Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and...

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Overview of the steel and iron ore market Moscow, H2 2019

Transcript of Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and...

Page 1: Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and iron ore market 18 Production trends 19 Consumption trends 21 Steel exports in figures

Overview of the steel and iron ore marketMoscow, H2 2019

Overview of the steel and iron ore marketMoscow, H2 2019

Page 2: Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and iron ore market 18 Production trends 19 Consumption trends 21 Steel exports in figures

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Contents

Foreword 04

Key findings 05

Overview of the global steel and iron ore market 07Production trends 08Consumption trends 11Prices for raw materials 13Steel prices trends 16Global steel trade in figures 17

Overview of the Russian steel and iron ore market 18Production trends 19Consumption trends 21Steel exports in figures 22Steel imports in figures 23Key industry events 24

Development strategies in the steel industry 25Investment options 26Collective strategies 27Corporate, competitive and functional strategies 28Development strategies of foreign steelmaker 30Comparative analysis of strategies of Russian and foreign steelmakers 31

Temperature check of the Russian steel and iron ore market 32The current state of the steel-making industry 33Issues, competitiveness and priority strategies 34Digitalization and innovation in the steel industry 35

Contacts 37

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We are pleased to present the full version of our analytical report, prepared on the initiative of Deloitte CIS with the support of the Center for Strategic Research Foundation. This is our second overview of the steel and iron ore industry this year. We have summarized the updated data for 2018, interim data for 1H 2019, and outlooks for 2020.

We have released a comprehensive analysis of this industry every year since 2015. If you have any questions regarding this research, please do not hesitate to contact us.

Key topics:

• Overview of the global steel and iron ore market;

• Overview of the Russian steel and iron ore market;

• Development strategies in the steel industry;

• Temperature check of the Russian steel industry.

The metals industry was rocked by freak events in 2019. Episodes in Brazil (Brumadinho dam disaster), Australia (tropical cyclone), Turkey (economic destabilization) undoubtedly had a more significant impact on the sector than any changes driven by global market trends.

Developments in China, India and other Asian countries in 2020 will most likely continue shaping the global market in 2020. The influence of markets in Europe, North America and Japan is waning: although considerable supply and demand remains, their sway over steel-making processes in other countries is in terminal decline.

Russia should get a boost from the rise in investment activity by steel-making companies in 2018–2020. Growth in production efficiency, achieved by cutting resource consumption and boosting the quality of finished goods, will be sustained by demand from national projects.

Foreword

Andrew SedovPartnerLeader of the Metals Group, Deloitte CIS

Dmitriy KasatkinDeputy Head of the Center for Socio-Economic Studies at the Center for Strategic Research

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Key findingsGlobal market overview Russian market overview

H1 2019: (year-on-year change)

• Russia was the sixth biggest steel producer in 2018.

• In 8M 2019, Russian companies produced 48 million tonnes of steel, a 0.4 percent drop on the same period last year.

• The leading Russian metallurgical companies had had EBITDA margins of between 24 and 39 percent in H1 2019.

• In monetary terms, rolled steel exports fell 23 percent year-on-year in H1 2019 and fell 17 percent in volume terms.

• Steel pipe exports plummeted 51 percent year-on-year in the first half of 2019 in both monetary and rose 39 percent physical terms.

• In monetary terms, rolled steel imports remained unchanged in H1 2019 compared to H1 2018, but rose 8 percent in volume terms.

• Pipe imports shot up by 43 percent year-on-year in monetary terms and rose 86 percent in volume terms.

Forecast for 2019:

Growth in global steel production

Growth in global steel production

Growth in global steel production

Prices for raw materials have been falling in 2019.

Top three exporters 2018: • China • Japan • Russia

Top three importers 2018: • USA • Germany • Italy

Growth in Chinese steel production

Decline for all other countries

+4.9% 71.7 mln tonnes

41.2 mln tonnes+2.3%

+1.8%

+9.9%-0.7%

Driver:

Price of steel Profit margin Production

Russian steel production in 2018

Russian steel consumption in 2018

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Key findingsTemperature check of the Russian steel industry

Current situation

Growth prospects

Of steel makers have a positive outlook on the current situation in the industry

Of steel makers are optimistic about the growth prospects of the industry in Russia

Of steel makers are optimistic about the growth prospects of their companies

Of steel makers have a positive outlook on the current standing of their companies

80%

45%

62%

93%

Top three issues faced by steelmakers:

• Regulatory gaps

• Insufficience of production and technical capacity

• High tax ratio

Top three strategies of steelmakers:

• Expanding into new markets

• Implementing advanced technologies and innovations

• Production upgrades and modernization

Technological development level of the metallurgical industry

The steel industry is currently the second most digitalized sector in Russia, behind the TMT sector (the level of innovation** of the metallurgical industry of 0.24, the average level of innovation in Russia of 0.17).

Electronic document flow is the most widely-used technology among steelmakers (72 percent).

Steel companies focus most of their innovation efforts on acquiring advanced equipment and machinery (66 percent).

0.24* –

Average innovation and digitalization strategy investments by steel companies (% of revenue)1.5%

1.0%

in 2019–2020

in 2018

* Based on the findings of the 1H 2019 Deloitte CFO Survey of the Leading Companies in Russia** The level of innovation is a weighted average of the technology complexity estimate (of 0 to 1)

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Overview of the global steel and iron ore market

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Overview of the steel and iron ore market | Overview of the global steel and iron ore market

Production trendsEIU experts revised their 2019 global steel output forecast up from 1.3 percent to 2.3 percent to reflect the full-year statistical data released by the World Steel Association (WSA).

Global production rose 4.9 percent in the first half of 2019; however, growth stalled in H2, rising 4.6 percent year-on-year for 8M 2019, with a total output of 1,239 million tonnes.

The sizable gap between China and the rest of the world continues to grow: Chinese output rose 9.9 percent in H1 while production in the rest of the world fell by 0.7 percent. Regionally, the contrast between China and the rest of the world remains: by lowering import duties in anticipation of a trade dispute with the United States, Chinese metals companies achieved record productivity indicators in the first half of the year.

Their productivity increase of 9.9% is an outlier when compared to other countries, whose production contracted by 0.7% collectively. In the second half of the year, high prices for iron ore concentrate (a particularly exigent supply crisis), growing uncertainty surrounding the trade war, and stricter environmental standards led to a decrease in production growth in China.

Despite buoyant growth at the beginning of the year, the EIU is forecasting a slowdown in annual output growth to 2.3 percent in 2019. Output is then expected to contract by 1.1 percent in 2020. This trend will essentially act as a correction for the high growth rates seen in 2017–2019, before returning to around 3 percent by 2021.

Source: World Steel Association, EIU

Figure 1. Global steel output

Steel production (mln tonnes)

Growth (%, yoy)

1,560 1,627 1,8251,669 1,8031,538 1,620 1,8451,650 1,718 1,880

2011 2015 2019*2012 2016 2020*2013 20172014 2018 2021*

1.4%

0.4% -1.1%

1.2%4.9%

7.3%

-2.9%

2.3%5.8% 5.6% 3.0%

* EIU forecast

Figure 2. Steel output, by month (mln tonnes)

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Overview of the steel and iron ore market | Overview of the global steel and iron ore market

Production trendsAsiaChinese production shot up 9.9 percent in H1 2019. EIU experts expect this growth to tail off in the second half of the year and decline in the fourth quarter. One third of steel consumption in China (excluding construction) is used in manufacturing, including shipbuilding, the automotive sector, household appliances, electronics and industrial goods. According to the China Association of Automobile Manufacturers (CAAM), car sales in China fell by 2.8 percent to 28.1 million units in 2018 and output dropped 4.2 percent to 27.8 million units. This downward trend is persisting: CAAM reported that overall automotive manufacturing fell 13.7 percent in H1 2019, with sales declining by the same figure. Total industrial production in China rose by 6 percent in H1 2019, compared to 7.1 percent in the first half of 2018 and hit a 17-year low of 4.8 percent in July 2019. It would seem that the trade war with the US has hit industrial production and capital investment in the Chinese manufacturing industry. Nonetheless, the government will likely be able to offset any weakness in demand with targeted or general stimulus, which will mitigate the severity of any slowdown. An inventory correction may trigger a drop in consumption in 2020 following strong production growth in 2019, but EIU experts expect to see a recovery in 2021.

