05/11/12
In Crisis Whirlpool

During the first ten months of 2012, the Ukrainian metal making companies smelted by 1.9 million tonnes of steel less than during the similar period of 2011. The reason for such a significant decline is the world economic crisis observed since the start of the current year and led to a decrease in demand in the foreign steel markets. At that, experts cannot see any conditions for the macroeconomic negative factors, which affect the sales of the Ukrainian metal products, to stop during the remaining months of 2012. The metal makers do not expect to seriously win their steel losses back earlier than by the late spring of next year.

The Ukrainian government’s updated statistics shows the following results of the metal production in Ukraine for the ten months. During January-October this year, the country produced 23.74 million tonnes of cast iron, 27.143 million tonnes of steel and 22.215 million tonnes of finished metal products. The decrease year on year amounted to 1.4% of cast iron, 6.6% of steel and 5.9% of rolled products.

The percentage of steel decline in this list of the negative achievements by the Ukrainian ferrous metal industry is worth being emphasised. Steel is a basic product for the industry; it is not metal makers alone and not only from our country that make allowances for the changes in its production dynamics. During the current year, this dynamics was not in favour of the domestic iron and steel companies, which are decreasing steel production faster and faster month after month.

If the volume of steel production in the country decreased by 3% year on year by the end of the first half of 2012, then the lag already amounted to 5.6% by the end of the first three quarters. Finally, the industry performance during the first ten months demonstrated that the hopes of the experts and metal makers for a certain increase in steel product consumption this autumn, though with a long delay, have not been justified. The same happened to the domestic metal making companies, whose local plans have not been implemented completely this month.

In October, steel production in Ukraine was expected to be at a rather low level – 2.59 million tonnes, according to the participants of the meeting held at MetalurhProm. Compare: this August, which was not the best month for the sector, the country produced 2.625 million tonnes of steel. But in October, the Ukrainian metal makers did not even manage to carry out such low plans. The average daily steel output in the country amounted to 82.2 thousand tonnes (89 thousand tonnes – for the first ten months of the current year and 95 thousand tonnes – for the whole last year); the volume of steel produced in October was 2.548 million tonnes. Interfax Ukraine interpreted this figure in the following way: the decline against September 2012 amounted to 1.4%, against October 2011 – 15.4%.

 

Experts’ Interpretations

 

When determining the reasons for the metal production decline in Ukraine, analysts agree that it is the external macroeconomic environment that forms the principal negative factor for the industry. “Given that 75-80% of the Ukrainian metal products are exported, the external factors have a decisive influence on the reduction of production volumes at the metal making plants. Among them, there is the exacerbation of the debt crisis in a number of European countries, the political tensions in the Middle East and North Africa and the deceleration of economic growth in South East Asia”, says Oleksandr Kushnarov, an economist from Altana Capital’s investment consulting department.

The negative trends as depicted directly affect the foreign metal consuming sectors, where the demand for steel has been characterised as poor for rather a long time already. It also has a negative impact on our metal making industry’s export sales markets. “The prices have fallen seriously and remain low. For certain types of products, they have been close to metal product production costs for rather a long time and sometimes even lower. So, the decrease in offers is a logical attempt by the metal makers to maintain the market”, says Oleksandr Syryk, RCG AG’s vice president.

The price analysis of certain types of the products exported by the domestic iron and steel companies proves the analyst’s thesis. During the last decade of 2012, the prices for the Ukrainian steel billets amounted in average to $ 505-510 per tonne FOB Black Sea against $ 585 per tonne a year earlier. So, the decline amounted to 12.8%. There were similar changes in the prices for finished long products. Since the end of October 2011, reinforced steel have gone down in value by 11.9%, to about $ 570-575 per tonne, rolled products – by 13.8%, down to $ 580 per tonne. The price fall for the domestically produced steel plates was even more noticeable. The export prices for the Ukrainian hot rolled plates decreased by 15.3% during the year and by the end of the previous months amounted to $ 510-515 per tonne, cold rolled plates – by 15.9%, down to $ 595-600 per tonne.

Dmytro Lenda, the senior analyst from Art Capital, names the increase in raw material costs among the negative factors for the domestic metal making plants. “After the price decline for iron ore below $ 100 per tonne at the edge of August and September 2012, we observed a certain rise. And now iron ore is sold at a price over $ 120 per tonne”, he notes.

 

Metal Makers’ Pessimism

 

When estimating the development of the situation in the domestic metal production and sales, the experts agree that there are no any positive outlooks to turn the situation around so far. Oleksandr Syryk cannot see any special grounds for optimism regarding the Ukrainian metal product sales markets. “It is true that the demand for certain types of rolled products has been waking up recently”, he admits. But at the same time he acknowledges: “this is a very small positive factor”.

Oleksandr Kushnarov cannot see any real reasons for increasing production volumes by the Ukrainian metal makers during the remaining months of 2012 either: “When winter comes, the business activity in a number of sectors (construction, pipes) is likely to decrease. At best, our metal making companies will manage to maintain steel production at the level of September-October”. Dmytro Lenda sticks to a similar point of view: “There are no preconditions for recovery of the sector. Even the decline in steel production in Ukraine last November-December will not impact the dynamics significantly, in spite of the low comparison base effect, because there are no distinct improvements in the world economy. This is a wide-spread opinion of the market participants”.

According to a simple arithmetic, the Ukrainian metal makers reduced steel production by 1.909 million tonnes during January-October 2012 year on year. During the entire 2012, even without any regard to the negative trend in metal production, the industry will be behind the 2011 results (over 34.6 million tonnes) by over 2 million tonnes. In other words, the annual decline in the country’s metal making industry is likely to amount the same 6% that many analysts predicted in early autumn. And the annual absolute figure may even be lower than in 2010, when the Ukrainian metal makers produced about 32.6 million tonnes of steel. Though, this is a reasonable pessimistic scenario...



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