Overview of steel and iron market 2017 - Deloitte US · PDF fileIntroduction Deloitte CIS...

Overview of steel and iron marketDeloitte CIS Research CentreMoscow, 2017

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Contents

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Introduction 3

Key findings 4

Global steel and iron market 5

Output trends 6Consumption trends 8Commodity prices for 2016-2017 10Steel prices for 2015-2017 12

Overview of the Russian steel and iron market 13

Output trends 14Consumption trends 17Exports 18Imports 19

The current state of the steel-making industry in Russia 20

Appendix 22

Contacts 23

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Key findings

Introduction

02 Global steel and iron market

03 Overview of the Russian steel and iron market

04 The current state of the steel-making industry in Russia

05 Appendix

06 Contacts

Introduction

Deloitte CIS thanks for your interest in Overview of steel and iron market research, which is conducted on a regular basis.

The global metals market is primarily driven by three critical factors: the Chinese market, USD exchange rates and oil prices. This triad is as important as ever. The demand from China has recovered due to government incentives for the manufacturing industry while the US dollar has weakened on the global market amidst a growth in oil prices, boosting prices across all metals, with steel being no exception. In addition, the year 2016 saw steel prices hit a record of USD 500 per tonne since 2014.

The metal product output and consumption arena has also witnessed several developments. In 2016 the downward trend line continuing from 2015 gave room to a more stabilised trend, with industry indicators changing less than 2 percent:

• Steel output grew by 0.8 percent up to 1,629 million tonnes

• Steel consumption grew by 1.3 percent up to 1,600 million tonnes

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From a strategic perspective, the steel and iron industry depends on global industralisation, which primarily involves the demand for metals from countries that are ready to make an investment leap (e.g. India, Vietnam and Indonesia). From a tactical perspective, the industry is dependent on actions China and global companies might take and how some countries would respond in terms of protectionism.

While being potential regions of growth, India, Iran and Vietnam have limited opportunities to raise capital. The search for a solution is on, with a way out likely to be found in 2018-2019. However, these countries will not have a significant impact on the global metals market. Growing demand will drive the rise of local industry. Countries in the Middle East and Africa represent potential growth areas that will be attracting global resources to meet the demand. Investment mechanisms may start emerging in these countries after 2020.

Re-industrialisation of the industrialised nations is expected to involve a fundamentally different technology platform. This effort would require materials that are substantially different from the existing offerings on the global market. The development of a resource platform for cutting-edge manufacturing applications is currently driven by projects aimed at manufacturing metal products with the use of rare earth elements and producing metal powders to support additive technologies and increase the output of products with higher technological availability (e.g. products and fabricated metals with complex structures).

Demand limitations in 2017 highlight the importance of corporate policy as a tool for gaining a competitive edge. Companies price their products to solve the tasks at hand, which leads to volatility in prices.

Andrey Sedov

Partner, Leader of the Metalsgroup in Deloitte, CIS

Igor BudanovProfessor, Doctor of EconomicsInstitute for Economic Forecasting of the Russian Academy of Sciences(INP RAN)

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In 2016 the downward trend in output and consumption that had been continuing from 2015 gave way to greater stability, with industry indicators changing by less than 2 percent:

• Steel output grew by 0.8 percent up to 1,629 million tonnes

• Steel consumption grew by 1.3 percent up to 1,600 million tonnes.

Over the first three months of 2017 saw global steel output reach 410.5 million tonnes, up 5.7 percent from the same period in 2016.

In 2016 China saw an increase of 1.8 percent in domestic consumption of steel amidst the continuing incentives and growth in loans.

Driven by a decrease in government incentives, an expected gradual weakening in the demand from China will create an oversupply, forcing prices down.

In 2016 steel output in Russia has grown by 0.3 percent to 69.6 million tonnes.

The apparent domestic consumption of steel dropped by 3.9 percent to 34.6 million tonnes. However, 4Q2016 saw a YoY increase of 3.7 percent as a result of the slightly improved situation in the construction industry and the Russian economy as a whole.

Exports and imports totaled 43.3 million tonnes and 11,3 million tonnes, respectively.

*Based on the annual survey by Deloitte CIS.