As a result of Chinese government stimulus measures, forecast production growth for 2019 is 4 percent, falling to 2.5 percent in 2020 due to weak demand for steel from the construction sector and reduced inventory as prices fall. However, the efforts of the Chinese government to support economic growth and avoid a protracted slump will lead to renewed growth in 2021, forecast at 3 percent.

Production in Japan and Thailand continued to wind down in the first half of 2019 while South Korea achieved slight growth. On the other hand, the launch of new capacity in Vietnam, Indonesia and Malaysia continues to push up steel production in these countries.

Steel output in India rose 4.9 percent in 2018, helping the country overtake Japan as the world’s second largest steel producer. Rising exports drove the Indian steel industry to 5 percent growth in H1 2019, helping the sector overcome weak domestic demand.

EIU experts expect production in Asia to increase 3.6 percent in 2019 and decline by 1.5 percent in 2020 as growing Chinese exports will again stifle local output.

Source: World Steel Association, EIU

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Production trends

North America

In March 2018, the US Government slapped a 25 percent tariff on all steel imports. Mexico and Canada responded with their own 25 percent tariffs on US steel. After the US, Canada, and Mexico signed the new USMCA agreement, which replaces NAFTA. Canada and Mexico refused to ratify the deal until the issue of steel tariffs has been resolved. In May 2019, the USMCA signatories lifted all tariffs, resulting in an increase in steel output at existing plants.

Production increased 5.4 percent year-on-year in H1 2019. However, demand in the region was lower as output fell in Canada, and especially Mexico.

North American steel mills claim to have expanded capacity by 10 million tonnes per year. They will start operating in 2020, which will boost production.

EIU Experts expect output to increase 3 percent in 2019 and are forecasting growth of 1 percent in 2020. This will be followed by 2.5 percent growth in 2021. US output will outpace that of the region as a whole.

Source: World Steel Association, EIU

* EIU forecast

Figure 3. Steel output by region (%, 2018)

EU

Production volumes fell by 2.5 percent in EU countries in the first half of 2019 while weak demand on the market hampered opportunities for steelmakers to sell to the automotive industry.

The bulk of decline was felt in the EU’s main steel producing powerhouses (France and Germany) although other countries also took a hit. In an attempt to stave off falling prices, ArcelorMittal, the world’s biggest steel producer, announced a 3 million tonne year-on-year cut in steel production in Q3 2019 at its plants in Spain, Poland and Italy. The steel giant then announced further curbs on production in Q4 at plants across Europe, including in Germany.

This was equivalent to around 10 percent of quarterly rolled steel output in the EU and therefore had a major impact, especially on the spot market. Other companies followed suit: US Steel left around a third of its 4 million tonne capacity in Slovakia idle and the Czech Liberty Ostrava was operating a 20 percent under full capacity.

EIU experts believe that this will lead to a 3 percent decline in steel production in the EU in 2019 and 2020, with recovery expected in 2021.

Table 1. Forecast* steel production

2019 2020 2021

Global production 2.3% -1.1% 3.0%

Asia 3.6% -1.5% 3.0%

China 4.0% -2.5% 3.0%

Asia (excl. China) 2.5% 1.5% 3.0%

EU -3.0% 0% 2.0%

North America (US, Canada, Mexico) 3.0% 1.0% 2.5%

China (51%)

Asia (excl. China) (19%)

EU (9%)

North America (7%)

CIS (6%)

Latin America (excl. Mexico) (2%)

Europe (non-EU) (2%)

Middle East (2%)

Africa (1%)

Australia and New Zealand (<1%)

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Overview of the steel and iron ore market | Overview of the global steel and iron ore market

Consumption trends

Figure 4. Global steel consumption

Steel consuption (mln tonnes)

Growth (%, yoy)

1,552 1,611 1,8211,627 1,7911,492 1,591 1,8251,613 1,723 1,876

2011 2015 2019*2012 2016 2020*2013 20172014 2018 2021*

4.0%

1.3%

-0.2%

0.9%

4.0%

6.5%

-2.2%

1.8%

3.9%

6.9%

3.0%

According to EIU estimates, global consumption rose 1.8 percent in 2019. Recession in Europe, sluggish growth in the Middle East, Africa and the CIS, and reduced  demand in Asia are the main reasons behind the slowdown in growth. A weak automotive sector across the world and flagging capital investment, driven down by the rise in trade tensions, are global concerns. While monetary stimulus measures are keeping Chinese consumption up, the trade war is having a negative impact on production, which is in turn tempering growth.

EIU experts forecast that faltering global trade, the end of stimulus in China, problems with emerging market debt and the deterioration of relations between developed economies will lead to a 0.2 percent reduction in steel demand in 2020. However, no major drop in demand is expected in the second half of 2019 or before 2020 as a cyclical response to the strong figures from 2017–2019, suggesting that the decline will be small and 2021 could see a recovery of up to 3 percent.

North America

According to the American Iron and Steel Institute (AISI), the US accounts for 75 percent of steel consumption in North America, with 43 percent of these steel products consumed by the construction industry in 2018.

The large investment in infrastructure promised by the administration of President Trump is unlikely to materialize any time soon given the fall in budget incomes.

Steel demand from the automotive industry, which account for 27 percent of demand in the US, will lose steam in the short-term due to the use of aluminum as a replacement for steel and the development of high tensile steels, which are lighter and take up less space. Electric cars are a serious threat to long-term steel demand, as technological advances and the longer service life of electric vehicles will reduce demand for new cars.

Since the imposition by the US government of a 25 percent tariff on steel imports in mid-2018, US companies that use steel must pay at least 25 percent more for steel purchases than their competitors as they continue to rely on exports. This will have an impact on steel demand in the US from certain sectors, one example being steel wire products, where the protected wire rod accounts for a larger part of the final cost than the unprotected steel wire.

The Federal Reserve System has backed away from expectations of a further tightening of monetary policy, and has entered into a cycle of loosening, starting by cutting interest rates by 25 basis points in June 2019.

As a result, the EIU forecasts that steel consumption in North America will rise to around 2 percent in 2019, then fall slightly in 2020 due to a slump in trading volumes and weak performance from the manufacturing sector.

Source: World Steel Association, EIU

* EIU forecast

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Consumption trends

Source: World Steel Association, EIU

Figure 5. Global steel consumption by region (%, 2018)

China (47%)

Asia (excl. China) (21%)

EU (10%)

North America (8%)

Middle East (4%)

Latin America (excl. Mexico) (3%)

Africa (3%)

CIS (2%)

Europe (non-EU) (2%)

Australia and New Zealand (<1%)

EIU experts are forecasting that following 4 percent growth in 2018, steel demand in Asia will fall to 1.5 percent in 2019.

EU

EIU experts expect the EU’s GDP growth to fall to 1.2 percent in 2019 due to the issues still faced by the automotive sector. The introduction of new emissions testing standards on 1 September 2018 are largely to blame for this instability, which have led to discounting and the sale of second-hand vehicles as new cars do not yet comply with the new standards. In the last quarter of 2018 and the first quarter of 2019, European car production wound down, resulting in the cancellation of steel orders.

The trade war between the US and China has already had an impact on German industrial production by reducing demand for high-added-value goods. There is a risk that if the trade dispute affects car production, an additional blow will be dealt to steel consumption in the EU.

Growth in steel demand will therefore contract by 2 percent in 2019, with modest rises of 1 percent and 2 percent in 2020 and 2021 respectively.

Asia

China accounts for 51 percent of global steel demand while Asia as a whole comprises 70 percent. Consumption in these countries is therefore of critical importance to the global steel market. The construction sector, including the infrastructure and real estate segments, is the most important driver of demand in China, accounting for almost two-thirds of the country’s steel consumption.

Steel demand in Asia (excluding China) rose 4 percent in 2018: Rapid growth in India and emerging Asian economies was partially offset by stagnant demand in Japan and a slowdown in the growth of demand in South Korea and Taiwan. According to EIU estimates, not one of Asia’s developed economies will see growth in 2019, with the automotive sector,

ship building and electronics all contributing to this downturn. Demand in smaller South East Asian countries, which is largely centered on construction, will continue to accelerate. Steel demand will rise by 5–10 percent in the Philippines and Vietnam.

