Ukrainian steel and aluminium producers are likely to quickly pull out of crisis in 2010 as demand growthreturns to both domestic and external markets, but it could take five years before output returns to prerecessionlevels, according to BMI’s latest Ukraine Metals Report.
In the first seven months of 2009, Ukrainian crude steel output fell 37.2% y-o-y to 16.28mn tonnes, as thecountry was gripped by an economic crisis. However, the situation began to show some improvementfrom Q209 and monthly output in July was up 15.5% (though down 27.7% y-o-y) to 2.66mn tonnes onthe back of a 5% month-on-month (m-o-m) rise in exports. This came in the context of a 4.9% m-o-mgrowth in Ukraine’s industrial output in July, although it was still down 26.7% y-o-y. The situation hasimproved as the government has introduced a series of measures intended to support the steel industryamid the growing crisis. In March 2009, legislation was finalised to boost the construction industry - thegovernment plans to buy up unfinished construction projects, targeting those that are 70% complete in2009 and 50% complete in 2010. If carried out, the programme would accelerate demand for constructionsteel, which represents around 15% of domestic steel consumption.
The increase in steel production from May has caused another set of problems, namely a deficit in cokingcoal availability, with the Ukrainian Coke Association estimating it at 1.4mn tonnes for H209. It couldtake up to six months for the coal industry to return to 2008 production volumes. In the mean time, thedeficit will have to be plugged by more expensive imports, thereby pushing up the cost of production. Thesituation is worsened by the continued depreciation of the Ukrainian hryvnia. It is still unclear whetherthe reports of modest growth in output are related to a genuine increase in demand or short-term stockbuilding - BMI suspects it is the latter. Our research suggests that exports will decline by 22% to21.56mn tonnes, but will stage a recovery from 2010 when they will rise by 18.1% with Ukrainiansteelmakers enjoying a competitive advantage as the global market revives.
BMI forecasts a 19% drop in crude steel output to 30.1mn tonnes in 2009, but predicts a rebound in 2010when output should grow 15%. Based on low capacity utilisation rates in H109, hot-rolled production islikely to fall by 24% to 23.6mn tonnes, with a higher proportion of steel exported in crude form.According to figures from the Ministry of Industrial Policy, roll production fell 34% y-o-y in the firstseven months of 2009 to 14.6mn tonnes. Domestic consumption of finished steel will fall by 29% to justunder 6.25mn tonnes. This is due to a slowdown in construction caused by a fall in fixed capitalformation and the credit crisis combined with a collapse in output from the automotive industry.However, by Q409, quarterly output should be growing on a y-o-y basis.
As such, finished steel consumption is set to grow by 11.2% in 2010 to 6.9mn tonnes and by a further13% to 7.9mn tonnes in 2011. Beyond that, while there is a risk that the ongoing financial marketinstability in Ukraine may result in Kiev losing its right to host the 2012 UEFA European FootballChampionships, our forecast for real GDP growth ticking up to 4.3% by 2013 assumes a best casescenario, if the tournament proceeds as planned. As a result, we forecast crude steel output reaching42.6mn tonnes, just under the industry’s 2007 peak while hot rolled production is expected to approach36.9mn tonnes, which is 2% more than 2007 and a rapid turnaround from the 2009 low point.
Gloomy prospects are also in store for the relatively small aluminium sector, which is expected to seeproduction halve to just 50,000 tonnes. Although we expect a full recovery in aluminium by 2013, this isdependent on RusAl maintaining operations in Ukraine. RusAl indicated even before the financial crisisthat it may close the 130,000tpa Zalk smelter as it was unprofitable to keep it running. With output set tonosedive and the debt-ridden company already facing severe financial problems, it may considerpermanent closure and sale. If RusAl can find a way to improve efficiency, BMI believes the smelter canbe returned to full capacity after the recession, assisted by a recovery in supplies to the automotiveindustry. However, until RusAl announces that it will close Zalk, BMI will forecast a return to fullcapacity within five years.
(0 items)