Top-5* issues for the industry in 2017:

• Prospects of weaker domestic demand

• Stagnation in the Russian economy

• Decrease in core business revenue

• Higher production costs in Russia

• Stricter government regulation in Russia

Top-5* priority business strategies in 2017:

• Ongoing cost control

• Business development through organic growth

• Cost cutting

• Increase in domestic output

• Expansion into new markets

Key findings

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Global steel and iron market

Global steel and iron market02

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Output trends

Steel prices for 2015-2017

Commodity prices for 2016-2017

Consumption trends

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2018F2017F

The first three months of 2017 saw global steel output reach 410.5 million tonnes, up 5.7 percent from the same period in 2016 (Figure 1). According to EIU analysts, output growth will decrease by about 3 percent by 2018, which is primarily due to a slowdown in the Chinese economy as a major steel producer/consumer (see below for more details).

China: Following the output contraction early in 2016, 2H2016, particularly Q4, saw Chinese producers respond with an increase in output amidst rebounding prices and softer credit terms. Annual output has grown by 1.2 percent.

The EIU expects that anti-dumping initiatives (e.g. the EU-initiated investigation into the prices of rolled coated products in December 2016) along with a sharp decline in demand due to stricter government regulation may hinder further growth in output.

North America: Despite a strong growth during 4Q2016, the annual steel output in the USA was down by 0.5 percent in 2016. At the same time, Canada and Mexico saw a growth in output during 4Q2016, compared to the same period in 2015. Overall, steel output in North America went up by 0.3 percent in 2016.

Output started rising in early 2017 as Big River Steel, a steel maker in Arkansas, went online in December 2016. Higher prices encouraged producers to turn on some of their idle capacities. Specifically, ArcelorMittal reactivated a blast furnace with a capacity of 1.3 million tonnes per year at its plants in Indiana in December 2016. In January 2017, US Steel restarted a rolling mill for 3.6 million tonnes. The company may also recommence an output of primary products. February 2017 saw Acero Junction start its rolling mill. The company is also planning a restart of the electric arc furnace with an output rate of 1.2 m per annum in 2H2017.

Figure 1. Steel output since 2009 (million tonnes)

Source: WorldSteel Association, EIU forecast

Figure 2. Top-10 countries/groups of countries ranked by percentage share in steel output for 2016

Output trends

20162015201420132012201120102009

Global steel output, million tonnes January-March

China

Other countries

EU

Japan

India

USA

Russia

South Korea

Brazil

Ukraine

Growth rate

0.92

1.161.07 1.01 1.06 1.01 1.01 1.000.97 0.96

1 23

9

1 43

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1 53

8

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1 67

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1 62

938

8.8

410.

51

629

1 57

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50%

10%

11%

6%

6%

5%

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Global steel and iron market \ Output trends

The EU: In 2016 low prices, higher costs and competition from cheap imports ruled the EU steel market, with YoY output down by 2.2 percent, even despite the fact that consumption was up. However, the European Commission has softened its stance on imports at dumping prices. In 1H2016 they imposed duties on reinforcing steel from China and rolled products from Russia and China. In October 2016 the EU increased customs duties for Chinese cold-rolled product imports by more than 20 percent while Chinese rolled steel plate products were excluded from the market as import duties went up by 60 percent. Moreover, December 2016 saw the EU start an investigation into Chinese imports of Zinc-coated products that account for 50 percent of the external supply on the market. In March 2017 the European Commission concluded that prices for coiled products from Russia, Ukraine, Iran, Brazil and Serbia were within the limits. As a result, no tariffs were applied.

India: In 1H2016 India continued production while increasing stocks. Since that time, production output has grown at the expense of depleted stocks and due to the introduction of new production capacities, with 2016 seeing a resulting stable growth of 7 percent. Output grew further by 12.4 percent over the first two months of 2017. Indian producers benefited from regulatory incentives as the industry regulator introduced minimum import prices (MIPs) across almost all steel products in February 2016. The level of MIPs was substantially higher than the market prices, thus prohibiting imports into India. Some of the MIPs were repealed in August while others continued.

Figure 3. Steel output by region (million tonnes)

Figure 4. Month-by-month average capacity utilisation across 67 producing countries on a monthly basis (%)


20162015

12.2

015

01.2

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01.2

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11.2

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2014

64.9 65.4 66.3

70.5 71.1 71.172.7

68.1 68.370 69.4 69.2 67.6

69.370.7

72.7

60

70

65

75

ChinaAsia (except for China)EUNorth AmericaCISSouth AmericaEurope (except for EU)

Middle EastAfricaAustralia

2018F2017F

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In 2016 steel consumption increased by 1.3 percent from 2015 to 1,600 million tonnes. A similar, moderate growth of 1.4 percent is expected in 2017. However, this upward trend will change its direction by late 2018 as global consumption of steel is expected to decrease by about 2 percent in 2018.