India has one of the fastest growing steel markets in the world. GDP growth picked up speed in 2018, driven by major spending on infrastructure and rising production. Steel consumption in India increased by around 7.5 percent in 2018, leading to a decline in exports and an increase in imports. However, demand will be considerably weaker in 2019. Indian manufacturing grew only 2 percent year-on-year in June 2019 and was well below the average for 2018 (5.2 percent), all while annual GDP growth slumped to a five year low in Q1 2019 at 5.8 percent.

Table 2. Forecast* steel consumption

* EIU forecast

2019 2020 2021

Global consumption 1.8% -0.2% 3.0%

Asia 2.4% 0% 2.9%

China 2.8% -1.0% 3.5%

Asia (excl. China) 1.5% 1.5% 1.5%

EU -2.0% 1.0% 2.0%

North America (US, Canada, Mexico) 2.0% -1.0% 3.0%

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Prices for raw materialsFigure 6. Iron ore, USD/tonne, 2018–2019  (Fe 62% CFR, Tianjin, China)

Source: Investing.com, EIU, MetalBulletin

Despite a rebound in August, prices for iron ore shot up faster than for any other raw material in 2019. Iron ore prices reached a six year high in July 2019 (USD 123/tonne), Rising by almost 70 percent since the start of the year, then falling to USD 93/tonne. One reason for this rapid growth was the disaster at Vale’s Brumadinho ore mine in Brazil in late January 2019, which reduced output and fueled concerns of a global iron ore shortage.

In spring 2019, a tropical cyclone also interrupted shipments from Australia, shutting down the country’s main export terminals. Reduced supply from Brazil and Australia coincided with record steel production in China.

The balance of supply and demand has been recovering since August 2019 as a result of Brazil’s Vale launching production and increased output in China. This has led to lower prices.

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Figure 7. Iron ore, USD/tonne, consensus forecast through 2024

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Prices for raw materialsFigure 8. Coking coal, USD/tonne, 2018–2019 (FOB, Australia)

Source: The Steel Index S&P Platts, EIU, MetalBulletin

Figure 9. Coking coal, USD/tonne, consensus forecast up to 2024

High demand from Chinese metals companies, which showed record performance in the first half of 2019, temporarily kept prices for premium-grade coking coal afloat. However, between June-September, prices had fallen by 30% to USD 145 per tonne.

The expected continuation of China’s current policy, along with decelerated growth, will lead to lower prices in the medium term, which should stabilize at around USD 140–160 per tonne. Ja

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Prices for raw materialsFigure 10. Ferrous scrap, USD/tonne, 2018–2019 (Steel Scrap Futures – (SSCc1))

Source: Investing.com, The Steel Index S&P Platts, Metal Market

The ferrous scrap market has been extremely unstable this year, with sluggish steel demand driving down market prices for most of H1. According to data from Fastmarket MB, total ferrous scrap sales in the US rose 5 percent from May 2018 to May 2019 as domestic demand increased 9 percent and exports fell 9 percent.

Demand for scrap in the US was boosted by the strong and consistent performance of Alter Trading Corp steel plant, with average capacity utilization of around 80 percent for most of this year. However, both US steel production and the operational performance of the rolling mill declined in September 2019.

US steel output fell as several companies, including US Steel and ArcelorMittal, cut their production in response to the recent fall in the profitability of hot-rolled steel compared with scrap, with the price of hot-rolled coil (HRC) continuing to fall.

Compounding this, data from the World Steel Association shows that US mills have announced plans to increase their steelmaking capacity by 13.9 million tonnes by 2023 compared with 2018 and virtually all this capacity will be electric arc furnace (EAF).

US scrap metal exports are expected to fall as demand for steel, and therefore for ferrous scrap, will be stifled by the global economic slowdown.

There is also concern about how trade wars and various trade restrictions will affect the flow of goods and make it more expensive for market players to ship scrap abroad. Turkey, which traditionally purchases around 40 percent of US ferrous scrap exports, and therefore remains the key market for US scrap, has considerably scaled down its orders recently. Turkey has only bought around 20 percent of US ferrous scrap exports since the start of the year, which has had a major impact on the scrap market, including US export prices. However, this reduction has yet to be reflected in the latest data from the US Census Bureau, which reported a 3.3 percent increase in US scrap exports to Turkey in 7M 2019.

Although it is true that relations between the US and Turkey have soured somewhat recently, Turkey has been reducing its scrap imports from all sources, not only the US. This is because Turkish steel companies are finding it increasingly difficult to sell rebar at the prices they had planned to customers in South East Asia due to serious competition from other countries in the Middle East and Asia, where cheaper semi-finished products are readily available.

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From 1 September 2019 Russia enacted restrictions on the export of the raw materials, most notably, a 1.009 million tonne quota was placed on ferrous scrap exports outside the Eurasian Economic Union (EAEU) from 1 September to 31 December 2019.

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Steel prices trendsFigure 11. Prices for hot-rolled steel, USD/tonne, 2018–2019 (CIS exports, FOB Black Sea)

Source: EIU, MetalBulletin

As China remains the world’s biggest exporter, its prices set the level for most of the global market. At the beginning of the year hot-rolled products were selling at USD 475/tonne FOB. Prices recovered by more than USD 50 to USD 525/tonne FOB after Chinese New Year and stayed around this level for 3–4 months. The impact of increased output and weaker demand was felt in May and June, with prices falling to below USD 500/tonne FOB, followed by a more dramatic drop in July and August to the current level of USD 460/tonne FOB.

Higher prices of iron ore puts pressure on profit margins, and amid sluggish demand from China, EIU experts expect prices to start falling, hitting new lows in H2 2019. This will lead to even tighter margins in steel production (at least until iron ore prices fully adjust to historical values), forcing producers to cut output.

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Aug

ust 2

019

Apr

il 20

18

Aug

ust 2

018

Dec

embe

r 201

8

May

201

9

Apr

il 20

19

Sep

tem

ber 2

019

586553

526496 489

598564

466 475

574 568 538

452481499

615566

487518

476434

16

Page 16: Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and iron ore market 18 Production trends 19 Consumption trends 21 Steel exports in figures

Overview of the steel and iron ore market | Overview of the global steel and iron ore market

million tonnes

1 China 68.82 Japan 35.83 Russia 33.34 South Korea 30.15 EU (1) 28.46 Germany (2) 26.07 Turkey 19.98 Italy (2) 18.29 Belgium (2) 18.010 Ukraine 15.111 France (2) 14.412 Brazil 13.913 Taiwan 12.314 India 11.115 Netherlands (2) 11.016 Iran 9.317 Spain (2) 8.618 USA 8.619 Austria (2) 7.520 Canada 6.4

Global steel trade in figuresThe top three steel exporting and importing countries have remained unchanged since 2016. China is the world’s biggest exporter, although export volumes are continuing to fall (by 6 million tonnes compared to 2017). Japan remains in second place after posting a slight decrease in exports (by 1 million tonnes). Russia takes third place, boosting exports to 33 million tonnes.

India saw exports drop by 5 million tonnes in 2018 year-on-year in 2018.

Steel imports to the EU increased by 4 million tonnes in 2017, whereas South Korean steel imports fell by 4 million tonnes.

(1) excluding intra-European trade(2) including intra-European trade

Table 4. Top 20 steel exporters (2018, million tonnes)

Table 3. International trade (2018, million tonnes)

Table 5. Top 20 steel importers (2018, million tonnes)

million tonnes

1 EU (1) 44.92 US 31.73 Germany (2) 26.64 Italy (2) 20.65 Thailand 15.56 South Korea 14.97 France (2) 14.98 Belgium (2) 14 .8.9 China 14 .4.10 Vietnam 14.111 Turkey 14.012 Mexico 13.113 Poland (2) 12.114 Indonesia 11.715 Spain (2) 10.816 Netherlands (2) 10.317 Canada 9.118 Philippines 9.119 India 9.020 Malaysia 8.0

EU Euro

pe (e

xcl.

EU)

CIS

Nor

th A

mer

ica

Am

eric

a, o

ther

Afri

ca a

nd

the 

Mid

dle

East

Chin

a

Japa

n

Asi

a (e

xcl.

