***COMMENT: Stockholm syndrome

The combination between Metinvest and Ilyich Iron & Steel is compelling.

Metinvest brings its raw materials assets to the deal and plans to invest a cool $2 billion in modernising and improving Ilyich’s facilities.

Together, the two Ukrainian companies will have capacity to produce 20 million tpy of crude steel. This is more than any CIS steelmaker produced last year.

And that steel will be pretty cheap to make.

Marketed correctly, this tonnage will have a powerful influence on the world market.
Ukraine is a pretty low-cost place to make steel, well below China and Turkey, according to Kiev-based research outfit UPE, which reckons only Russian production is cheaper.

Even there, logistical snarl-ups and the land-locked location of many mills makes Ukrainian steel plants more efficient exporters in many cases.

But this deal isn’t just about bulk.

In 2009 Metinvest produced only 7.03 million tonnes, down significantly from 8.24 million tonnes the year before.

Ilyich produced only 4.28 million tonnes, which gave the companies a combined total of only 11.31 million tonnes. A long way short of 20 million.

Even in Ukraine, when time, power and raw materials are relatively cheap, mills have had to cut production.

Rinat Akhmetov, the billionaire brains behind Metinvest, knows that. That’s why his company is going to plough such a large amount of money into modernising Ilyich’s facilities.

His reasoning is excellent. Just across the Black Sea, many Turkish mills have continued to pursue an export-oriented strategy on vanilla products like rebar.

Rather than reducing output, many of them have scouted for demand wherever they can find it, selling cargoes as cheaply as they can to keep their mills rolling.

In Dubai, this has caused a problem. Once again, a large stock overhang has built up.

Stockists and fabricators who bought Turkey-origin material in the spring, when local producers downed tools and scrap prices were high, are now being undercut by Turkish exports.

Businesses that are already weak after the problems last year now find themselves having to swallow large writedowns. Again.

Fortunately, news just in suggests that many Turkish mills are going to cut production. But the damage has already been done.

Operating a purely cost-driven model is effectively holding the rest of the sector hostage to fortune. Until a couple of years ago, the industry has happily accepted its state of captivity.

But now, some companies are breaking out.

Preparations for MB’s upcoming Stockholm Selection continue apace. We’re putting together our manifesto, which will focus on innovation. Next week we’ll be selecting the panel.

We really want to hear from you. Contact us directly at editorial@metalbulletin.com and share your thoughts. More news soon.