Figure 5. Steel consumption for 2014-2018 (million tonnes)

Consumption trends

2018F2017F201620152014


Global steel output, million tonnes Growth rate

China: China consumes over 40 percent of the global steel output. In 2016 the country saw an increase of 1.8 percent in domestic consumption of steel amidst the continuing incentives and a growth in loans. This growth has come primarily from the construction and machine building industries, which account for almost all steel consumption in the country. The positive effects from government regulation, which will continue throughout 1H2017, will decrease gradually over 2H2017 as the Chinese government starts making cuts to incentives fueling industrial growth, with an expected weakening in the economy. Given the imminent removal of the support for the construction industry, hope for further growth over late 2017 and 2018 lies with the machine building industry and component producers, with growing exports and low energy prices to support this growth.

The US: The demand for steel across North America is led by the US, which accounts for three thirds of the total consumption in the region. The US construction industry accounts for about 40 percent of the demand. While sending a positive signal for a growth takeoff, the existing proposals for boosting infrastructural investments require approval from Congress, which results in a rather strong uncertainty about the scale and timing of infrastructural development.

Gradual tightening of monetary policy may slow down activity in the automotive industry, which accounts for 25 percent of the total domestic demand for steel. In 2016 car sales hit a new record of 17.6 million vehicles. However, repeating this feat in 2017-2018 will be a tough task, given the trend for higher oil prices and interest rates. A long-term demand for steel on the automotive markets is also threatened from a potential replacement of steel with aluminum and innovative high-resistance steel products that can reduce steel weight per unit of production without compromising durability.

0.981.011.01

0.970.99

1581

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1622

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1599

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1579

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The EU: Major steel consumers in the EU economic sectors continue to enjoy monetary support from the European Central Bank (ECB). The ECB has made borrowing easier and has also been lowering currency pressures, helping producers to stay competitive. In 2016 the automotive market delivered a boost to the demand for steel, accounting for almost 20 percent of the regional needs. Declining unemployment has also encouraged demand from other steel consumers such as house appliance producers and private housing builders. No change in regulation is expected in 2017 with the result that moderate growth in consumption continuing.

Asia: In 2016 South Korea saw its automotive production go down by 7 percent from 2015, along with a sharp decline in steel consumed by ship builders who account for 15 percent of the domestic demand. The construction industry has also seen a contraction, with political uncertainty affecting business activity. In Japan a low demand from builders has only been partially offset by a growth in the exports of industrial iron and steel products. Boosted by extensive infrastructural investments, the demand for steel in South-Eastern Asian countries such as Vietnam, Indonesia, Thailand and the Philippines increased by 10 percent in 2016. However, with loan interest rates starting to rise, this growth will not be easy to maintain in 2017-2018. After a hesitant start in early 2016, demand in India increased in 2H2016 to reach an annual growth of 3.2 percent, which is significantly lower than the growth in production.

Source: Based on data of WorldSteel Association, EIU forecast

Global steel and iron market \ Consumption trends

Figure 6. Steel consumption for 2014-2018

201620152014

ChinaAsia (except for China)EUNorth AmericaMiddle EastSouth AmericaAfrica

CISEuropa (except for EU)Australia

2018F2017F

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Ore: In 2016 the average price for ore was USD 57 per tonne, compared to USD 55 per tonne in 2015. This may be due to a rally in 2H2016 when prices were above USD 80 per tonne. Higher prices continued into early 2017, increasing above USD 90 per tonne. However, the second half of March saw prices drop by more than 10 percent. High prices seem to be volatile due to the excessive supply that is expected to continue over 2017-2018, according to forecasts by the EIU. Having left the market in 2014-2015, some of expensive offers from Canada, Brazil, Sierra Leone, Iran, South Eastern Asia and Australia are coming back as a response to higher prices. Plus, several mining majors are continuing with large projects, including Rio Tinto and BHP Billiton (both in the UK/Australia), Hancock Prospecting (Australia) and Anglo American (the UK/South Africa) in Brazil. Starting production in 2015-2016, these companies will ramp it up in 2017. In 2Q2016, Vale (Brazil) commenced production at its S11D mine with an annual capacity of 90 million tonnes.

