Key Steel and Gas Sectors Show Strain in Russia's 2010 Growth Prospects

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Reported by Richard Finlayson, Senior International Editor, Industrial Info Resources (Sugar Land, Texas)--After creeping a couple of points above the "50" datum line to 52 in September 2009, the Russian purchasing managers index dropped to 49.6 in October, according to VTB Capital (Moscow, Russia). This index, a continued lack of capital investment, unemployment, and weak domestic demand mean the jury remains out for final forecasts for Russian GDP growth in 2009 and 2010. An extended flat bottom to a gradual "U"-shaped recovery appears to be the consensus for the pattern of how the country's economic recovery will unfold.

At the beginning of November, deputy economic minister Andrei Klepach was quoted by Interfax (Moscow) as saying that Russia's GDP would grow 3% to 4% in the fourth quarter of 2009 compared to the third quarter. With this seasonally adjusted growth, the total contraction of GDP in 2009 would be about 8.5%, he said, adding that the possible range is between -8.3% and -8.8% growth. Although Russia's 2009 GDP has risen every month since June, on a year-over-year basis, September's GDP was, in fact, 8.6% lower than growth in September 2008.

Klepach said that growth might pause at the beginning of 2010, but he doubted that there would be a second wave in the downturn (the "W" arrested recovery scenario). Klepach forecast Russia's growth for 2010 at 1.6%, with the possibility of reaching 2% or even higher. If oil prices remain at current levels through 2011 and 2012, growth will be 0.5% to 0.8% higher than the current official forecast, he said.

In October, the International Monetary Fund (IMF) (Washington, D.C) forecast a 7.5% contraction for Russia's GDP in 2009 and positive growth of 1.5% in 2010.

Data issued by Russia's Ministry of Industry and Trade shows that the country's metallurgical industry is only expected to reach pre-economic-downturn levels in 2014-15. The expected 15% to 17% decrease in the sector would have been approximately 2.5% worse if current state support measures, equivalent to 1.1 million tons of production, had not been implemented. These support measures include an increase of import duties on some steel products, a decrease of import duties on scarce raw materials, an acceleration of value-added tax compensation, exclusive railway transportation tariffs for exporters, the zeroing of import duty on manufacturing equipment, state guarantees, and the refinancing of accounts payable.

The ministry reports that consumption of rolled steel products and supplies to the domestic market went down 34% year over year in the period from January to September, and delivery on imported steel products went down 50%. Steel pipe consumption went down 37%, and deliveries of imported pipes fell 50%. However, steel market analyst SteelOrbis (Istanbul, Turkey) reports a more upbeat sentiment from Russia's Special Steel and Alloys Consumers and Suppliers Association (Spettstal), based on data that imports of stainless steel products increased 71% to 10,800 tons from August to September, the highest since the beginning of 2009. The association suggests that this increase demonstrates that the worst days for the steel market have passed. The overall decrease in imports of various steel products for the first nine months of 2009 ranged from a drop of 53.6% for flat products to a 15.8% decline for billets.

With October's estimated crude steel production figures up 10% to 15% from September 2009, Ukrainian steel producers have orders up to the middle of December, and the government has upped the 2009 steel production forecast to 29.9 million tons. Such positive news, however, must be set against the backdrop of a steel market down 41.1% for the first nine months of the year. Imports of steel products declined 64.4% from the same period last year.

With a fiercely contested national election coming up in January 2010, the government has crossed policy swords with the IMF by proposing the implementation of wage and pension increases. This jeopardizes a multibillion-dollar IMF loan and could shake the country's growth prospects. In October, the IMF forecast for Ukraine was a contraction of 1.6% in 2009 and positive growth of 2.7 % in 2010.

Another unresolved matter, central to Ukraine's prospects for 2010, is the running crisis with Russia about the payment terms for Russian gas. This dispute involves paying for supplies as they are received or paying for the full contracted amount by the first week of the month following supply. This dispute could drag on until election time, and if Russian gas pipeline company Gazprom (OTC:OGZPY) (Moscow) claims full payment because of breach-of-contract, there could be another eruption of the gas war that unsettled East-West relationships and threatened Europe's winter gas security.

Energy exports are the drivers of Russian growth prospects, and the country is looking east for long-term markets. At the beginning of November, a Gazprom delegation visited China National Petroleum Corporation (Beijing) to discuss arrangements for importing Russian natural gas to China and the formation of expert groups from the two companies to address participation in gas-fed chemical complexes in the Far East. A further round of talks is scheduled before the end of 2009. These talks take place as the pipeline network from Russia crosses the border into China.

In established European markets, Gazprom is giving some signals that long-term contracts could be changed at a time when European customers reportedly owe Gazprom $2.5 billion under the take-or-pay terms, with off-take gas volumes and prices pegged to the price of oil and fixed for years in advanced. This arrangement suits neither Gazprom, which wishes to retain market share, nor customers wishing to manage the economics of supply purchases.

Gazprom forecasts that that the average gas-export price in 2009 will exceed $280 per 1,000 cubic meters and that a $20 to $30 rise in price will occur in 2010.

The company sees an upward trend in gas consumption through 2020, with current domestic consumption at the same level as October 2008. Gazprom forecasts a 12.5% increase in European consumption by 2020 (reaching 700 billion cubic meters), a 6.6% increase in North America, and a 59% increase in Asian-Pacific gas consumption. This forward view mitigates the possible decrease in export revenues by 35% in 2009 to $42.5 billion, down from the record $65 billion in 2008.

Russian power utility RAO UES (Moscow) is planning to increase the export of electric power to China to 60 billion kilowatt hours (kWh) by 2020. From March through September 2009, the RAO Eastern Energy Systems exported a surplus 523 million kWh to China, with total exports for the year expected to be about 800 million kWh. New power plants and transmission networks are to be built to facilitate these exports, and mines to supply coal might also be acquired. Funding credits to back the export drive are expected to come from Russian and Chinese banks. This brings the Russian scenario back to prospects of recovery from the downturn, leading to investment in major projects and continued growth.

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