Investigating Decreased Steel Output: Understanding Russia's Production Reduction
Steel Production Slump in Russia
Russia's steel production has taken a hit this year, with the first quarter seeing a 3.8% drop to 17.7 million tons. The downturn continued in March, with a year-on-year decrease of 4.7% to 6.1 million tons [1]. Analysts predict that by the end of 2024, production will fall to 71 million tons [2].
The reasons for this decline are attributed to a combination of factors. One significant cause is the slide in global steel prices [3]. Other issues plaguing Russia's steel industry include a shrinking domestic market and an expensive borrowing environment.
Dwindling Global Prices
The drop in steel prices worldwide has contributed to the challenges facing Russia's steel producers. Interestingly, global production only decreased by 0.4% compared to the first three months of the previous year, to 468.6 million tons [3]. The declines in steel production in Russia and other major producers like Japan, the US, South Korea, Germany, Turkey, and Iran were partly countered by increased production in China and India [3].
However, the World Steel Association (WSA) has postponed the publication of its demand forecasts indefinitely due to the imposition of a 25% import tariff on steel from all countries by the US administration in February [3]. Some experts warn that Chinese exports are flooding the market, causing prices to plummet, and the shutdown of the US market exacerbates the issue in other regions.
domestic headwinds
Beyond global forces, domestic factors are also responsible for the dip in steel production in Russia. One critical factor is the high key interest rate, which has dampened demand, particularly in the construction sector [4]. Construction and machinery manufacturing have been heavily impacted, as have automobile production, trailers, and road construction equipment [4].
Metal traders are stockpiling metal from producers in the hope of selling it to wholesalers or retailers, but this buffer strategy is faltering due to high interest rates limiting financing for these ventures [4].
Steel consumption in Russia is indeed on the decline [4]. According to estimates from Severstal, consumption in the first quarter of the year dropped by 13% compared to the same period in the previous year [4]. Nikita Klimantov, head of investor relations at Severstal, pointed out that the high key interest rate of the Central Bank has led to a decrease in demand for steel [4].
The Future of Steel Production
Unfortunately, experts predict that the demand for steel in Russia will continue to decrease. One reason is the slowdown in both the construction sector and machinery manufacturing [4]. Data from "Severstal" indicates that demand in key consumption segments of steel in Russia decreased by 6% in 2024 compared to 2023 [4].
Dmitry Skryabin, portfolio manager at UК "Alpha-Capital," stated that the steel industry in Russia is experiencing a tense period due to both internal signals and global market dynamics [5]. The industry faces the risk of stagnation as high lending rates and cautious expectations curtail construction activities [5]. Experts at Evraz Steel believe that the decline in demand in China and the strengthening of the ruble may encourage Chinese steel producers to increase their presence on the Russian market [6].
In conclusion, the Russian steel industry is grappling with a decrease in domestic demand, partly due to the high key interest rate and the economic slowdown [4]. Producers' revenue decreases due to currency appreciation [5], and the sharp rise in Chinese steel supply threatens to displace Russian imports [6]. Under these circumstances, Russian steelmakers will need to make adjustments to weather the storm and recover in the long term.
References
[1] Rosstat data, as reported by [Base Article][2] Analysts surveyed by [Base Article]'s website[3] Data from the World Steel Association (WSA), as reported by [Base Article][4] Data from "Severstal," as cited in [Related Material][5] Dmitry Skryabin, as quoted in [Topic Material][6] Experts at Evraz Steel, as cited in [Topic Material]
- Krasnожеnov, a metallurgist, agrees with industry analysts that the demand for steel in Russia will continue to decline in 2024, reaching 71 million tons, suggesting that the high key interest rate and economic slowdown are significant factors.
- The budgets of steel businesses in Russia may be affected by the downturn in the industry, as the shrinking domestic market and expensive borrowing environment could lead to reduced financing opportunities for ventures, such as metal trading.
- Financiers anticipate that the industry will face challenges in 2024, as the slowdown in both the construction sector and machinery manufacturing will suppress demand for steel, impacting steel consuming segments, including automobile production, trailers, and road construction equipment.
- In an effort to remain competitive, steelmakers in Russia may look to mobilize resources to increase their presence on the Chinese market, knowing that strengthening of the ruble and the decline in demand in China could potentially enable Chinese steel producers to displace Russian imports.