However, full capacity will not be reached until 2021. While predicting ore prices within a range of USD 45–70 per tonne in 2017-2018, the EIU points out that there may be periods where prices go above the range. One of these periods could include a higher demand from China after a New Year season. However, prices will become lower as ore stocks at Chinese ports start getting beyond the peak.

Coal: In 3Q2016 contractual prices for coking coal were calculated at USD 92.5 per tonne while prices in the middle of October were fixed at USD 200 per tonne for 4Q2016. With spot prices above USD 300 per tonne (FOB, Australia) in November, contracts for 1Q2017 were negotiated at USD 285 per tonne (FOB). The end of force-majeure events in Australia has also contributed to a boost in supply, sending prices down to USD 150-160 per tonne (FOB) in early December. The EIU predicts that contractual prices will return to USD 100-120 per tonne in 2H2017, assuming that China continues with high production quotas.


Figure 7. Iron ore, spot price (Fe 62%, CFR, Tianjin, China), USD per tonne

Figure 8. Coking coal (FOB, Australia), USD per tonne

1Q20

15

1Q20

16

2Q20

16

2Q20

15

3Q20

16

3Q20

15

4Q20

16

4Q20

15

1Q20

17

64

73

58

80

55

99

47

86

48

91

56

95 120150

210

320270

175 160 167230

190

59

71

86

01.2

017

02.2

016

02.2

017

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03.2

017

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Source: WorldSteel Association, EIU, The Steel Indexasn-ua.com

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In a situation with prices fluctuating rapidly over a limited period, forecasts are driven by institutional factors. Such volatile prices benefit vertically integrated companies. Fluctuating prices create a barrier to new market entrants and complicate investment decision making. It is particularly important in the context of China’s programme to restructure the steel-making industry, as well as India’s and Iran’s plans to develop their steel-making industries.

Reaching a normal level after a price hike or collapse is indicative of a general trend towards a relative decrease in prices. Steel-makers have limited opportunities to transfer a price impulse to metal product consumers as they experience issues with end-user demand.

When choosing between lower prices and lower output companies are increasingly going for lower prices.

However, the existing trends towards lower prices on the global market do not exclude a stronger price differentiation across regions and countries. This is driven by protectionist efforts taken over 2016-2017.

The most likely trend for 2017 would involve a gradual decrease in prices down to a level enabling an efficient production of coking coal in China (above USD 100 per tonne).

Prof. I.A.Budanov,Doctor of Economics (INP RAN)

Expert commentary

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China saw a continuing growth in steel prices over 2H2016 and early 2017. Steel prices have reached USD 500 per tonne (FOB), which is the highest since 1H2014. With low stocks and longer shipment periods, Chinese manufacturers returned to profitability in 2H2016. The EIU expects that a weakening in Chinese demand as China decreases government incentives will result in supply exceeding demand, with prices starting to go down from 2Q2017. The end of March saw prices drop by USD 20-30 per tonne. This supports the trend underlying the forecast.

Lower prices for Chinese products will act to drive exports, putting pressure on producers from emerging economies such as Russia, India, Brazil and the CIS. These economies will experience stable domestic demand in 2017.

Figure 9. Steel prices since 2015 (USD per tonne)Despite transformations in China and shutdowns of production facilities in other markets, capacity utilisation rates will be at least 75 percent by the end of 2017 and in 2018. Therefore, a limited growth in demand will not allow producers to enjoy a comfortable price level in the long term. Overcapacity will lead to a decreased margin for steel makers, reducing the price spread between commodities and finished steel products.

Transformations on the market may take some time, which is partially due to the protectionist initiatives by the EU and the US. However, the efforts should result in increased imports into the EU and the US in 2H2017 that would lead to lower prices. This will bring down output and demand for commodities as well.The EIU predicts lower steel prices in 2H2017.

Source: EIU

450 433 417 350 360460 433 480

595 592490 420

Most iron and steel producers and consumers are quite comfortable with a price corridor of USD 400-500 per tonne of steel. This price range covers costs related to resources and the maintenance of business financial stability. A positive dynamic on the market contributes to less intense competition. As the initiative for driving higher prices with protectionist measures seems to be reaching its limits, the potential for import substitution programmes is increasingly on the rise. There have been

numerous attempts and little success to intervene in the metal market mechanism within which the Chinese metal industry continues to strengthen its position and the role of European and US industries is declining. We are most likely to see a shift from price competition to product quality competition.

