On a grassy plain an hour’s drive southwest of Moscow, Vladimir Lisin has started producing steel at a newly completed plant. That’s something rival metals billionaire Lakshmi Mittal hasn’t achieved in Europe.
The mill Lisin’s OAO Novolipetsk Steel (NLMK) opened in Kaluga July 23 can turn scrap into 900,000 metric tons a year of products for construction, just as Moscow and the surrounding regions build skyscrapers, homes and railroads and ready for the 2018 soccer World Cup.
While ArcelorMittal’s chief executive officer has been mothballing plants from Poland to Spain, Russia is saving its industry with projects that will underpin 4.4 percent growth in steel demand this year, said Dmitry Kolomytsyn, a Morgan Stanley analyst. That matches the bank’s estimate for Brazil and beats the World Steel Association’s 2014 forecasts of 3.3 percent growth for Europe and a 2.9 percent increase in the U.S.
“Russia is a unique place right now, where demand for construction steel is heating up overall consumption because of the boom in development,” Kolomytsyn said by phone last week. “You don’t find it in Europe.”
Lisin has sought advantages for the plant by recycling metal rather than smelting ore and locating it near some of his biggest customers. Moscow almost doubled spending on housing for its 12 million residents in the two years to 2012 and plans to add more than 60 kilometers (37 miles) to the city’s metro system by 2015, making an investment of 460 billion rubles ($14 billion), Deputy Mayor Marat Khusnullin said in February.
About 70.1 million square meters of newly built housing will be registered for use this year in Russia, the most since at least 2000, according to estimates from the economy ministry. That’s a boost for Lisin’s company, known as NLMK, just as its European counterparts lament a sluggish construction industry.
Construction will account for a record 60 percent of Russian steel use this year, compared with just 27 percent in the European Union, according to Morgan Stanley. Spending on homes and infrastructure will rise by 20 percent to $107 billion this year and a further 16 percent to $124 billion in 2014, the bank predicts.
Steel demand in the country is close to all-time highs, Kolomytsyn wrote in a report on Aug. 5.
Russian steelmakers are “starting new construction-steel production capacity to replace imports and because demand for such types of material is rising in Russia, while in Europe it’s falling,” said George Buzhenitsa, a Deutsche Bank analyst in Moscow.
Russia consumed 53 percent more rebar, the steel product used in construction, from 2010 to 2012, when use reached 7.8 million tons, said Oleg Korzhov, a senior vice president at OAO Mechel (MTLR), a Moscow-based steel and coal producer. Demand for shaped steel, also used in buildings, jumped by 24 percent. By contrast, the European Union’s rebar and shaped steel consumption fell 16 percent and 8 percent respectively, according to Korzhov.
Like NLMK, Mechel and OAO Severstal are also betting on Russia’s construction boom. Mechel last month started a new $700 million plant at Chelyabinsk in the Urals region, capable of making about 1 million tons a year of railroad rails and steel for commercial construction.
Severstal plans to open a $700 million plant with annual capacity of 1 million tons in the southern Saratov region. The area has a shortage of construction steel, said Elena Kovaleva, a Severstal spokeswoman. “The key to the project’s success should be its location near the client,” she said.
Some of the plant openings have more to do with decisions made before the European financial crisis began in 2008 than with resurgent demand for the metal, said Deutsche Bank’s Buzhenitsa. They’ll be saved by their relatively low production costs and Russia’s need for construction steel.
“To be fair, they are starting new projects only because they passed the point of no return in those investments, and they are unlikely to recoup the spending within a decade” Buzhenitsa said. “Still, given the current markets, NLMK and Severstal are the last two to die should the prices collapse further, which should make them more attractive for investors,” Buzhenitsa said.
For NLMK, the Kaluga plant is the second major project it has started within the last two years. It increased steel output by 18 percent last year to 15.2 million tons after bringing on line the first new blast furnace in post-Soviet Russia.
The Lipetsk-based company has become the largest producer domestically, with 20 percent of the Russian market. Locating capacity near customers is a strategy that has spread through the industry, said CEO Oleg Bagrin.
“Local consumption, including import substitution, is one of the clearest trends that we see today,” Bagrin said July 24. “This is steel companies’ reaction to a squeeze on margins.” NLMK’s earnings before interest, tax, depreciation and amortization margin fell to 11.1 percent in the first three months of the year, the lowest quarterly figure since at least 2005.
NLMK’s Kaluga plant uses the company’s own scrap “and is just 100 kilometers from the Kremlin, which will allow it to win the Moscow market,” Morgan Stanley’s Kolomytsyn said.
NLMK has a market value of about $9 billion, less than half that of ArcelorMittal, the world’s largest steelmaker, formed when Mittal prevailed in a 2006 contest to acquire Arcelor SA.
Lisin weighed, and decided against an offer for Arcelor SA in 2006, Vedomosti newspaper reported at the time. Severstal CEO Alexei Mordashov went further, making an offer for 30 percent of Luxembourg-based Arcelor that was rejected by the target’s shareholders, allowing Mittal to complete a $36 billion takeover.
Lisin and Mordashov are unlikely to regret losing out, given that steel prices have since fallen to the lowest since 2009 amid higher costs and weaker European demand, said Sergey Donskoy, an analyst at Societe Generale SA in Moscow.
ArcelorMittal has lost about 85 percent of its value since its June 2008 peak, while NLMK and Severstal have dropped about 60 percent each from their highs that month through yesterday. NLMK’s shares were down 0.5 percent at 48.01 rubles at 5:57 p.m. in Moscow.
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