Chin

a)

Oce

ania

Tota

l im

port

s

Non

-reg

iona

l im

port

s

EU 118.5 11.4 15.4 0.6 2.1 1.5 4 0.2 9.4 0.2 163.3 44.9

Europe (excl. EU) 8.6 0.6 7.2 0.1 0.9 0.6 0.9 0.2 1.2 0 22.2 19.7

CIS 1.3 0.4 9.2 0 0 1.7 2 0.1 0.5 0 15.1 5.9

North America 8 1.9 4.3 16.7 7.1 0.9 2.3 3.4 7.1 0.3 51.8 35.1

America, other 1.2 1.4 0.8 2.3 3.8 0.2 6.9 1.1 2.8 0 20.4 16.7

Africa 3.9 2.6 5.8 0.1 0.1 3.2 5.9 0.8 1.2 0 23.6 20.4

Middle East 1.6 3.4 3 0.1 0.2 5.7 5.6 0.8 2.9 0.1 23.5 17.8

China 1.5 0 0.1 0.1 0.1 0.1 - 5.4 7.1 0 14.4 14.4

Japan 0.1 0 0 0 0 0 1 - 4.8 0 5.9 5.9

Asia (excl. China) 2 1.7 6.9 0.5 0.8 7.9 39.3 23.6 29.7 0.3 112.8 83.1

Oceania 0.3 0.2 0 0 0 0 0.9 0.2 1.7 0.2 3.5 3.2

Total exports 146.9 23.6 52.6 20.5 15.1 21.8 68.8 35.8 68.2 1.2 454.5 267.1

Non-regional exports 28.4 23 43.5 3.8 11.3 12.9 68.8 35.8 38.6 1 267.1

Balance (export/import) -16.5 3.4 37.5 -31.3 -5.3 -25.3 54.4 29.9 -44.5 -2.2

Source: World Steel Association

Импорт

Эксп

орт

17

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Overview of the Russian steel and iron ore market

Page 18: Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and iron ore market 18 Production trends 19 Consumption trends 21 Steel exports in figures

Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market

Production trendsRussia was the sixth biggest steel producer in 2018; it fell one place and was overtaken by South Korea. Annual Russian steel output totaled 71.7 million tonnes, a slight increase on the previous year (+0.2 million t tonnes).

In January-August 2018, Russian companies produced 48.3 million tonnes of steel, 0.4 percent less than in the same period last year. July and August were not the best months for Russian steel producers. According to WSA estimates, Russian steel production fell 4.0 percent year-on-year to 6.0 and 5.9 million tonnes respectively.

The Russian Economic Development Ministry estimates that GDP growth was 1.6 percent in August (1.8 percent in July). GDP rose 1.1 percent year-on-year in January-August. A slight increase in industrial production in August to 2.9 percent year-on-year (from 2.8 percent in July) gave economic growth a boost.

Production of metal ore played a major role in the acceleration of mineral extraction growth (to 3.5 percent year-on-year in August from 1.9 percent year-on-year in July).

Manufacturing growth was 2.7 percent year-on-year in August (following 2.8 percent year-on-year in July). Seasonality hurt the manufacturing sector in August: there was one less working day this year (while July had one more working day). Seasonally adjusted growth is estimated at 3.4 percent year-on-year (compared to 2.1 percent year-on-year in July). Median manufacturing growth, which also felt the effects of seasonality, was 3.0 percent year-on-year in August following a near zero figure in July. The steel segment saw an improvement (1.7 percent), while output for mechanical engineeringgoods fell sharply (-3.2 percent).

In 8M 2019, the volume of shipped metallurgical goods increased by 4.6 percent compared to the same period in 2018 (in current prices).

Figure 12. Metal products shipped (RUB billion)

Figure 13. Russian steel production in 2018–2019

Janu

ary

2018

May

201

8

Sep

tem

ber 2

018

Mar

ch 2

019

Janu

ary

2019

July

201

9

Febr

uary

201

8

June

201

8

Oct

ober

201

8

Apr

il 20

19

Feb

ruar

y 20

19

Aug

ust 2

019

Mar

ch 2

018

July

201

8

Nov

embe

r 201

8

May

201

9

Apr

il 20

18

Aug

ust 2

018

Dec

embe

r 201

8

June

201

9

0%

6%

-1%-4%

5%

-4%0% -1%

4%

0%2%

3%

-3% -2%

3%

-4%-2%

3%1%

4%5,473

6,0295,883 5,8465,738 5,900

6,110 6,147 6,1806,0466,066 6,115

5,812

6,0996,251

6,0466,217 6,293

5,786

6,335

Steel production (‘000 tonnes) Growth (%, yoy)

Janu

ary

May

Sept

embe

r

Febr

uary

June

Oct

ober

Mar

ch July

Nov

embe

r

Apr

il

Augu

st

Dec

embe

r

422

478

520

477

527 528

419

496519

480

515504

458

512494

535

436

512495

545

2019 2018

Source: World Steel Association, Rosstat, the Russian Ministry of Economic Development “On industrial production. September 2019

19

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Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market

Production trendsTable 6. Financial performance of the top Russian steelmakers Figure 14. Steel output by the top steelmakers, 2017/2016 (‘000 tonnes)

Metalloinvest develops rolled steel production capabilities at OEMKMetalloinvest, a leading global producer and supplier of iron ore and hot-rolled steel, has commissioned a new reduction and calibration unit at OEMK. The reduction and calibration unit can produce hot-calibrated rolled steel products at temperatures starting from 950 degrees Celsius.

Investments in the project totaled more than RUB 600 million.

EVRAZ, NLMK, Severstal, MMK, Metalloinvest, and Mechel produced a combined total of 31.7 million tonnes of steel in H1 2019, Accounting for 87 percent of the Russian steel output at the time.

The top Russian steelmakers posted profit margins varying between 24 percent to 39 percent, all down by 2 to 6 percentage points on the previous year except for Metalloinvest, which kept its margin the same as in H1 2018.

Severstal increases sales of new products five-fold in H1 Severstal, one of the world’s leading vertically integrated steel and mining companies, sold 192,000 tonnes of new products in H1 2019 as part of its Product Innovation project. Agile business principles and work in scrum teams radically reduced the time needed to develop new products, with 67 such products currently in the active stage of development. For example, TEMPO produced its first batch of a linear pipe from an innovative corrosion-resistant steel grade Severkor, which is also used in field development by Gazpromneft.

EVRAZ will use solar power to produce green steelEVRAZ North America, energy trader Xcel Energy and solar power company Lightsource BP have reached a long-term agreement to develop a new 240-megawatt solar facility in Pueblo. This innovative agreement makes possible EVRAZ North America’s planned long-term investment in its new rail mill at EVRAZ Pueblo.

Lightsource BP and project investors on its side will invest an estimated USD 250 million into the solar facility. The electricity generated will be sold to Xcel Energy under a long-term power purchase agreement.

The project is expected to go online by the end of 2021.

Source: company data

Revenue, USD million EBITDA, USD million Margin (%)

H1 2019 H1 2018 H1 2019 H1 2018 H1 2019 H1 2018

EVRAZ 6,140 6,343 1,482 1,906 24% 30%

NLMK 5,666 5,906 1,430 1,727 25% 29%

Severstal 4,208 4,432 1,416 1,580 34% 36%

MMK 3,835 4,161 937 1,210 24% 29%

Metalloinvest 3,584 3,779 1,410 1,491 39% 39%

Mechel 2,353 2,639 466 696 20% 26%

1H 2019

1H 2018

2,4

30

NLMK MetalloinvestEVRAZ Mechel Severstal MMK

6,3

04

6,1

76 8,5

94

2,4

96

6,8

32

2,0

51

6,1

01

6,1

98 8,1

75

6,9

94

1,8

61

20

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Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market

Consumption trends

Source: Markit Economics, metalinfo

* World Steel Association forecast ** Purcharsing Managers Index (PMI) is an indicator characterizing economic trend in the manufacturing sector.

World Steel Association figures show that Russian steel consumption was 41.2 million tonnes in 2018 (+0.7 percent compared to 2017).

Output from the Russian steel segment rose 2.6 percent in H1 2019, higher than the average for the manufacturing sector. However, the US China standoff has lowered metal prices, meaning that company revenues from Russian steel exports also fell in the first half of the year (by 12 percent).