Prof. I.A.Budanov,Doctor of Economics(INP RAN)

Expert commentary

1Q20

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1Q20

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2Q20

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3Q20

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3Q20

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2015

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2015

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Overview of the Russian steel and iron market

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According to the Russian Federal Statistics Service (RosStat), steel output in 2016 was up 0.3 percent to 69.6 million tonnes (Table 6).

Compared to 2015, the industry has experienced an overall decrease of 2.3 percent in production output rates, including other finished metal products.

A decrease in the industry’s production output in 2016 was caused by lower demand for rolled products, with the automotive and construction industries accounting for the largest portion of the contraction.

• While the output of rolled products has remained stable, a decrease in the industry’s output as a whole is due to decreased output of metal products from other production stages, including tubes and rolled products with coating.

• A growth in steel output accompanied by a decrease in cast iron output is explained by an increased use of metal scrap to produce steel.

• The overall change in 2016 was driven by issues facing smelters in 1Q2016 and the volatile situation on the market for tube and pipe products.

• There is still potential for rebounding growth in the metal industry, which will be realised in 2017.

• Expanding domestic demand will play a leading role in stimulating production.

Output trends

Table 1. Production output in YoY terms ( 2016/2015, %)

Table 2. Output of key and finished products (million tonnes)

Source: RosStat; calculations by the Russian Ministry of Economic Development

2015 January February March April May June July August September October November December 2016

(%)

Metal products, including other finished metal products

-6.5 -6.5 -1.4 0.3 -1.8 0.2 -1 -6.9 -5.5 -6 -0.9 -0.3 2 -2.3

Metal products -4.7 -6.2 -2.3 -1.8 -2.2 -3.4 -4 -8.1 -6.7 -5.4 -3.2 -0.4 3.3 -3.3

Finished rolled ferrous products -1.5 -12.6 -5.3 2.2 3.5 1.6 3.1 -2.9 -2.5 0.3 0.3 5.1 7.6 -0.2

Steel pipes 1.2 -10.6 2.7 -9.2 -5.3 -4.2 -17.9 -25.7 -19.3 -12.8 -11.3 -8.4 -3.1 -11.5

2012 2013 2014 2015 2016

(million tonnes)

Pig iron 50.5 49.9 51.5 53.7 51.9

Steel 70.4 68.9 70.5 69.4 69.6

Finished rolled ferrous products 60 59.2 61.2 60.3 60.3

Flat-rolled products with coating 4.7 5.4 5.6 5.6 5.4

Steel tubes 9.7 10.1 11.3 11.4 10.1

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“As part of the strategy, we will ramp up our exports against the background of contracting domestic demand. We are planning to build our presence on the market for seamless tubes, both for the oil and gas industry and general use, including markets in the Americas and the Middle East. This year, after a long break, we have resumed OCTG shipments to Canada.”

Alexandr GrubmanLeader of ChTPZ Group

“We need to find our place in the global division of labour. Otherwise, we would inevitably lag behind the leaders. For that we need to negotiate beneficial trade agreements and increase our competitiveness through lower integration costs in Russia. This is only possible through an active dialogue between government and business.”

Alexey MordashevChairman of the BoardPJSC Severstal

\ Output trends

Source: Severstal.ru, Interfax

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Overview of the Russian steel and iron market \ Output trends

With a combined steel output of 62.4 million tonnes, EVRAZ, NLMK, Severstal, MMK, Metalloinvest and Mechel account for 90 percent of Russian steel output.

• Severstal is planning to invest RUB 43 billion in its production capacities in 2017, including RUB 26 billion in Russia, with RUB 12.1 billion to go to new projects, RUB 13.9 billion to maintain the existing initiatives and RUB 1.7 to develop its IT and telecommunication capacities. In 2017 the company will announce the full scale go-live of an online shop, with expected sales of 3.5 million tonnes for 2018. Severstal has plans to invest RUB 17 billion in its iron ore and coal projects, including RUB

8.4 billion for new projects and RUB 8.6 for initiatives aimed at upgrading and expanding the existing capacities.

• Metalloinvest and United Metallurgic Company (OMK) have signed a long-term supply agreement for round cast billets with which to produce seamless railway wheels. The pricing formula set forth by the agreement is based on current market indicators, including global price trends. The agreement is effective until the end of 2027.

