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Russian Steel Production to Drop on Lower Exports, UralSib Says

Russian steel output and prices will probably fall as the country’s producers lose their cost advantage over rivals because of cheaper raw materials, UralSib Financial Corp. said.

“Going forward, we expect another decline in steel volumes of Russian companies, while steel prices are likely to remain under pressure,” Michael Kavanagh, Dmitry Smolin and Nikolay Sosnovsky, analysts at UralSib, wrote in a report today. Russian steel production may fall 30 percent this year to 49 million tons, they said.

Russian steelmakers have been paying less for coking coal and iron ore after domestic prices for raw materials plummeted. The lower prices helped steelmakers boost exports to China. The country’s steelmakers currently pay $75 per ton of coking coal compared with $200 a ton for those steelmakers worldwide who do not have their own source of raw materials, while prices for iron ore are $60 per ton versus $85 per ton.

This cost advantage may disappear if rival steel producers, many of whom use more expensive Brazilian and Australian iron ore and Australian coking coal, begin to pay between 50 percent and 60 percent less for raw materials after new global contracts for iron ore and coking coal are settled, UralSib said.

“Unless we see a recovery in domestic demand for steel, the situation in the industry may worsen before it gets better,” the report said.

UralSib said it expects a 45 percent to 50 percent drop in steel prices for 2009 from last year.

To contact the reporter on this story: Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net.

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net.

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