2007 International Trading Supplement - The Russian Bear Roars

Discussions of global markets typically revolve around China; however, Russia is growing in prominence.

When Europe’s Mittal Steel entered the U.S. market with some high-profile acquisitions, many steel industry observers took note. Additionally, however, many Russian steel companies have been acquiring U.S. steel operations in an effort to grow their businesses. These moves, in many ways, illustrate the growing role that Russian steel companies, as well as other metals-based companies, are playing in the global market as they parlay greatly improved markets to expand their operations.

Russian steel companies that are not acquiring U.S. companies are often developing partnerships with U.S. operations to strengthen their businesses. (See sidebar, p. S18.)

GETTING IN GEAR

The Russian steel industry, far from sleepy, is growing rapidly, with Russian steel production totaling 70.8 million metric tons in 2006. The total makes it the fourth largest steel producing country in the world, trailing only China, Japan and the United States. If steel production in the Ukraine, a former CIS (Commonwealth of Independent States) country, was included in the numbers, steel production in this region would leapfrog the United States and only slightly trail Japan as the second largest steel producing country.

Helping Russia to reach these production figures are several Russian-based

For copper and aluminum, the trend is not much different. Russia, filled with abundant natural resources, is one of the world’s largest producers of many key metals. In fact, the Russian firm Russian Aluminium (Rusal) recently merged its operations with Sual Group and Glencore International AG to form the largest aluminum and alumina company in the world.

Russia’s scrap metal industry also continues to grow. However, some economic issues can make dealing with Russian suppliers more challenging than dealing with suppliers in many other countries. As Russia’s metals production business continues to develop, the Russian and Ukrainian governments have enacted tariffs and other steps to keep scrap flowing adequately to meet the needs of the country’s domestic steel producers.

TALKING SCRAP

Ildar Neverov, a director of the Bureau of International Recycling (BIR), an international trade organization for recyclers, and a spokesman for Siberia Metals Recycling, a scrap metal recycling processor and broker with operations in Moscow, says Russian scrap metal recyclers presently are prohibited from shipping nonferrous scrap outside of the country. He cites high duties and London Metals Exchange (LME) prices as keeping Russia out of the volatile global nonferrous markets. The result, says Neverov, is that the main drivers for the Russian nonferrous market are domestic scrap supply and demand.

As for the ferrous market, the growth of the Russian steel industry means that more domestically generated scrap material is staying within the country. "The steel scrap business in Russia is a steadily growing industry," Neverov says. "Domestic consumption is very strong, and from year to year exports of steel scrap decrease."

Meanwhile, Russian mills are becoming more competitive with international market prices, with Neverov saying prices from Russian sources are at the same level as those on the international market.

The result is that Russian ferrous scrap consumption will reach approximately 25 million metric tons, while exports will be at approximately 6 million metric tons.

While different dynamics affect the Russian scrap industry, some of the trends being seen in other regions of the world are also at play in Russia.

Consolidation in the scrap industry, which has been sweeping the North American market, also is taking place in Russia. "We can clearly see consolidation in the scrap industry (in Russia)," Neverov says.

Mergers among steel companies include several mini-mills in the country being consolidated into a single holding company.

TIGHTENING SUPPLY

China continues to play a key role in consuming scrap metal, and most export purchases from Russia are happening in the far eastern part of the country. But China, for its part, is finding it more opportune to purchase scrap from Turkey.

With the Russian economy continuing to grow, problems in scrap supply are cropping up. Scrap generation in Russia is declining, Neverov says.

To turn the situation around, more Russian scrap metal recyclers are looking to invest significant amounts of capital in equipment to boost the quantity as well as quality of the material available.

Earlier this year, ferrous scrap prices in Russia crept above the $234 per metric ton as a result of material shortages in the market.

An even sharper price increase took place in the Ukraine, which saw the average price of scrap increase by $42 per metric ton earlier to $258 per metric ton in light of a depletion of consumers’ stock while new supplies remained low.

While Russia’s steelmakers have enjoyed robust growth and are expected to grow from between 6 percent to 7 percent per year during the next 18 months, according to Fitch Ratings, steelmakers must continue investing in equipment to boost the scrap metal delivered as well as in more sophisticated production equipment.

While the Russian steel industry continues to be a major factor in the global steel industry, scrap yards are finding out that to remain competitive, investments in equipment are becoming necessary. While scrap yards in North America and many parts of Western Europe have invested in equipment to boost their production capabilities, many Russian scrap yards are playing catch up. Neverov says that most Russian companies are looking to purchase used equipment from Europe to address this problem.

As Russia starts to exercise its position in the global market, Russian steel companies are looking to spend significantly to boost domestic scrap and steel production. Russian companies are finding fertile ground, not only in Russia, but also in Europe and the United States.