• It is the first time that Beloretsk Metallurgical Plant, which is part of Mechel Group, has produced and put into operation a complex

spare part—a rotor component for rope making equipment produced by foreign manufacturers. With the production cost of the component being several times lower than similar spare parts from foreign manufacturers, this is an innovative step for the Russian machine building and metal hardware industry. The innovation opens a path for large scale overhauls.

• Novolipetsk Steel, which is part of NLMK Group, has completed the construction of an advanced modular dust exhausting plant that can rival the best available technologies to reduce total dust emissions by almost 22 times and increase gas purification efficiency

up to 99.7 percent. The project has a total cost of RUB 300 million.

• During the 2017 Russian Investment Forum in Sochi, the General Director of Don Metall and the Governor of the Rostov Region signed a contract to build a metallurgical plant in Kamensk-Shakhtinskiy. The plant commission date is scheduled for 2018. The plant will create 480 jobs and have an annual capacity of 180,000 tonnes of hot-rolled reinforcing steel, with investments to exceed RUB 3.3 billion.

Table 3.

Source: Severstal.ru, Interfax, Russian Ministry of Economic Development

Company

Revenue for 2016 (USD million)

Compared to 2015

Steel output for 2016

(million tonnes)

Compared to 2015

Revenue for 1H2016 (USD million)

Revenue for 2H2016 (USD million)

Output for 1H2016 (thousand tonnes)

Output for 2H2016 (thousand tonnes)

EVRAZ 7,713 -12% 13.5 -6% 3,543 4,170 6,739 6,789

NLMK 7,636 -5% 15.9 1% 3,446 4,190 8,222 7,855

Severstal 5,916 -8% 11.6 2% 2,632 3,284 5,721 5,909

MMK 5,630 -4% 12.5 2% 1,552 4,078 6,208 6,336

Mechel 4,551 9% 4.3 -2% 2,147 2,404 2,108 2,144

Metalloinvest 4,261 -3% 4.7 4% 1,931 2,329 2,292 2,370

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In 2016 the apparent domestic consumption of steel dropped by 3.9 percent to 34.6 million tonnes. At the same time, 4Q2016 saw an YoY increase of 3.7 percent as a result of the slightly improved situation in the construction industry and the Russian economy as a whole.Despite some recovery in the Russian economy in 2016, reduced consumption of metal products continues, although at a significantly slower pace. With steel consumption down by 10 percent in 2016, compared to 25 percent in 2015, the automotive industry has witnessed the sharpest decline.

The demand from builders, metal hardware producers and tube manufacturers has declined by 7-8 percent while steel consumption in the machine-building industry has increased by 2 percent.

The Russian Ministry of Economic Development predicts that macroeconomic indicators will grow in 2017:

• Manufacturing—up by 1.2 percent

• GDP—up by 0.6 percent

• Capital investments—up by 0.3 percent

Combined with stable, long-term development, a favourable macroeconomic environment in the country will have a positive impact on metal product consumption. It is expected that after declining for two years, consumption will

increase by at least one percent. There have been some signs of livelier demand since early 2017. On 19 January 2017, Prime Minister Dimitry Medvedev approved a list of initiatives aimed at stable, socio-economic development of the Russian Federation over 2017. The list contains support initiatives for certain industries, particularly, the machine-building industry (RUB 87.9 billion) and additional capital for the Industrial Development Fund (RUB 18.2 billion).

The early results may include a slowing decline and a gradual recovery in the machine-building industry in the form of growing output of machines and equipment for the agriculture and the forest sector, as well as an increased production of radial-flow and other pumps (up by 17.9 percent), overhead cranes (up by 58.9 percent), bulldozers and angle-blade dozers (up by 95.0 percent).

As oil and gas projects continue in Russia in 2017, they will generate a demand for tube products. In February 2017, Gazprom announced a purchase of almost 600 thousand tonnes of large-diameter tubes for the Power of Siberia trunkline, with six companies to act as tube suppliers.

Overall, local manufacturers of rolled steel products cover about 90 percent of the existing local demand.

