Russian steelmakers are nervously looking east, waiting to see what effect a series of deals hammered out in China will have on their own fortunes.
Traditionally, on April 1, the start of China's fiscal year, Russia's steel producers hold negotiations with iron ore miners to work out the terms of their annual contracts.
Chinese iron ore producers are reluctant to agree to contracts that by UralSib's estimates will likely represent a 30 percent to 40 percent price cut from last year because of low steel prices worldwide. And the longer they wait to accept it, the greater advantage low-cost steel exporters such as Russia have.
Usually, an agreement is reached in April; last year it was reached in June. This year, it could drag on even longer.
Since 2008, Russia has grown from the fifth-largest steel exporter to the largest thanks to the ruble's devaluation and a troika of competitive advantages: raw materials, inexpensive labor and low energy costs. Severstal, the country's biggest steelmaker, announced Friday that it would be exporting half of its output this year because of rising demand in Southeast Asia.
The Russian steel industry as a whole is seeing roughly 70 percent of its flat steel and 30 percent of its long steel sent abroad, Renaissance Capital metals analyst Rob Edwards said.
But the industry, which is capitalizing on the higher prices that it can manage on Asian markets, will see the heyday come to an end when China's iron ore agreements are finalized. With a lower production cost, local steel is likely to sweep out most competitors.
"When the iron ore price falls, the relative cost position of the Russians may weaken," said Michael Kavanagh, a senior metals analyst at UralSib. "In other words, the cost curve might flatten."
The increased volume on the market will also help drive out foreign competition.
"Once costs come down in Asia, the domestic Asian producers are going to ship more, and that's going to displace some of the Russian tonnages that are being shipped there," Edwards said. "That tonnage has to find a home somewhere else, hopefully by which time domestic demand will have recovered."
That somewhere else will have to be the domestic market, where summer usually represents a peak in demand. So far, apparent demand for steel here is down approximately 30 percent year on year, while real demand has probably fallen 25 percent, Edwards said.
Russian steel production bottomed out in December, when the country produced 3.3 million tons over the month. But output has been rising steadily since, with production reaching 4.6 million tons in March. China, the world's top producer, posted a rise of 1.4 percent in the first quarter for 45 million tons in March.
A small market rally and revving output helped steel stocks recover their losses after a miserable Monday, though analysts were of different minds concerning what lies ahead for the sector.
Bucking the trend was Magnitogorsk Iron & Steel Works, or MMK, whose Global Depositary Receipts gained 6 percent over the week in London after Bank of America bumped it up to "buy," citing increased domestic demand. The GDRs had fallen 6.3 percent last Monday.
Others were not so lucky, with a round of bad marks from banks weighing on sentiment. ING cut Severstal and Evraz to "sell" on lower steel price forecasts. Severstal also got a downgrade from Credit Suisse, which lowered both it and Novolipetsk Steel, or NLMK, to "underperform," also citing weaker prices.
Severstal's London-traded shares fell 9.9 percent Monday and limped back to close the week down 4.3 percent. NLMK shed 6.7 percent on the week's first day and closed on Friday down 5.5 percent for the period. Evraz recovered from a 5.6 opener in London to end the week down 0.5 percent.
Coal and steel maker Mechel had the biggest first-day drop, sinking 14.8 percent in New York, though it managed to finish the week behind just 1.4 percent after saying Wednesday that it would buy the coking-coal assets of Bluestone Coal for at least $1.4 billion.
The ruble-denominated MICEX Index finished the week down 1 percent, and the dollar-denominated RTS Index fell 0.4 percent.
Traditionally, on April 1, the start of China's fiscal year, Russia's steel producers hold negotiations with iron ore miners to work out the terms of their annual contracts.
Chinese iron ore producers are reluctant to agree to contracts that by UralSib's estimates will likely represent a 30 percent to 40 percent price cut from last year because of low steel prices worldwide. And the longer they wait to accept it, the greater advantage low-cost steel exporters such as Russia have.
Usually, an agreement is reached in April; last year it was reached in June. This year, it could drag on even longer.
Since 2008, Russia has grown from the fifth-largest steel exporter to the largest thanks to the ruble's devaluation and a troika of competitive advantages: raw materials, inexpensive labor and low energy costs. Severstal, the country's biggest steelmaker, announced Friday that it would be exporting half of its output this year because of rising demand in Southeast Asia.
The Russian steel industry as a whole is seeing roughly 70 percent of its flat steel and 30 percent of its long steel sent abroad, Renaissance Capital metals analyst Rob Edwards said.
But the industry, which is capitalizing on the higher prices that it can manage on Asian markets, will see the heyday come to an end when China's iron ore agreements are finalized. With a lower production cost, local steel is likely to sweep out most competitors.
"When the iron ore price falls, the relative cost position of the Russians may weaken," said Michael Kavanagh, a senior metals analyst at UralSib. "In other words, the cost curve might flatten."
The increased volume on the market will also help drive out foreign competition.
"Once costs come down in Asia, the domestic Asian producers are going to ship more, and that's going to displace some of the Russian tonnages that are being shipped there," Edwards said. "That tonnage has to find a home somewhere else, hopefully by which time domestic demand will have recovered."
That somewhere else will have to be the domestic market, where summer usually represents a peak in demand. So far, apparent demand for steel here is down approximately 30 percent year on year, while real demand has probably fallen 25 percent, Edwards said.
Russian steel production bottomed out in December, when the country produced 3.3 million tons over the month. But output has been rising steadily since, with production reaching 4.6 million tons in March. China, the world's top producer, posted a rise of 1.4 percent in the first quarter for 45 million tons in March.
A small market rally and revving output helped steel stocks recover their losses after a miserable Monday, though analysts were of different minds concerning what lies ahead for the sector.
Bucking the trend was Magnitogorsk Iron & Steel Works, or MMK, whose Global Depositary Receipts gained 6 percent over the week in London after Bank of America bumped it up to "buy," citing increased domestic demand. The GDRs had fallen 6.3 percent last Monday.
Others were not so lucky, with a round of bad marks from banks weighing on sentiment. ING cut Severstal and Evraz to "sell" on lower steel price forecasts. Severstal also got a downgrade from Credit Suisse, which lowered both it and Novolipetsk Steel, or NLMK, to "underperform," also citing weaker prices.
Severstal's London-traded shares fell 9.9 percent Monday and limped back to close the week down 4.3 percent. NLMK shed 6.7 percent on the week's first day and closed on Friday down 5.5 percent for the period. Evraz recovered from a 5.6 opener in London to end the week down 0.5 percent.
Coal and steel maker Mechel had the biggest first-day drop, sinking 14.8 percent in New York, though it managed to finish the week behind just 1.4 percent after saying Wednesday that it would buy the coking-coal assets of Bluestone Coal for at least $1.4 billion.
The ruble-denominated MICEX Index finished the week down 1 percent, and the dollar-denominated RTS Index fell 0.4 percent.
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