Russia steel protection has suicide look
By John Helmer
MOSCOW - Russia's steelmakers have a better chance to lift output and revenues
on a recovery in export demand, especially in the China market, than on
reviving domestic demand for steel, according to a report that flatly
contradicts the consensus of Russian steel analysts a year ago.
The latest forecast, was issued in a steel sector report of March 24 by Troika
Dialog investment bank in Moscow. A year ago, analysts told investors they were
certain Russian government spending on public works would sustain demand for
steel for domestic construction and infrastructure, and so buffer the
domestic steel industry against external shocks.
What a canard that turns out to be.
"Now that demand for steel is falling," the new Troika report claims,
"international trade is going to decline dramatically as well, but we think
that Russian players are well positioned to claw back at market share thanks to
the cost advantage, and hence protect export volumes from falling massively ...
On the domestic front ... we expect demand to drop by around 40% in 2009 from
its peak 2007 level ... At the same time, we do not entertain illusions about a
possible positive impact from the government economic stimulus program, which
seems to be growing smaller by the day."
The report predicts that the protectionist option may also grow in importance,
as Russian mills and pipemakers apply to the Trade Ministry in Moscow for
domestic injury or anti-dumping relief, primarily to keep out Chinese steel
imports. "Russian producers could partly offset the drop in demand by squeezing
out imports, which averaged 13% of Russian consumption last year (the same as
during the entire previous decade), but this might be difficult without
official support. The Russian government took the first step in January,
imposing import duties on certain types of long products and pipes ranging from
15-20%, though this may not be enough to put a barrier in the way of imports."
The paradox for Moscow policymakers is in the double-sided importance of China.
If Beijing retaliates tit-for-tat against protectionist measures being imposed
by Moscow against Chinese imports, then the sustainability of Chinese demand
for Russian steel exports will fail. And if Chinese demand for Russian steel
slows or stops, the Russian production lines will grind to a halt.
According to the Troika report, "the biggest question is whether China is going
to ramp up exports again now that the domestic recovery is running out of
steam. Production costs currently seem to limit participation of less-efficient
Chinese steelmakers in international trade, so the moment of truth will
probably come in April, when new annual contracts for iron ore and coking coal
should come into force."
The Russian Trade Ministry is backing local applications for protective duties,
but industry sources have told Asia Times Online the prime ministry is
reluctant, so far, to go along. In February, Prime Minister Vladimir Putin
charged that protectionism was "unrestrained economic egotism". But he also
conceded that the pressure from the Russian steel industry for protection from
Asian imports is difficult for him to resist. "True, we are increasing import
duties of certain ready-made equipment to promote Russian manufacturers, but I
don't think we are extremists in this respect. We are also reducing and even
abolishing import duties for technical equipment, especially of the kind Russia
is not manufacturing, thus promoting Russian industrial advancement."
A source at Novolipetsk Metallurgical Combine (NLMK) says the biggest threat to
Russia's export position in the Chinese market is "the possibility of a serious
decline in prices for raw materials - coking coal and iron-ore - by the main
global suppliers, BHP, Vale, Rio Tinto. This would lead to a further decline in
the cost of steel production in China, which, when added to the difference in
transportation cost, would make Russian imports non-competitive."
At present, NLMK is selling between 15% and 20% of its output to China, pricing
slabs at between US$400 and $500 per tonne. The weakening rouble has also
enabled such exports to remain competitive internationally. But as oil has
started to recover above $50 per barrel, the rouble has firmed as well. Thus,
the profit margin for Russian steel sales has begun to shrink.
The Troika report warns that "the recovery in demand for CIS [former Soviet
Union countries] steel from Far East customers was doomed to be over very soon,
which is exactly what we are seeing happen now. Russian export prices have
visibly weakened in the last two weeks, with billets and slabs falling through
the psychological barrier of $350/tonne. We estimate that $250-$280/tonne on an
FOB [free on board] basis should be the break-even point, even for low-cost
integrated producers like Novolipetsk Steel."
But will Beijing counteract the Russian initiative by duplicating it, raising
support for exports, and protection against imports?
Russia's Trade Ministry has begun an anti-dumping investigation of
polymer-coated steel imports from China, a ministry source has told Asia Times
Online. But the Russian official denies reports from China that the
investigation also covers stainless steel imports. A Chinese Ministry of
Commerce publication that nickel-bearing steel from China is the target of
Russian anti-dumping enquiry is categorically denied by Moscow.
The Russian trade ministry says that between March 21 and April 1, official
investigators from Moscow will visit metal-rollers in China and South Korea and
gather information on costs and prices. The target date for completion of the
investigation and report phase of the inquiry is July 21, the source said.
The Trade Ministry also told Asia Times Online that an investigation of
imported corrosion-proof pipes, also from China, that have been the subject of
an domestic injury application by Russian pipemakers, was concluded on December
12. Pipes from Brazil were also targeted. The report made a recommendation for
a 28.1% protective duty for a three-year term. However, there is opposition to
this in the cabinet, and the prime ministry has yet to approve the new
protectionism.
Thus, the Russian pipemakers are not getting everything they demand; and some
Chinese fears have proven unfounded.
Alexander Deineko, head of the Russian Fund for Pipemaking Industry, a lobbying
group, confirms that "as yet we have no measures against Chinese pipe
producers, while they are continue aggressively to press on our market's
stability. We are working on imposing some anti-dumping measures, but this
stage doesn't allow me predict when we may see positive results." According to
the pipemakers, Chinese exporters are pricing their pipes for Russia at
one-third to one-fifth the level of the domestic market.
Import data for Chinese pipes, provided by Deineko, do not appear to
substantiate the domestic complaints. Deineko said that 240,000 tonnes of
Chinese pipes, including large-diameter, were imported in 2007. This volume
fell to "around 200,000" tonnes in 2008, Deineko said. The trade ministry
report had focused on much earlier import data from the period between 2004 and
2007 and had not considered the impact of the global crisis in steel demand and
protection, which began in the third quarter of 2008.
There were reports from the fair trade bureau of China's Ministry of Commerce
in December that the Russians had begun an anti-dumping investigation into
imports of bearing steel tubes from China. This was then denied by officials at
the Trade Ministry in Moscow, and by Deineko, who claimed the import volumes
were too small to justify government action.
This week, Cheng Yongru, the spokesman for the fair trade trade bureau at the
Commerce Ministry in Beijing, took the offensive, charging that trade friction
with Russia is intensifying, even though growth in the trade volume between the
two countries is slowing down. According to a report of his remarks by China
Economic Times, Russia is planning to attack China's stainless steel exports.
He added that China was targeted for nine separate anti-dumping or trade
protection cases in five former Soviet countries during last year.
Cheng said that trade turnover between Russia and China was $56.8 billion last
year. This was up 19% on 2007, but the rate of growth was less than the 44%
annual growth rate recorded between 2006 and 2007. He said that Russian imports
from China fell 27% this past January, while Russian exports to China dropped
even more - by 51%. He estimated that the value of Chinese steel exports to
Russia now targeted for protectionist measures amounts to $250 million.
According to the Troika forecast, Russian steel exports to the world this year
should amount to 28 million to 30 million tonnes; aggregate output of steel
products to 52 million to 55 million tonnes; and the production level of the
mills will be 65% to 70% of capacity. Capacity utilization so far this year, in
aggregate, has been below 64%.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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