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Sochi: Let the gains begin By John Helmer
will lift the investment in the region to a total of $25 billion to $30
billion.
Regional supply-demand shortages can be expected to benefit steel distributors
and processors such as Inprom more than the steel producers. That is because
the steel mills closest to Sochi, Novelties and Severstal, are 1,248 and 2,143
kilometers away, respectively. Magnitogorsk is at the 2,516km post, while the
two
mills that hold the biggest domestic market share of long steel, such as rebar,
frame and angles, Zapsib and Nizhny Tagil (Evraz Group), are at a distance of
2,884km and 4,529km.
This year, it is estimated that the these steel mills will turn out a total of
5.5 tonnes of rebar, and export 650,000 tonnes. Projected consumption will be
6.4 tonnes. And so it is expected the Russian market will import the
difference, amounting to about 850,000 tonnes. In the first quarter of 2007,
the mills lifted rebar production to 1.3 tonnes; that's a year-on-year gain of
30%. At the same time, exports of rebar fell to 154,000 tonnes, down 33%.
Imports have jumped in volume to 320,000 tonnes, up 73%. Exports of rebar have
now dwindled to less than 10% of mill sales.
Even before the Sochi decision was announced, the boom in Russian construction
activity has been putting intense pressure on the domestic rebar market, Sergey
Madatjan told a conference of the Russian Association of Metal Suppliers in
Moscow recently. According to his presentation, domestic construction over the
next three years will see an increase in the volume of concrete and
ferro-concrete construction by 1.5-1.62 times. This will translate into an
increased demand for consumption of rebar to 7.2 million to 8.4 million tonnes
per annum.
A recent report issued by Trust Investment Bank for Comtech, a major steel
distributor and service center, indicates that the Moscow region leads the
country with a 31.4% share of steel consumption, but its rate of growth has
been slowing after several years of rapid activity. St Petersburg (8.5%) and
Yekaterinburg (7.9%) follow.
The southwestern regions and Black Sea coast have been consuming relatively
small shares to date: Krasnodar has a 4.1% share of countrywide consumption;
Samara 3.4%; Kazan 3.4%; and Stavropol 1.5%.
Global sporting events are a major driver in the growth of steel consumption
and demand in Russia, China and South Africa. The all-Russia growth rate for
finished-steel consumption in 2006 was 19.5%, according to figures provided by
industry sources. According to data released by Inprom, 25% of its steel sales
annually go to the construction sector. A breakdown of steel volumes sold in
2006 show that of Inprom's aggregate of 706,378 tonnes, 28% was sold at
Inprom's southern regional hub of Taganrog. Last year's growth rate in that
region, Inprom said, was 3%.
In Krasnodar, tonnage sold in 2006 by Inprom was 55,855, with a year on year
growth rate of 26%. In neighboring Rostov, sales volume in 2006 was 58,067
tonnes, with a growth rate of 40%.
Inprom is being followed into the south by other steel service centers.
ThyssenMaterials, 20% Russian owned, with the German parent holding 80%,
reports that it is concentrating its plan of establishing new steel
service-centers in four regional markets - Moscow, St Petersburg, Nizhny
Novgorod, and the Krasnodar region.
Comtech, which is in the Moscow market this month with an issue of $150 million
in credit-linked notes (CLN), discloses in a recent memorandum that it intends
to open more facilities this year in Krasnodar, where Inprom is the major
rival. Comtech claims a 15.7% market share of steel turnover in Krasnodar, with
sales revenues there of $53.1 million. In Samara, Comtech claims 15.8% market
share, with sales last year of $53.2 million.
Estar, a mid-sized steelmaking group based in Moscow, is about to commission a
mini-mill at Shakhti, in Rostov; this is the first new steel mill to be built
from scratch in Russia in the past 20 years. Official startup is planned for
this Thursday, and Estar has invited Elton John to lead the inaugural concert
on the day. Estar says the mill will turn out 550,000 tonnes of rebar and rod,
plus another 180,000 tonnes of shapes.
"The domestic Russian steel market," reports Renaissance Capital in Moscow,
"can best be described as having been explosive over the past year - primarily
due to strong demand and tight supply." Insulation from global steel-price
volatility, the report suggests, is provided by "the huge distances that buffer
the domestic heartland from imports, as well as the tariffs and quotas that are
imposed on imported steel products".
Moreover, it is the high concentration of mill ownership - 85% of crude-steel
output controlled by four groups - and their geographic location, far from the
steel-consuming centers, that puts a floor under domestic steel pricing. "What
we have seen in the past," reports Renaissance Capital, "is that when export
steel prices fall, domestic prices stabilize, but are unable to rally. When
export prices recover, domestic prices recover in tandem. However, the spread
between domestic prices and export prices was rarely as great as it was at the
start of first-quarter 2007."
Alexander Rubtsov, general director of Comtech, acknowledges that in this
fast-moving market, it is difficult to agree on valuation of
steel-service-center companies.
"Everyone wants service centers to exist," he said. "So the term exists, but
there are not yet full service centers, in the European market sense of the
term."
To raise capital to catch the momentum of demand, Comtech says it is relying
for the time being on secured lending. Konovalov says Inprom owns most of its
plants, and has pledged less than a third of their asset value to secure
current loans. Unlike Comtech, Inprom's business plan calls for expansion
through acquisition.
Steel bankers and investors hold different views of how to value
steel-service-center companies. Pure steel trading is considered too volatile,
and thus its multiple to capitalization is usually discounted. However, steel
processors in Europe such as the BE Group of Stockholm believe steel companies
of their type should enjoy higher multiples than the steel-mill companies,
because their revenues are spread over large client bases that can absorb price
shocks more flexibly. BE, which is smaller than Inprom, recently made a merger
bid for the Russian group, but Konovalov said no.
Is the steel-service sector more exposed than the steel mills if prices drop,
and profit margins contract? Rubtsov says Comtech's performance shows it has
grown rapidly and consistently in years when prices rose "like 2004; in 2005,
when they fell; and in 2006 when they rose again".
Konovalov said the impact of price volatility is smaller on Inprom than on the
steel producing companies.
"During the period of price decline Inprom has the marketing flexibility to
stimulate rapid turnover of stocks so as to prevent sale prices from sinking
below cost," Konovalov said. "Besides, prices on the Russian steel market will
have strong support from the dynamic growth of the economy for the next five to
seven years. As our company annually expands the share of sales with higher
added value, we expect to offset whatever volatility there may be in margins
for the steel delivered from the mills."
John Helmer is the longest-serving foreign correspondent in Russia.
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