Steel demand is continuing to rise in Russia, mainly driven by domestic consumption of rolled steel. The World Steel Association forecasts that consumption of ferrous metal products will grow 1.0 percent in 2019 and 1.5 percent in 2020. Experts from Severstal think that a significant proportion of rising demand in H1 2019 was fueled by an increase in construction activity in anticipation of changes to laws governing escrow accounts (Severstal is forecast a 4 percent increase in demand in 2019).

Figure 15. Russian Purchasing Managers Index (PMI), 2018–2019

Janu

ary

2018

May

201

8

Sept

embe

r 201

8

Janu

ary

2019

July

201

9

Febr

uary

201

8

June

201

8

Oct

ober

201

8

Apr

il 20

19

Febr

uary

201

9

Mar

ch 2

018

July

201

8

Nov

embe

r 201

8

May

201

9

Mar

ch 2

019

Apr

il 20

18

Aug

ust 2

018

Dec

embe

r 201

8

June

201

9

50.249.5

51.351.8

50.1

51.3

48.9

51.7

48.6

52.1

49.8 50.0

50.9

49.350.6

48.1

52.6

49.8

52.8

Figure 16. Consumption of finished steel products since 2011 (million tonnes)

2011

2015

2019

*

2012

2016

2020

*

2013

2017

2014

2018

42.8

38.7

43.1

41.242.2

41.5

39.8

41.6

43.3

40.9

21

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Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market

Value (USD mln) Weight (‘000 tonnes)

1H 2019 1H 2019 1H 2018 1H 2018

Kazakhstan 261 193 278 207

US 155 86 169 99

Belarus 102 115 120 120

Serbia 53 3 41 3

Uzbekistan 41 55 38 45

Azerbaijan 36 34 44 41

Ukraine 22 21 25 21

Kyrgyzstan 18 19 28 25

Poland 13 16 17 21

India 12 14 1 2

Steel exports in figures In monetary terms, rolled steel exports fell 23 percent year-on-year in H1 2019 to USD 1,944 billion and decreased 17 percent in volume terms to 3,442 million tonnes. Reduced exports to Turkey (down 38 percent in monetary terms) was primarily responsible for this downturn.

Figure 17. Exports of flat-rolled products by quarter

Table 7. Exports of flat-rolled products

Steel pipe exports plummeted 51 percent year-on-year in the first half of 2019 in both monetary to USD 827 million and rose 39 percent physical terms to 910,000 tonnes respectively. The slump was mainly due to a collapse in exports to Finland (down 98 percent in monetary terms). The reason for is the completion of the construction of Nord Stream 2.

Figure 18. Exports of tube products by quarter

Table 8. Exports of tube products

Flat-rolled products: HS 7208, 7209, 7210, 7211, 7212; tube products: HS 7303, 7304, 7305, 7306Source: Russian Federal Customs Service

Value (USD mln) Weight (‘000 tonnes)

1H 2019 1H 2019 1H 2018 1H 2018

Turkey 435 702 905 1,207

Uzbekistan 207 114 290 150

Belarus 192 212 283 301

Poland 171 169 308 300

Latvia 148 131 243 208

Kazakhstan 122 136 182 190

Ukraine 86 76 149 112

Vietnam 62 112 127 209

Italy 55 83 116 146

Germany 53 80 91 123

Weight (‘000 tonnes)

Value (USD mln)

Weight (‘000 tonnes)

Value (USD mln) 1,368

761

973 506 1,269

469 1,150 734

971 404

1,246 514

2,222 798 1,705

477

2,203

446

1,902 885

1,737

351

2,025 496

2018 20182019 2019

Q1 Q1Q1 Q1Q2 Q2Q2 Q2Q3 Q3Q4 Q4

22

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Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market

Value (USD mln) Weight (‘000 tonnes)

1H 2019 1H 2019 1H 2018 1H 2018

Kazakhstan 376 495 635 766

Ukraine 264 190 483 322

China 181 131 240 153

South Korea 83 76 84 71

Germany 47 44 41 34

Belgium 31 27 29 25

Hungary 14 15 10 10

Finland 13 14 10 12

France 11 12 10 10

Slovakia 9 7 8 6

Value (USD mln) Weight (‘000 tonnes)

1H 2019 1H 2019 1H 2018 1H 2018

China 172 101 79 44

Finland 150 3 202 1

Kazakhstan 89 88 90 78

Belarus 34 32 37 35

South Korea 33 9 15 2

Japan 28 26 11 12

Ukraine 26 52 12 38

Germany 26 21 4 5

Italy 25 34 8 9

Austria 15 19 11 10

Steel imports in figures In monetary terms, rolled steel imports remained unchanged year-on-year in H1 2019 at USD 1,059 billion but rose 8 percent in volume terms to 1,573 million tonnes.

Figure 19. Imports of flat-rolled products by quarter

Table 9. Imports of flat-rolled products by country of origin

Pipe imports shot up by 43 percent year-on-year in monetary terms to USD 671 million and rose 86 percent in volume terms to 491,000 tonnes. The considerable increase in pipe imports from Finland was due to the return of Russian large diameter pipes delivered earlier for the construction of North Stream 2.

Figure 20. Imports of tube products by quarter

Table 10. Imports of tube products by country of origin

Flat-rolled products: HS 7208, 7209, 7210, 7211, 7212; tube products: HS 7303, 7304, 7305, 7306Source: Russian Federal Customs Service

626 676400432 384581

853 1,005592600 568

807

2018 2019

Q1 Q1Q2 Q2Q3 Q4

129

344

172 134 148139

235

408344

234 263249

2018 2019

Q1 Q1Q2 Q2Q3 Q4

Weight (‘000 tonnes)

Value (USD mln)

Weight (‘000 tonnes)

Value (USD mln)

23

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Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market

Key industry eventsSeverstal announces sale of Mini-Mill Balakovo PAO Severstal has closed a deal worth USD 215 million to sell Mini-Mill Balakovo to Abinsk Electric Steel Works.

The sale of Mini-Mill Balakovo will enable Severstal to focus on developing steel production at its main asset, Cherepovets Steel Mill and streamline its internal processes to execute the Company’s updated strategic priorities successfully.

Despite the sale, Severstal will maintain a presence on the long products market through its long product facilities at CherMK.

Zagorsk Pipe Plant to start production of seamless pipes with VTB fundingThe Zagorsk Pipe Plant (ZTZ) will build a new facility for the production of seamless pipes for RUB 35 billion. Its expected capacity is 400,000–450,000 tonnes of pipes per year, which should be attained by 2022.

EVRAZ develops rails that meet Korean standards along with new rolled product EVRAZ West Siberian Metallurgical Plant (ZSMK) has developed a new type of rail for subway systems that meets Korean standards.

EVRAZ ZSMK specialists designed a new, innovative roll-dressing technique and rail straightening/tempering technology for this product. The EVRAZ Nizhniy Tagil Integrated Metallurgical Plant (NTMK) has produced its first batch of hot-rolled steel rods (diameter 95 mm). The rods can be used by various industries: mechanical engineering, construction and pipe manufacturing. The heavy mill department is also now working on producing rods with a diameter of 125 mm.

Evraz and Severstal team up for online tradingThe two companies collaborated to create Online Storefront, a new trading platform for joint sales. The purpose of the project is to expand the geographical range of sales using Evraz warehouse infrastructure. Evraz Metal Inprom is a metals trader with a network of 48 offices throughout Russia, while the Severstal distribution network has only 26. With the help of Online Storefront, Severstal customers can now buy hot-rolled sheet from Evraz warehouses in Tula, where Severstal has none.

Delivering Severstal products to Evraz warehouses will reduce logistics costs and delivery time, a key goal of the company’s new strategy. In turn, Evraz Metal Inprom can boost its own online sales while developing similar projects with other manufacturers: the trader plans to grow the site into a marketplace for large manufacturers.

Metalloinvest launches Fine Screening Technology at Mikhailovsky GOKMetalloinvest has launched Derrick Fine Screening Technology at Mikhailovsky GOK to improve the quality of iron ore concentrate.

During the first stage of the project, the screening technology was introduced at four technological sections of the benefication plant. The budget for the first stage was over RUB 1.2 billion. As a result of the first stage of implementation, in 2020, over 3.7 million tonnes of iron concentrate will be produced at the fine screening technology section with an increased iron level of 67% (up from 65.1%).

The second stage of the project, launched in August 2019, will see construction of a new building for the beneficiation of concentrate. Following the second stage, the company expects to produce 16.9 million tonnes of high-quality concentrate with an iron content of 68.7% in 2022.

