CIS, Ukraine Steel Production Squeezed by Lack of Demand, Capital

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--World crude steel production for the 65 countries reporting to the World Steel Association (Brussels, Belgium/Beijing China) was 133 million tons in July 2015, a 3.8% decrease from July 2014.

China's crude steel production was 65.8 million tons in July, down 4.6% from the same month a year earlier. Japan produced 8.8 million tons, a decrease of 4.9%. Russia produced 6 million tons, down 2.8%, and Ukraine produced 1.9 million tons, down 24.1%. The U.S. produced 7 million tons in July, down 9.1%.

India produced 7.7 million tons in July, up 1.2% from a year earlier, and Germany produced 3.6 million tons, an increase of 4.7%.

Steel producers in the ex-Soviet Commonwealth of Independent States (CIS) countries are sensitive to Russian economic activity levels and low oil prices, as well as the global effect of Chinese production and demand. Geographically, the CIS countries lie between the two economic powers in Central Asia and far-eastern Europe.

The ability to raise capital for projects and development in the CIS countries has been diminished by the global economic malaise and commodity price slump. "We expect that CIS banks will be affected by lower oil prices and Russia's recession through pressures on local currencies, declines in remittances from CIS nationals working in Russia, and lower exports from CIS countries to Russia," said Lev Dorf, an analyst at Moody's Investors Service (New York).

Moody's reported an expected 3% contraction in Russian gross domestic product (GDP) in 2015, followed by zero growth in 2016. Banks will be affected primarily through the impact of currency weakness in most CIS countries. The main problem arising from this is the banks' large portfolio of loans denominated in foreign currency, which, for the most part, are provided to borrowers with no foreign exchange earnings.

A report, "Banks in CIS feel pinch from Russian downturn and low oil prices," said that currency pressures are the most acute for banks in Belarus, Tajikistan and Azerbaijan, and could be relatively contained in Uzbekistan, where the currency is gradually devalued against the U.S. dollar.

With prospects of further 20% currency devaluation by Kazakhstan by the end of 2016, the country's banks will face more pressure than those in Uzbekistan, but less than those in the worst-affected CIS countries.

The drop in remittances from CIS nationals working in Russia, which fell 47% in U.S. dollar terms in first-quarter 2015 from the same quarter a year earlier, is another challenge for banks, particularly in Tajikistan, where remittances are a major proportion of GDP.

Belarusian banks will be affected the most severely by weakness in the Russian economy. Exports to Russia dropped sharply in first-quarter 2015.

At the beginning of September, Kazakhstan and China announced the signing of 25 agreements worth $23 billion, with the aim of moving cooperation dominated by raw materials to products with greater added value. Up to the present, China has invested billions of dollars mainly in oil & gas and infrastructure serving the hydrocarbon and resource extraction industries.

"At this new stage, we are beginning to intensify our interaction in the processing sectors of the economy, including mechanical engineering and resource-processing," Kazakhstan President Nursultan Nazarbayev said.

Leaders of the country's sovereign wealth fund said it had signed deals worth $5.1 billion with Chinese companies on transportation and energy projects, covering the nuclear, metallurgical and chemical industries. In March, China and Kazakhstan reported signing 33 agreements worth $23.6 billion in sectors from hydropower to steel.

In an expanding mining sector, and with 12% of the world's uranium resources, Kazakhstan produced about 22,830 tonnes of uranium in 2014, and plans to increase production by 2018. With a major plant making nuclear fuel pellets, it is targeting the sale of value-added fuel in addition to basic uranium. The country's Development Bank is financing projects to the value of about $2 billion in metallurgical and manufacturing development projects.

In 2014, Ukraine ranked as the world's fifth-largest steel exporter. But with war-like violence in the country's eastern heavy industry region, it is feared that exports to Russia could fall 50% this year. Making up 15% of the country's economy, shipments to Russia fell 38% in the first four months of this year, according to the International Steel Statistics Bureau (ISSB). In 2013, Ukraine sold 75% of its annual steel production to foreign markets, with Russia accounting for 15%.

In Ukraine's Luhansk and Donetsk regions, where the conflict with Russia has been centered, industrial output in May fell to 86% on an annual basis in Luhansk and 45.6% in Donetsk. Overall industrial output is projected to contract 3.5% in 2015 and to rise 3.4% in 2016. The armed conflict resulted in a 17% fall in steel production in 2014 from 2013, to 27.2 million tons. Just more than 50% of Ukraine's 43 million tons of annual capacity is based in the Luhansk and Donetsk regions.

Ukraine holds about 5% of global mineral and other resources, and is ranked first among European countries for iron, manganese, titanium and uranium ore. Total reserves of iron or are estimated at 24.7 billion tons covering 83 deposits.

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