Consumption trends

Source: RIA Rating, Russian Ministry of Economic Development

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Exports

Table 4. Flat-rolled products* Table 5. Tube products**

Source: Russian Federal Customs Service

* Flat-rolled products: TNVED 7208; ** Tube products: TNVED 7303,7304,7305 and 7506

In 2016 exports of ferrous products declined by 7 percent in monetary terms while increasing by 2 percent in physical units: USD 14,123.2 million, or 43,339.2 thousand tonnes

In 2016 exports of flat-rolled products increased by 11 percent in monetary terms and 22 percent in physical units: USD 2,411.8 million, or 7,010.5 thousand tonnes

In 2016 exports of tube products declined by one percent in monetary terms while increasing by 5 percent in physical units: USD 961.7 million, or 1,302.5 thousand tonnes

2015 2016

Weight (thousand tonnes)

Exports (USD million)



TURKEY 1,889.0 651.6 1,897.7 650.1

IRAN 123.6 53.7 588.4 204.3

ITALY 664.4 246.8 592.2 189.6

LATVIA 197.6 80 367.0 128

GERMANY 252.0 99.9 337.0 121.7

POLAND 237.7 90.6 338.0 118.4

VIETNAM 429.6 113.7

BELARUS 200.4 82.3 197.8 85.2

KAZAKHSTAN 164.1 72.7 180.9 78

UZBEKISTAN 137.8 67.3 126.1 61.9

2015 2016





KAZAKHSTAN 376.9 300.7 338.3 254.7

FINLAND 12.3 7.5 213.7 211.4

BELARUS 207.9 154.8 198.0 153.3

USA 150.9 135.2 81.4 54.7

AZERBAIDZHAN 134.2 74.2 55.8 33.4

KYRGYZSTAN 46.8 35.6 44.8 25.4

TURKMENIA 39.3 26.3 20.8

UKRAINE 13.8 12.8 27.0 19.8

INDIA 18.5 21.7 17.6 16.9

ESTONIA 20.2 11.5 30.9 15.5

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* This figure reflects imports of metal scrap from Kazakhstan and is explained by the specific nature of foreign trade accounting related to EAEC countries, which hinders correct data interpretation. Source: Russian Federal Customs Service


Table 6. Flat-rolled products Table 7. Tube products

Imports

In 2016 imports of ferrous products declined by 8 percent in monetary terms while increasing 2.5 times* in physical units: USD 3,044.8 million, or 11,250.1 thousand tonnes

In 2016 imports of flat-rolled products increased by 5 percent in monetary terms and 9 percent in physical units: USD 316.4 million, or 780.8 thousand tonnes

In 2016 imports of tube products declined by one percent in monetary terms while increasing by 5 percent in physical units: USD 745.7 million, or 506.6 thousand tonnes

2015 2016


Imports (USD million)



UKRAINE 428.8 164.7 458.9 178.2

KAZAKHSTAN 227.7 92.6 309.6 128.8

GERMANY 2.5 2 2.2 2.1

FINLAND 2.7 1.9 1.6 1.3

BELGIUM 0.7 1.1 1.3 1.2

SOUTH KOREA 1.1 0.8 1.2 1

POLAND 17.0 11.2 1.6 0.8

LATVIA 1.5 0.7 1.6 0.6

CHINA 0.8 0.7 0.4 0.5

LITHUANIA 1.5 0.7 0.9 0.5

2015 2016





CHINA 103.2 156.4 88.5 145.4

UKRAINE 100.3 97.8 142.4 106.3

KAZAKHSTAN 35.0 41.7 106.3 85

GERMANY 10.4 42.2 14.0 58.9

USA 5.3 40.1 7.3 54.4

ITALY 12.3 36.8 16.2 45.4

BELARUS 63.9 44.3 61.0 42

JAPAN 17.7 65.3 10.8 33.8

MEXICO 5.4 17.9 4.8 32.7

UK 0.5 4.9 3.3 17.7

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The current state of the steel-making industry in Russia

Deloitte CIS held a comprehensive CFO survey in the first half of 2017. As part of the research, we surveyed experts from a number of steel- and tube-making companies. The detailed analysis of the survey data provided a snapshot of the Russian steel-making industry, including an insight into the sentiments and expectations of the market players, as well prospects they have for the future direction of their businesses and the industry as a whole.

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The current state of the steel-making industry

The current state of the steel-making industry in Russia

Trends On the whole, the steel-making industry has demonstrated above-average optimism, with a majority of the respondents (74 percent) expecting positive changes for their business in 2017 while another 26 percent do not expect any significant developments. It is noteworthy that none of the experts surveyed predicted negative developments for their business in 2017. Steel-makers are fairly optimistic about indicators such as:

• Operating profit, with 60 percent expecting a growth in this area in 2017

• Pay levels, with 74 percent expecting a growth in this area in 2017

With the overall optimism and the ongoing recovery of the Russian economy, more than half of the respondents from the steel-making industry (63 percent) say they have plans to expand international contacts and enter new markets.