Severstal to build third bar-rolling millSeverstal will build bar-rolling mill No. 3 at Cherepovets Steel Mill.

The new mill will help the company develop new products to meet the needs of the construction and extractive industries, thereby expanding the potential markets for grinding ball sales. The grinding ball unit will manufacture products with a diameter of 60–100 mm and produce 70,000 tonnes of grinding balls per year.

Total investment will total RUB 840 billion. The unit is slated for launch in H2 2020.

Source: Corporate press-releases

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Development strategies in the steel industry

Page 25: Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and iron ore market 18 Production trends 19 Consumption trends 21 Steel exports in figures

Overview of the steel and iron ore market | Development strategies in the steel industry

Investment options Investment in Russian or foreign assets:

• NLMK Group has production assets in Russia, the US, Belgium, Denmark, Italy and France.

• EVRAZ owns assets in Russia, the US, Canada, the Czech Republic, Italy and Kazakhstan.

• Severstal has its core assets in Russia and a small number of enterprises abroad.

• MMK Metalürji San.Tic. ve Liman İşletmeciliği A.Ş., MMK Group’s investment project in Turkey, has production sites in industrial zones in Dortyol (Iskenderun) and Gebze (Istanbul).

• Metalloinvest operates mining and steel-making segments with assets in Russia.

• Mechel’s steel segment includes assets in Russia, Ukraine and Lithuania.

• TMK has three divisions: Russian (six plants in Russia and one in Kazakhstan), American (12 plants in the US and Canada) and European (two plants in Romania and sales units).

• ChelPipe’s tube division has assets in Russia and one plant in the Czech Republic.

• OMK has five large plants in its metals segment, all located in Russia.

Develop steel-making capacity or diversification:

• Leading Russian steelmakers have both core and non-core assets. Mechel sells and leases its non-core real estate assets. MMK Group has a sanatorium, a vacation retreat and other resort infrastructure, incorporated as MMK-Kurort. Aviapredpriyatiye Severstal LLC is the operator of Cherepovets Airport and operates domestic and international flights. Metalloinvestleasing, a subsidiary of Metalloinvest, leases technical equipment, custom machinery, transportation and railway wagons to companies in various industries.

Investment in raw materials, basic or final processes of the industry value chain:

• The majority of leading steelmakers are vertically integrated.

• Vertically integrated companies are built on large steel mills that manufacture basic types of metal products.

• They invest in developing the production of feedstock (iron ore, HBI, coal, coke and scrap), transportation and logistics, service and sales assets and the production of downstream products.

Creation of in-house R&D pipelines or acquisition of turn-key technology solutions:

• On the one hand, Russian steelmakers have their own R&D structures and design divisions: – Severstal has KO VNIIMETMASH (a design and development company for rolling mills and equipment), Sevestal-Proekt (Severstal’s chief designer), SPB-Giproshakht LLC (a design and development company for the comprehensive design of mining facilities).

– Metalloinvest has GIPROMEZ LLC (City Institution for Designing Metallurgical Plants, which main activities include rendering engineering and consulting services for metallurgical production, developing and implementing reconstruction projects, technical revamps and the construction of the new industrial facilities).

– NLMK-Engineering is one of the largest design institutes in the Russian steel sector. The company designs facilities for the metallurgical, energy, mechanical engineering and transport sectors.

– On the other hand, 58.5 percent of the Russian steel sector’s spending on technological innovation goes on purchasing machinery and equipment, with only 14.1 percent spent on R&D and 12.9 percent on engineering.

Source: INP RAN, company websites (nlmk.com, evraz.com, severstal.com, mmk.ru, metalloinvest.com, mechel. ru, tmk-group.ru, omk.ru, chelpipe.ru), Indicators of Innovation: 2019

26

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Overview of the steel and iron ore market | Development strategies in the steel industry

Collective strategies Collective strategies (strategic alliances) aim to achieve competitive advantages from the joint use of the assets of several independent organizations. Collective strategies are a “cheap” alternatives to classic corporate strategies by making savings on investments (the ability to pool the financial, material and intellectual resources of companies participating in an alliance to tackle common objectives), but involve specific risks (the interests of participating companies may intersect on one issue, but could diverge considerably on other issues).

Organization Participants Tasks and objectives

Russian Steel Association (founded in 2001)

EVRAZ, Mechel, MMK, NLMK, OMEK, Severstal, TMK, IMH, OMK The association aims to unite companies’ strategic positioning on the domestic and international market, coordinate the implementation of joint projects and promote common interest in government and in the business community of Russia and other countries. Key activities: Research support for association members; occupational, industrial and environmental safety; production and technical development; training; securing feedstock supply for the steel industry; technical regulation; trade policy; transportation and energy; formation of legal positions on Russian legislation about taxes and duties.

Foundation for Development of Tube Industry (founded in 1999)

The Foundation’s founding members are the Volzhsky, Seversky, Sinarsky and Almetyevsk pipe plants, the Taganrog and Vyksa steel plants, Chelyabinsk Pipe Rolling Plant and Pervouralsk New Pipe Plant, which are part of the holdings: TMK, OMK and ChelPipe Group

The Foundation was set up to promote and defend the interests of pipe producers on the Russian, EAEU and international markets. The Foundation includes working groups covering the following areas: Trade protection measures; PR; technical regulation; limiting the use of used pipes; logistics and rail tariffs; purchases from state-owned companies; research cooperation.

Prommetiz Association of Manufacturers of Metal Products (founded in 1996)

AESW, Bekaert Wire, BelZAN, EvrazHolding, Beloretsk Iron and Steel Works, Vyartsilya Metal Products Plant, VMZ, Kamskaya Kuznitsa, Catter Group, Lepse, Metroprom-Ural, MMK-METIZ, Parallel, PromStroyInvest, Rechickij Metiznyj Zavod, Severstal-Metiz, SMS

Goals:

• Metalware information center: a one-stop source of information for federal agencies about the state and prospects of the metalware segment (monthly operational data on sales by product type and company, staff numbers and average salaries for each company, export and import reports);

• Аdvocacy for companies in the industry (formation of protective measures, standardization policies and technical regulations).

Russian Union of Metal and Steel Suppliers (founded in 1997, renamed in 2005)

84 companies and 316 branches in 63 Russian regions Main goal: coordinate the development of Union members, improve their professionalism and stability on the metals market. Objectives:

• represent and protect the interests of Union members domestically and abroad, coordinate their activities, resolve complex issues;

• improve professionalism among the staff of Union members in sales, storage, trade, marketing, etc.;

• conduct meetings, consultations and conferences with Russian and foreign producers of metal products;

• protect the domestic market from unethical practices and outside competition, exchange information on rogue market actors;

• introduce cutting-edge sales, trade and production practices to the Russian market.

Source: russtal.ru, frtp.ru, asmetiz.ru, rspm.ru

27

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Overview of the steel and iron ore market | Development strategies in the steel industry

Corporate, competitive and functional strategiesCompany Corporate strategy Competitive strategy Functional Strategies

NLMK Group Strategy 2022 is a balanced strategy that combines investment in growth projects with financial stability and a highly competitive dividend policy.Horizontal integration: Growth of steel output at NLMK Lipetsk site by 1 million tonnes to 14.2 million tonnes per year. Vertical integration:

• Growth of concentrate output by 2.6 million tonnes to 20 million tonnes per year; and growth of pellet output by 1.3 million tonnes to 8 million tonnes per year at Stoilensky;

• Growth of NLMK Lipetsk energy self-sufficiency from 60% to 95%.

• Global leadership in operational efficiency and the cash cost of steel production.

• Target EBITDA gain of USD 0.5 billion per year (in 2023 compared to 2018).

• Key activities: Debottlenecking steelmaking operations, minimization of environmental footprint

• Finances: Financial stability, maximizing stakeholder value

• Marketing: Growth of steel product sales to 18 million tonnes per year

• HR: High level of personnel motivation and engagement, reduction of the injury rate to LTIFR 0.5.

EVRAZ EVRAZ’s strategy vision is to be a global steel and mining company and the leading producer of infrastructure steel products with low-cost production across the value chain. EVRAZ’s strategy is based on five key success factors, which are crucial in achieving our corporate vision: • Health, safety and environment • Human capital • Customer focus • Asset development • EVRAZ’s business system

• low-cost production across the value chain; self-sufficiency (79% for iron ore and 239% for coal).

