Moscow, H2 2019 Contents
Overview of the steel and iron ore market Moscow, H2 2019 Contents
Foreword 04 01 Key findings 05
Overview of the global steel and iron ore market 07 02 Production trends 08 Consumption trends 11 Prices for raw materials 13 Steel prices trends 16 Global steel trade in figures 17
Overview of the Russian steel and iron ore market 18 03 Production trends 19 Consumption trends 21 Steel exports in figures 22 Steel imports in figures 23 Key industry events 24
Development strategies in the steel industry 25 04 Investment options 26 Collective strategies 27 Corporate, competitive and functional strategies 28 Development strategies of foreign steelmaker 30 Comparative analysis of strategies of Russian and foreign steelmakers 31
Temperature check of the Russian steel and iron ore market 32 05 The current state of the steel-making industry 33 Issues, competitiveness and priority strategies 34 Digitalization and innovation in the steel industry 35
06 Contacts 37
03 Foreword
We are pleased to present the full version of our analytical The metals industry was rocked by freak events in 2019. report, prepared on the initiative of Deloitte CIS with Episodes in Brazil (Brumadinho dam disaster), Australia the support of the Center for Strategic Research Foundation. (tropical cyclone), Turkey (economic destabilization) This is our second overview of the steel and iron ore industry undoubtedly had a more significant impact on the sector this year. We have summarized the updated data for 2018, than any changes driven by global market trends. interim data for 1H 2019, and outlooks for 2020. Developments in China, India and other Asian countries We have released a comprehensive analysis in 2020 will most likely continue shaping the global of this industry every year since 2015. market in 2020. The influence of markets in Europe, Andrew Sedov Dmitriy Kasatkin North America and Japan is waning: although considerable Partner If you have any questions regarding this research, Deputy Head of the Center supply and demand remains, their sway over steel-making Leader of the Metals Group, please do not hesitate to contact us. for Socio-Economic processes in other countries is in terminal decline. Deloitte CIS Studies at the Center Key topics: for Strategic Research Russia should get a boost from the rise in investment activity by steel-making companies in 2018–2020. •• Overview of the global steel and iron ore market; Growth in production efficiency, achieved by cutting resource •• Overview of the Russian steel and iron ore market; consumption and boosting the quality of finished goods, will be sustained by demand from national projects. •• Development strategies in the steel industry;
•• Temperature check of the Russian steel industry.
04 Key findings
Global market overview Russian market overview
H1 2019: •• Russia was the sixth biggest steel producer in 2018. (year-on-year change) Growth in Chinese Russian steel Growth in global +9.9% steel production 71.7 mln tonnes production in 2018 +4.9% steel production Decline for all •• In 8M 2019, Russian companies produced 48 million tonnes of steel, other countries -0.7% a 0.4 percent drop on the same period last year.
Forecast for 2019: •• The leading Russian metallurgical companies had had EBITDA margins of between 24 and 39 percent in H1 2019. Growth in global +2.3% steel production Russian steel consumption in 2018 Driver: 41.2 mln tonnes
•• 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 Price of steel Profit margin Production 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. +1.8% Growth in global steel production •• Pipe imports shot up by 43 percent year-on-year in monetary terms and rose 86 percent in volume terms. Prices for raw materials have been falling in 2019.
Top three exporters 2018: Top three importers 2018: •• China •• USA •• Japan •• Germany •• Russia •• Italy
05 Key findings
Temperature check of the Russian steel industry
Current situation
Of steel makers have a positive outlook Technological development level 80% on the current situation in the industry 0.24* – of the metallurgical industry
Of steel makers have a positive outlook The steel industry is currently the second most digitalized sector 93% on the current standing of their companies 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).