Top-5 issues for the industry in 2017:

• Prospects of weaker domestic demand

• Stagnation in the Russian economy

• Decrease in core business revenue

• Higher production costs in Russia

• Stricter government regulation in Russia

Top-5 priority business strategies in 2017:

• Ongoing cost control

• Business development through organic growth

• Cost cutting

• Increase in domestic output

• Expansion into new markets

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Appendix

Top-20 M&A deals on the steel and iron market in 2016-2017

Date Deal target Buyer Seller Deal size (USD millions)

1 22/09/2016 Wuhan Iron and Steel Company Limited Baoshan Iron & Steel Co. Ltd 8,719

2 13.05.2016 Nisshin Steel Co., Ltd. (42,78% акций Stake) Nippon Steel & Sumitomo Metal Corporation

2,981

3 24/12/2016 Shandong Iron and Steel Co., Ltd. (Certain assets)Shandong Iron and Steel Group Co., Ltd.

Shandong Iron and Steel Co., Ltd.

2,311

4 21/02/2017 Thyssenkrupp Companhia Siderurgica do Atlantico Ltda.

Ternium SA ThyssenKrupp AG 1,648

5 01/04/2016 Thyssenkrupp Companhia Siderurgica do Atlantico Ltda. (26,87% Stake)

ThyssenKrupp AG Vale S.A. 500

6 10/12/2016 Xinjang Bagang Nanjiang Iron and Steel Baicheng Co., Ltd

Xinjiang Bayi Iron & Steel Co., Ltd.

Xinjiang Ba Yi Iron and Steel Co. Ltd.

445

7 19/09/2016 Independence Tube Corporation Nucor Corporation 435

8 21/07/2016 Xinjiang Jinte Steel Co., Ltd. (48% Stake); Xinxing Ductile Iron Pipes (Xinjiang) Co Ltd

Xinxing Cathay International Group Co., Ltd

Xinxing Ductile Iron Pipes Co Ltd

407

9 07/03/2016 Nickel Resources International Holdings Company Limited

Tairu Co., Ltd 399

10 20/06/2016 Vallourec Group SA (13,85% Stake) Nippon Steel & Sumitomo Metal Corporation

390

11 15/12/2016 Republic Conduit, Inc. Nucor Corporation Tenaris SA 335

12 07/01/2016 Fame Risen Development Limited Intelligent Wealth Limited Kai Yuan Holdings Limited 307

13 20/05/2016 Gerdau Sidenor Clerbil Sociedad Limitada Gerdau S.A. 174

14 13/01/2017 Jindal Stainless Limited Jindal Stainless Limited (Creditors)

132

15 23/12/2016 Brahmani River Pellets Limited Tata Steel Limited Moorgate Industries Group 132

16 06/12/2016 Southland Tube, Inc. Nucor Corporation 130

17 09/02/2017 Tata Steel UK (Specialty Steel Business) Liberty House Limited Tata Steel UK 125

18 14/07/2016 Steel Forming, Inc.; ZERO Manufacturing, Inc.; Jorgensen Forge Corporation

CE Star Holdings, LLC 108

19 02/08/2016 Arcelormittal Zaragoza S.A. Bipadosa, S.A. ArcelorMittal SA 90

20 30/06/2016 Vulcan Steel Products Inc. Steel Dynamics, Inc. Kent Upton (Private Investor); Bill Jenkins (Private Investor); Bill Upton (Private Investor)

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Contacts

Andrew Sedov

Leader of the Metalsgroup in Deloitte, CIS

Partner, Head of Consumerand Industrial ProductsAudit department

+ 7 (495) 787 06 00, ext. [email protected]

Vladimir Perfiliev

Director, Consumerand Industrial

Products Audit (Metals)Deloitte CIS

+ 7 (495) 787 06 00, ext. [email protected]

Dmitriy Kasatkin

Senior SpecialistResearch Centre,Deloitte CIS

[email protected]

Authors:If you have any questions regarding the survey,please do not hesitate to contact us.

Lora Zemlyanskaya

ManagerResearch Centre Leader,Deloitte CIS

[email protected]

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deloitte.ru

About Deloitte

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© 2017 ZAO Deloitte & Touche CIS. All rights reserved.

deloitte.ru

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 244,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2017 ZAO Deloitte & Touche CIS. All rights reserved.

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