are currently planned at
more than $12 billion. "The 2008 Summer Games in
China [which cost $39 billion] has been a
significant driver of investments in
infrastructure, which in turn stimulated growth of
steel consumption and production as well as
consumption of a variety of base metals, including
copper and zinc."
Alfa analyst Vladimir
Zhukov went on to predict that the steel sector as
a whole will be the biggest beneficiary of the
construction boom to follow.
"We expect
Russian producers of long steel products, such as
Evraz [the largest in Russia], Mechel, Severstal
and MMK to be the most obvious beneficiaries, and
to a lesser extent producers of flat steel, which
is also used in construction," Zhukov said. "Evraz
should also benefit, as it is Russia's monopoly
producer of rails and the most likely supplier for
new railways planned for construction. We also
view MMK, which will build a steel mill in Turkey
across the Black Sea from Sochi, as potentially
another significant supplier."
This is "an
enormous boost to regional steel consumption",
according to Igor Konovalov, chief executive of
Inprom, the dominant steel-service-center supplier
in southwestern Russia.
Steel service
centers buy large lots of steel products from the
handful of steel mills that dominate the
production sector in Russia, and break them down
into small enough lots for processing and
delivery, according to client needs. In Europe,
steel service centers finish and process roughly
two-thirds of the steel they sell; in Eastern
Europe, the proportion is about one-third; in
Russia at present, the leading steel service
companies such as Inprom process about 10% of
throughput, but they are investing rapidly toward
30%-40%.
Raising the cash for that
investment in land acquisition, warehouses,
processing machines, and delivery fleets is
triggering a round of debt and equity issues this
year in Moscow, totaling almost $400 million.
Inprom is the first steel-service-center company
to go to an initial public offering; this is
scheduled for the autumn.
For the first
time since the end of the Soviet Union in 1991,
more than 60% of the rolled steel produced by
Russian mills will be sold and consumed this year
on the domestic market. But since the great
Soviet-era steel mills produce steel in a quantity
and quality that cannot be directly consumed by
the country's industrial end-users, the
steel-service-center companies are developing
rapidly to fill the widening gap between output at
the factory gate and on-time delivery to
construction sites, machine-engineering plants,
and appliance manufacturers.
The Olympics
award was announced by the IOC in Guatemala late
last Wednesday. "We've been confident of a Sochi
win," Konovalov said, "and now that it's been
achieved, we feel our ambitious plans for
investment in new steel-processing capacity and
new supply centers will be justified."
Altogether, domestic steel consumption
across Russia last year was 35 million tonnes, out
of total production of 58 million tonnes.
Construction of office blocks, stadiums, housing,
and port and air terminals depends on cement and
steel reinforcement bar (rebar). For the
foreseeable future, there isn't enough supply in
Russia to go around.
A drain on cement
flow in Russia will also impact across the border.
Alfa reports, "We anticipate further support for
cement prices in Kazakhstan, as the market is
already in deficit, with 22% of cement demand
satisfied by imports from Russia."
A
report from Michael Kavanagh, steel analyst for
UralSib Bank in Moscow, sees the stock market
swiftly pricing in the Sochi Games in share
prices.
"Although many of the blessings of
Sochi's successful bid for the 2014 Winter
Olympics are intangible or long-term, the market
seemed content to front-load the information and
price it all in now," Kavanagh reported. "What
cannot be quantified, however, is the fillip given
to sentiment, but Thursday's best guess was 30
index points. Stocks that were perceived to be
potential beneficiaries of Sochi's beatification
were the most highly prized. Real-estate plays and
steel stocks were a general theme and, among the
day's many rippers, Evraz and Open Investments,
both up 7%, were the best performers."
According to Zhukov of Alfa, the planned
$12 billion budget for the Sochi Games will be
spread evenly over eight years, "implying an
additional $1.5 billion of infrastructure spending
per year, of which (assuming 10-20% allocation)
the steel sector will get an additional $150
[million to] $300 million per year. This does not
look material compared [with] the $20 billion size
of the Russian steel market."
UralSib is
estimating that, on top of the state budget
commitment of $12 billion, cost overruns and
further state-private commitments
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