Russia's mini-mill bonanza set to reshape the region’s long steel market

The CIS long steel market is bracing itself for a massive shake-up that will reverberate beyond the region in the next two years, following the launch of several new mini-mills in Russia in 2013.

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The increased capacity will unleash tough price competition in Russia and squeeze out some imports, which will then be redirected to the regions outside of the CIS, market participants said.

Russian steelmaker Severstal is to launch its 1 million-tpy long-products mini-mill at Balakovo in the country’s Saratov region in the third quarter of 2013, while Novolipetsk Steel (NLMK) is to start its 1.5 million-tpy mini-mill in Russia's Kaluga region in early summer.

Those are the largest projects of 10 new mini-mills, with a total rolled steel production capacity of 4.4 million tpy, which are set to be launched in Russia this year, according to Metal Expert Consulting. In addition, there are another 20 mini-mill projects, with a total long steel production capacity of almost 9.5 million tpy being built in Russia, according to the consultancy.

Even though the largest of the mini-mills are to be launched this year, the market is unlikely to feel the full impact of this mini-mill bonanza before 2014, as the facilities will need time to ramp up.

“I realistically expect both Kaluga and Balakovo to work at full capacity only in 2015,” Renaissance Capital analyst Boris Krasnojenov said.

However, following the ramp-up, market participants expect a tough competition on prices.

“After the Balakovo and Kaluga mini-mills ramp-up, a real price war will start,” a manager from a large Russian trading company said.

“The new mini-mills launch will first of all lead to the sharper price competition, and prices will fall as a result,” a manager at a large Russians steel producer said.

“As the Russian producers traditionally sell rebar at a higher price at home than for export, the domestic prices may first fall to the export levels, and may then go further down, approaching the production costs,” the manager at a trading company said.

“The next stage will be the reshaping of the market shares among the new and existing plants, as the new ones will actively be [targeting] the regions surrounding their production sites,” the manager from a steel producer said.

Both the Kaluga and Balakovo mini-mills will be located within easy reach of Moscow, where most of the construction in Russia takes place. The region is targeted by the existing long steel producing capacities of NLMK and Severstal, as well as Mechel and Magnitogorsk Iron & Steel Works.

Among the major exporters to Russia are state-run Belarus Metallurgical Plant (BMZ), and Ukraine’s ArcelorMittal Kryvyi Rih and Metinvest.

“Another effect of the NLMK and Severstal mini-mills will be the squeezing out of the plants' regional competitors, including the Russian, Belarussian and Ukrainian ones,” a steelmaker manager said. “The mini-mills will be quite competitive in their domestic regions price-wise due to the low transportation costs.”

“This way, the Ukraine and Belarus exports to Russia will become less profitable that their sale to the traders outside of CIS,” he added.

Kryvyi Rih is likely to try out options outside Russia first as its facilities are located closer to the port than those of BMZ, market participants said..

The manager of a large trading house said, though, that it may not happen if the markets continue to be weak.

“Kryvyi Rih and BMZ will then have to continue exporting to Russia at lower prices,” he said.

Within the CIS, there will also be changes, as Russian producers will try their material elsewhere once they see the domestic market toughen, the manager at a large steelmaker said.

“Another effect of the mini-mills launch will be sharper price competition in the CIS market outside Russia, as the current Russian long steel producers, such as Mechel, Evraz and MMK, will boost their exports,” the manager said.

The last resort will be a cut in production, market participants said.

A source close to one of the producers launching a mini-mill this year said that if there is a need for a cut, the new capacities would operate while production at older facilities would be reduced, as the new project “needs to start giving the return on the money invested in it”.

“The current Russian long steel makers will have to cut their production in the short term as they are unlikely to be able to sell all their volumes on the domestic and export markets amid the generally weak economic environment,” a manager at a steelmaker said. “They will come back to their previous production levels later due to the growth of the domestic consumption.”

The market participants named the existing long-steel producing capacities of NLMK, Severstal and Magnitogorsk Iron & Steel Works as the most likely ones to cut production when the market gets tough, as they have the highest production costs.

However, the mini-mill owners do not foresee any problems.

“Russia has quite a robust situation with demand,” NLMK’s cfo Grigory Fedorishin said at a recent conference call. “The market will easily absorb the new capacity.”

When NLMK and Severstal were making decisions on their mini-mills before the 2008 crisis, Russia’s construction market was booming, supported by sky-high oil prices and the rising consumer incomes in the country.

“If the construction [sector's] steel consumption remains flat this year, we will consider it a great achievement,” RenCap’s Krasnojenov said. “But the market will have to grow in the next couple of years for the new [mini mill] output to be consumed.”

The manager at a large steelmaker said he expects the steel consumption in Russia’s construction sector to grow by 4-5% a year on average in the next five to six years. “But the growth will only be there if there are state orders, which will be the key driver of demand’,” he said.

Morgan Stanley said in a report late last year it expects the total demand for construction steel, both flat and long, in Russia to increase by 5% in 2013.

Last year there was a 14% rise in demand, which was due to the the construction projects for the 2014 Winter Olympic Games in Russia’s southern town of Sochi and the Asia-Pacific Economic Co-operation (APEC) summit that took place in the Russia’s Far Eastern city Vladivostok.

Morgan Stanley sees steel demand in Russia rising at a compound annual growth rate of 4.4% until it reaches 50 million tpy in 2017 due to robust residential construction and investment in infrastructure, including roads, airports, ports, utilities and communications. Additionally, Russia will have to build more infrastructure in the 11 cities that will host the football World Cup in 2018.

“At the end of the day it will all depend on on the price of oil,” RenCap’s Krasnojenov said. “If it continues to be high, Russia will build.”

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