Sluggish domestic demand constrains Russian steel recovery

Despite posting relatively solid performance since the economic turmoil of 2009, the slow recovery of domestic demand continues to limit the growth prospects of the Russian steel industry, Moody's Investors Service said in a new Special Comment.
Following on from the global downturn, Russian steel producers have continued to recover to show stronger signs of robust performance that has boosted the early, tentative signs of recovery.
"The companies' full capacity utilisation and the healthy price increases for steel products in H1 are expected to continue contributing to the industry's overall improved profitability and strong cash flow generation. A return to economic growth should help revive domestic demand, which is important for the steel producers' long-term stability and growth prospects," explained Larissa Loznova, author of the report.
However, Moody's noted that the slow recovery in domestic demand is limiting the companies' growth prospects, as export sales of predominately semi-finished steel products expose Russian producers to more price volatility.
"After the significant increase in steel prices in Q2, prices levelled off in Q3; during the next two quarters, Moody's believes that steel prices will most likely remain relatively stable. Russian steel producers are to a large extent immune from recent price hikes in key raw materials due to their high degree of vertical integration. We expect that the export sales of semi-finished steel goods will continue to support current production and high-capacity utilisation rates if domestic demand remains sluggish," added Loznova.
The recent move to a short-term pricing mechanism for key raw materials (such as coal and iron ore) will have little impact on the performance of Russian steel producers due to their high level of self-sufficiency in raw materials.
Looking ahead, the rating agency noted that although domestic demand is currently weak, a return to economic growth in Russia should help to revive this demand, which is important for the producers' long-term stability and growth prospects.
Any gradual recovery of domestic demand would be driven by an increase in economic activities that started in January. Along with growth in GDP, which according to the World Bank is forecast to grow 4.5% in 2010 after declining 7.9% in 2009, some industries related to steel consumption also registered growth. Production of cars grew by 190% in H1 (according to the Ministry of Trade), while construction activity, although stagnant in the country as whole, continued to increase in certain regions (i.e., the Southern Federal Region due to the upcoming Olympic games in Sochi).