• Focus on infrastructure steel products (rails, beams and construction steel productions)

• R&D and key activities: Application of new technologies and cost efficiency

• Corporate governance: A culture of continuous improvement to ensure long-term competitiveness

• Finances: Debt management, stable dividends and prudent capex

• Marketing: Respond to the evolving needs of customers, create new products and solutions that unlock additional value

• Human Capital: Level of personnel engagement is in line with industry leaders, safe work (LTIFR ≤ 1.0х)

Metalloinvest Metalloinvest’s development strategy focuses on strengthening the Company’s position as one of the world’s leading producers of high added value iron ore products.

• Boost operational efficiency (low production costs for pellets and HBI/DRI*)

• Focus on HBI production (maintain the Company’s position as a leading global producer of HBI)

• R&D Introduce energy-efficient technologies

• Key activities: Produce the highest quality iron ore products in Russia

• Corporate governance: Continuously improve corporate governance, promptly respond to changes in the internal and external environments, conclude long-term partnership agreements with stakeholders

• Finances: Increase shareholder value, make investments to create additional value

• Marketing: Strengthen the Company’s market position in high added value products

• Human Capital: Develop personnel and implement social and environmental initiatives

* Hot Briquetted Iron and direct reduced iron Source: Company websites (nlmk.com, evraz.com, metalloinvest.com)

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Overview of the steel and iron ore market | Development strategies in the steel industry

Corporate, competitive and functional strategiesCompany Corporate strategy Competitive strategy Functional Strategies

Mechel Mechel’s strategy aims to improve the company’s financial results, increase its shareholder value and decrease its debt portfolio. Elements of the strategy:

• Consolidate the company’s leadership in the production of metallurgical coals.

• Develop the company’s position on the steel market.

• Increase Mechel’s share of the high value added roducts market.

Improve vertical integration and control over the business’s transport component, expansion of logistical capabilities.

• Mining segment: Focus on the production of metallurgical coal.

• Metals segment: Focus on the production of long products.

• Key activities: Ensure low production and transportation costs

• Finances: Improve financial performance, increase shareholder value, reduce debt burden

• Marketing: Develop the service and sales network, maintain a leading position on the metal products market in Russia and the CIS.

MMK Strategy 2025 Strategic goal: to become a leader among global metal companies with comparable production volumes and shareholder value.

Strategic initiatives portfolio:

• strengthen position on priority markets; • increase operational and functional efficiency; • increase attractiveness for investors; • safe operations; • professional personnel development; • social strategy.

• Strengthen position on priority markets (the Russian automotive industry). Increase the share of domestic sales in the sales structure to 84 percent by 2025.

• Increase operational and functional efficiency (to decrease the cost of sales by 2–3% per year).

• Key activities: Implement lean production, punctual delivery, improve material flow accounts, minimize stocks.

• Corporate governance: Simplify the Group’s structure, increasing transparency and manageability. Roll out Big Data systems (comprehensive modeling and mathematic optimization of key processes).

• Finances: Increase attractiveness for investors. Adhere to specialization criteria, cost recovery and liquidity when implementing projects. Continue a conservative financial policy and focus on regular value creation for its shareholders.

• Marketing: Punctual delivery, remain the number one supplier for automotive industry clients in Russia, expand the quality products mix, develop a proactive marketing strategy.

• Human Capital: Engage employees in the improvement of operational efficiency at ММК, personalize resource management, promote employee health, zero tolerance policy towards health and safety violations

Severstal The Defensive Growth Strategy focuses on enhancing product quality rather than increasing production.

• Differentiation: Enhance product quality, create added value by boosting efficiency and monitoring costs.

• Reduce production costs for core products by at least 10 percent.

• R&D Support Defensive Growth by developing Big Data, Internet of Things and predictive maintenance. Develop and nurture digital projects that have the potential to become independent businesses.

• Key activities: Modernize facilities at Cherepovets to expand product mix

• Corporate governance: Structural reorganization, replace traditional departments with two company-wide divisions: upstream and downstream.

• Finances: Grow EBITDA by 10–15 percent per year.

• Marketing: Increase customer focus, service, flexibility and problem resolution, improve product branding, boost online sales to 50–60 percent by 2023.

• Human Capital: Bonus system tied to EBITDA growth

Source: Company websites (severstal.com, mmk.ru, mechel.ru), comnews.ru, vedomosti.ru

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Overview of the steel and iron ore market | Development strategies in the steel industry

Company Global ranking Steel production in 2018, mln tonnes

Share of global steel production in 2018, %

Strategy

ArcelorMittal 1 96.42 5.33 The world’s largest steel and mining company. The company has four strategic priorities:

• Improving safety performance (aiming for zero injuries and fatalities)

• Achieving financial targets

• Delivering the Action 2020 strategic plan

• Integrating sustainability into the business.

China Baowu Steel Group Corporation Limited

2 67.43 3.73 Strategic vision: to be the world’s leading steel company and a world-class business conglomerate. Strategy: develop iron and steel production as the company’s core activities and coordinate the development of interrelated types of operation.

Nippon Steel Corporation

3 49.22 2.72 Strategic priorities:

• Taking all possible measures required to ensure safety, environmental protection, disaster prevention, quality, and compliance.

• Building a solid manufacturing base, including the reconstruction of key facilities, equipment and software upgrades, and taking measures to prevent operational problems. Thoroughly implementing initiatives to enhance managers’ capability in line management and to strengthen training and development in the workplace.

• Increasing the profitability of overseas business. Focus on markets with high potential demand growth and in areas where the company can make use of its technological and product strength.

• Promoting business transformation, standardization and workstyle reforms. The aim is to establish a working environment where the company can perform at its best by aggressively adopting advanced IT tools, leading to higher productivity and competitiveness.

HBIS Group 4 46.80 2.59 Strategic vision: to be the most competitive steel enterprise. Principles: business globalization and oversight of the entire production chain. Goal: to build a global conglomerate with a globally recognized brand. By optimizing and strengthening its steel business, HBIS is also striving to develop modern industrial services and chain finance as well as digital technologies. Led by the philosophy of “globalized resource, globalized market, globalized customer”, HBIS is committed to speeding up the construction of a global marketing service platform, global R&D platform and global manufacturing platform. HBIS directly or indirectly controls more than 70 overseas companies worth around USD 9 billion. HBIS is the most international Chinese steel company.

POSCO 5 42.86 2.37 Strategic priorities: • expansion of the value chain; • investing in promising areas of the future; • expanding the scope of activities of promising geographies; • creation of an effective ecosystem (in the context of innovation and communication).

Development strategies of foreign steelmaker

Source: WSA, company websites (baowugroup.com, corporate.arcelormittal.com, nipponsteel.com, hbisco.com, posco.com)

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Overview of the steel and iron ore market | Development strategies in the steel industry

Sources: company websites

Improving steel production, resolving business problems, developing the domestic market:

• Increasing self-sufficiency in key raw materials and energy;

• Modernizing process units, IT infrastructure and management systems;

• Expanding the product mix, boosting the quality of steel products;

• Developing sales and service networks, improving customer service;

• Strengthening positions in priority segments on the domestic market;

• Increasing employee motivation and engagement;

• Increasing attractiveness for investors;

• Maximizing returns for shareholders (consistently high dividends).

Achieving national economic goals and global expansion:

• Integrating sustainability goals into the business;

• Contributing to national industrial development (e.g. Chinese, South Korean and Indian companies).

• Supporting the implementation of national social and economic development plans (e.g. Chinese and Iranian state-owned companies);

• Using innovative technologies to drive economic growth;

• Achieving aggressive growth and extensive expansion on foreign markets, building global production and processing platforms (Chinese, Indian and Japanese companies);

• Concluding strategic partnerships with foreign steelmakers;

• Developing non-core businesses (Chinese and Indian conglomerates)

• Boosting business continuity during periods of weak steel demand.

• Ensuring safe working conditions (reduce industrial injuries and workplace fatalities);

• Reducing environmental impact;

• Reducing costs (increase operational efficiency);

• Ensuring financial stability, reducing debt burden;

• Developing products with high added value.

