***COMMENT: Plantmakers’ Paradise?

Russia’s steel industry has grown astonishingly in recent years both domestically and internationally . Leading companies not only dominate the home market but now control assets in key markets such as North America.

With a fair amount of their output being marketed to export, most mills in Russia and other CIS countries have been able to capitalise on the voracious appetite for steel of emerging economies, which have sucked up construction grades in their quest to develop.

But now the market has changed.

Since the onset of the economic crisis and the subsequent collapse in demand for steel products around the world, Russian steelmakers have been particularly hard hit.

The international market has all but disappeared, and Russian exporters have been forced to battle it out with suppliers in other export-heavy regions, such as Ukraine and Turkey.

In these difficult times, the only competitive edge has been price.

Plantmakers must be feeling the pinch.

Over the last decade Russia has been a key market for these manufacturers as leading steel companies backed by ambitious banks have invested heavily in new machinery.

But now, with very few exceptions, orders for new equipment have been postponed, with project delays ranging from a year or two to, in the worst cases, indefinitely. And, based on the market appraisal of many leading industry executives at MB’s 7th Russian Steel Conference, held in Moscow last week, it doesn’t look like they will be back on track soon.

“Everybody’s full of promises, but where’s the money?” one planmaking exec remarked to MB on the sidelines of the conference. Less than a year ago, a great deal would have been in Moscow.

And project postponements are not their only concern.

Many of the conference’s key speakers chose to highlight that much of the equipment installed over the past few years has been imported, and that Russian steelmakers have therefore paid the same price for this equipment as producers in other regions such as North America and Europe.

Perhaps these steelmakers should have helped to develop Russia’s domestic plantmaking industry, several asked.

At the same time, there are many questions over the quality of many of these investments.

Russia’s exporters were a large factor in driving steel prices to the record levels recorded last year, and steelmakers there spent a great deal on increasing capacity as much as possible in order to reap the benefits.

But while capacity was growing many mills failed to invest in developing capacity for higher qualities and better grades of steel . Just as importantly, they also neglected to cut costs.

The reality, now that the market collapsed, is that many of these producers are left with high-cost mills producing steel products that, for the first time in many years, have little or no terminal market.

So Moscow’s focus is shifting.

The current crisis presents these steelmakers with an opportunity, officials say. They should take the opportunity to retool and invest in improving quality, not growing quantity.

They should also look to domestic plantmakers, rather than those overseas, to achieve this, and market the products that ensue to domestic customers, rather than overseas.

Some went far enough to say that Russia’s steel industry should be restructured from a few behemoths producing ten million tonnes of commodity-grade steels each year, to a more fragmented industry focussed on smaller production facilities with better margins.

Unfortunately things aren’t quite that simple.

The massive expansions witnessed in Russia over the past decade have been financed by banks — both domestic and international — and steelmakers are desperate to service these debts, to the extent that many have kept their mills rolling even though they are only able to sell at cost or, in some cases, at a loss.

Last week’s news that six mills owned by Estar Holdings declared bankruptcy is evidence of the pressure that the sector is under.

At the same time, it seems unlikely that there are many domestic steel plant equipment manufacturers able to supply mills with the technology necessary for them to develop production in better grades of steel.

Certainly there are few that will find the risks of supplying companies under such financial burdens acceptable.

Given the state of the domestic market and the wider Russian economy, it also seems unlikely that demand for steel here will recover quickly, and many steelmakers are likely to increase their focus on overseas customers, rather than turn it down a notch.

The case for modernisation in Russia’s steel industry is certainly strong, but the state of its finances and the economy may preclude this for some time to come.