Russian steelmakers Foreign steel-makers

Differences and similarities

Comparative analysis of strategies of Russian and foreign steelmakers

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Temperature check of the Russian steel and iron ore market

Page 32: Overview of the steel and iron ore market | Moscow, H2 2019 · Overview of the Russian steel and iron ore market 18 Production trends 19 Consumption trends 21 Steel exports in figures

Overview of the steel and iron ore market | Temperature check of the Russian steel and iron ore market

The current state of the steel-making industryIn 2H 2019, Deloitte CIS conducted a comprehensive study on the Current State and Outlook of the Russian Manufacturing Sector – 2019. The research included a survey of experts from a number of steel- and tube-making companies. Detailed analysis of the data gave us an insightful perspective into the Russian steel-making industry and revealed the mood and expectations of market players, as well the development prospects of their businesses and the industry as a whole.

Figure 21. Pulse survey of company and industry outlook

Positive

Quite positive

Quite negative

Negative

Situation in the industry Situation in their company

Figure 22. Pulse survey of company and industry growth prospects

The situation will probably improve

The situation will definitely improve

The situation will probably get worse

The situation will definitely get worse

The situation will not change much

Growth prospects for the industry Growth prospects for their company

The majority of respondents (80 percent) have positive opinions about the current state of affairs in the industry, while 93 percent are optimistic about the standing of their companies. The share of respondents optimistic about the industry increased by 13 p.p. compared to last year.

Respondents from steel companies were more optimistic the about current situation in their industry than that of the manufacturing sector as a whole (9 p.p. above the average).

Almost two thirds of those surveyed in the steel industry (62 percent) were positive about the growth prospects for their companies. Notably, this figure is up on last year (by 12 p.p.).

The share of respondents optimistic about the growth prospects of the Russian steel industry rose by 8 p.p. (45 percent). Another 45 percent said that the situation will not change much. The remaining 10 percent see the industry situation getting worse.

12% 14%

+8 p.p. +12 p.p.

4%

42%31%

4% 7%

38% 48%

2018

2018

2019

2019

17% 7%

4% 3%

46% 45%

13% 7%

20% 38%

2018

2018

2019

2019

38%

50% 55%

59% +13 p.p. +10 p.p.

4%

4%3%29% 13% 7% 17%

29% 33% 38%

21%

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Overview of the steel and iron ore market | Temperature check of the Russian steel and iron ore market

Issues, competitiveness and priority strategies

Figure 24. Top four drivers of competitiveness for companies on the Russian market

30%

15%

15%

30%Improved manufacturing capacity (launching new facilties)

Vertical integration

Stronger demand on foreign markets

Stronger demand in Russia

Experts named government financing and subsidies as the main driver of global competitiveness this year while improved manufacturing capacity and strong demand in Russia were cited as the key drivers on the domestic market.

The strategic development rating changed significantly this year. Expanding into new markets rose to first place (76 percent).

Implementing advanced technologies and production upgrades and modernization were new entries into the top five (69 percent and 66 percent respectively). All manufacturing companies tended to demonstrate a heightened interest in technological development. Import substitution also made it into the top this year (62 percent).

Last year’s top strategy, improving manufacturing capacity, fell to fourth place this year (62 percent).

Figure 23. Top four drivers of global competitiveness for the Russian steel industry

Figure 26. Top five priority development strategies for companies in 2019

26%

23%

23%

30%

69%

66%

62%

45%

76%

Government support

Expanding into new markets

Cost of Raw Materials

Improving manufacturing capacity (launching new facilities, increasing production)

Import substitution on the Russian market

Lower customs duties for imported raw materials and components

Production upgrades and modernization

Lower geopolitical risks

Implementing advanced technologies and innovations

Gaps in government regulation of the industry was named the top problem faced by the Russian steel industry this year (25 percent). Insufficience of production and technical capacity (18 percent) and high tax ratio (17 percent) also made it into the top  three this year.

Figure 25. Top three issues faced by metallurgical companies

Gaps in government regulation of the industry (administrative, trade, economic and other barriers)

High tax ratio

Insufficience of production and technical capacity 18%

17%

25%

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Overview of the steel and iron ore market | Temperature check of the Russian steel and iron ore market

Digitalization and innovation in the steel industry

Technology, media and telecommunications (TMT)

Electronic document management (EDM)

Smart manufacturing

Eco technologies

RPA

Advanced ERP systems (CRM, SAP, etc.)

Big Data

Alternative energy sources

Augmented/ virtual reality

Energy saving technologies

Full automation of business process chain

Video analytics and computer vision

Artificial intelligence

Full automation of selected business processes

Blockchain (distributed encrypted ledger technology)

Internet of Things (machine-to-machine communication, IoT technologies, sensors)

Steel industry

Construction and E&R (Energy and Resources) Technology, media and telecommunications (TMT)

Retail Retail

Financial services Construction and E&R (Energy and Resources)

Life sciences and health care (LSHC) Life sciences and health care (LSHC)

Steel industry Transportation

Transportation Financial services

0.24

48% 52% 0%

21% 72% 7%

0.31

0.10

24% 52% 24%

17% 52% 31%

0.17

0.17

45% 28% 27%

21% 62% 17%

0.24

0.08

24% 41% 35%

14% 48% 38%

10% 31% 59%

0.08

0.16

38% 48% 14%

21% 45% 34%

0.20

0.35

72% 21% 7%

24% 35% 41%

0.46

0.15

35% 48% 17%

21% 34% 45%

0.20

The metals industry is currently the second most digitalized sector in Russia, behind the TMT sector (the level of innovation** of the metallurgical industry of 0.24, the average level of innovation in Russia of 0.17).

Electronic document flow is the most widely-used technology among steelmaking companies (72 percent).

The most commonly planned technologies are smart manufacturing and automation of business processes (72 percent and 62 percent respectively).

Augmented/virtual reality technologies are the least sought-after for both the steel industry and the Russian manufacturing sector as a whole.

Figure 29. Advanced technology implementation

Implemented Planning to implementNeither implemented nor planning to implement

* Based on the findings of the 1H 2019 Deloitte CFO Survey of the Leading Companies in Russia** The level of innovation is a weighted average of the technology complexity estimate (of 0 to 1)

Figure 27. Level of maturity by complexity of technology implemented*

Figure 28. Level of maturity by complexity of technology to be implemented*

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Overview of the steel and iron ore market | Temperature check of the Russian steel and iron ore market

Digitalization and innovation in the steel industry

Figure 30. Innovation

Steel companies focus most of their innovation efforts on acquiring advanced equipment and machinery (66 percent). Moreover, 62 percent are planning to conduct staff training and development more regularly in 2019–2020.

Implemented by the end of 2018

Planning to implement in 2019–2020

66%52%52%28%24%21%17%

69%62%45%52%38%24%20%

Acquisition of advanced equipment and machineryStaff training and developmentTechnology acquisitionR&DMarket research and analysisAcquisition of rights to patents, licenses, etc.Business process digitalization

Average innovation and digitalization strategy investments by steel companies (% of revenue)1.5%

1.0%

in 2019–2020

in 2018

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ContactsAndrew Sedov

Partner, Leader of the Metals Group, Deloitte CIS

[email protected]

Kamila Zhalilova

CIS Energy & Resources Leader, Deloitte CIS

[email protected]

Ekaterina Trofimova

CIS Financial Services Industry Leader, Head of the credit risk, rating advisory and corporate governance practice, Deloitte CIS

[email protected]

Dmitriy Kasatkin

Deputy Head of the Center for Socio-Economic Research at the Center for Strategic Research Foundation

[email protected]

Victoria Pigalkina

Analyst, Center for Strategic Research Foundation

[email protected]

Lora Nakoryakova

Head of the Center for Socio-Economic Research at the Center for Strategic Research Foundation

[email protected]

Alexander Sinitsyn

President, Center for Strategic Research Foundation

[email protected]

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Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our network of member firms in more than 150 countries and territories serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 312,000 people make an impact that matters at www. deloitte.com.

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.

© 2019 AO Deloitte & Touche CIS. All rights reserved.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms are legally separate and independent entities. DTTL does not provide services to clients. Please see www. deloitte.com/about to learn more.

Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our network of member firms in more than 150 countries and territories serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 312,000 people make an impact that matters at www.deloitte.com.

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.

© 2019 AO Deloitte & Touche CIS. All rights reserved.