Growth prospects Electronic document flow is the most widely-used technology among steelmakers (72 percent). Of steel makers are optimistic about 45% the growth prospects of the industry in Russia 1.0% in 2018 Average innovation Of steel makers are optimistic about and digitalization strategy 62% the growth prospects of their companies investments by steel 1.5% companies (% of revenue) in 2019–2020 Top three issues faced by steelmakers: Top three strategies of steelmakers: Steel companies focus most of their innovation efforts •• Regulatory gaps •• Expanding into new markets on acquiring advanced equipment and machinery (66 percent). •• Insufficience of production •• Implementing advanced technologies and technical capacity and innovations
•• High tax ratio •• Production upgrades and modernization
* 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)
06 Overview of the global steel and iron ore market Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Production trends
EIU experts revised their 2019 global steel output Their productivity increase of 9.9% is an outlier Figure 1. Global steel output forecast up from 1.3 percent to 2.3 percent when compared to other countries, whose to reflect the full-year statistical data released production contracted by 0.7% collectively. 1,538 1,560 1,650 1,669 1,620 1,627 1,718 1,803 1,845 1,825 1,880 by the World Steel Association (WSA). In the second half of the year, high prices for iron 7.3% 5.8% 5.6% 4.9% ore concentrate (a particularly exigent supply 2.3% 3.0% Global production rose 4.9 percent in the first 1.4% 1.2% crisis), growing uncertainty surrounding the trade half of 2019; however, growth stalled in H2, rising 0.4% war, and stricter environmental standards led -1.1% 4.6 percent year-on-year for 8M 2019, with a total -2.9% to a decrease in production growth in China. output of 1,239 million tonnes. Despite buoyant growth at the beginning The sizable gap between China and the rest of the year, the EIU is forecasting a slowdown of the world continues to grow: Chinese in annual output growth to 2.3 percent output rose 9.9 percent in H1 while production 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020* 2021* in 2019. Output is then expected to contract in the rest of the world fell by 0.7 percent. by 1.1 percent in 2020. This trend will Steel production (mln tonnes) Regionally, the contrast between China essentially act as a correction for the high Growth (%, yoy) and the rest of the world remains: by lowering growth rates seen in 2017–2019, before import duties in anticipation of a trade dispute * EIU forecast returning to around 3 percent by 2021. with the United States, Chinese metals companies achieved record productivity indicators in the first half of the year. Figure 2. Steel output, by month (mln tonnes)
164 157 158 159 156 156 151 139 155 154 156 152 152 150 148 148 151 145 147 132 July May June April March August January October February December November September
2019 2018
Source: World Steel Association, EIU
08 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Production trends
Asia Chinese production shot up 9.9 percent As a result of Chinese government stimulus in H1 2019. EIU experts expect this growth to tail measures, forecast production growth off in the second half of the year and decline for 2019 is 4 percent, falling to 2.5 percent in the fourth quarter. One third of steel in 2020 due to weak demand for steel consumption in China (excluding construction) from the construction sector and reduced is used in manufacturing, including shipbuilding, inventory as prices fall. However, the efforts the automotive sector, household appliances, of the Chinese government to support economic electronics and industrial goods. According growth and avoid a protracted slump will lead to the China Association of Automobile to renewed growth in 2021, forecast at 3 percent. Manufacturers (CAAM), car sales in China fell Production in Japan and Thailand continued by 2.8 percent to 28.1 million units in 2018 to wind down in the first half of 2019 and output dropped 4.2 percent to 27.8 million while South Korea achieved slight growth. units. This downward trend is persisting: CAAM On the other hand, the launch of new capacity reported that overall automotive manufacturing in Vietnam, Indonesia and Malaysia continues fell 13.7 percent in H1 2019, with sales declining to push up steel production in these countries. by the same figure. Total industrial production in China rose by 6 percent in H1 2019, Steel output in India rose 4.9 percent compared to 7.1 percent in the first half of 2018 in 2018, helping the country overtake Japan and hit a 17‑year low of 4.8 percent in July 2019. as the world’s second largest steel producer. It would seem that the trade war with the US has Rising exports drove the Indian steel industry hit industrial production and capital investment to 5 percent growth in H1 2019, helping in the Chinese manufacturing industry. the sector overcome weak domestic demand. Nonetheless, the government will likely be able EIU experts expect production in Asia to offset any weakness in demand with targeted to increase 3.6 percent in 2019 and decline or general stimulus, which will mitigate by 1.5 percent in 2020 as growing Chinese the severity of any slowdown. An inventory exports will again stifle local output. 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.
Source: World Steel Association, EIU
09 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Production trends
Figure 3. Steel output by region (%, 2018) Table 1. Forecast* steel production
China (51%) Europe (non-EU) (2%) 2019 2020 2021 Asia (excl. China) (19%) Middle East (2%) Global production 2.3% -1.1% 3.0% EU (9%) Africa (1%) North America (7%) Australia and New Zealand (<1%) Asia 3.6% -1.5% 3.0% CIS (6%) China 4.0% -2.5% 3.0% Latin America Asia (excl. China) 2.5% 1.5% 3.0% (excl. Mexico) (2%) EU -3.0% 0% 2.0% North America (US, Canada, Mexico) 3.0% 1.0% 2.5%
* EIU forecast
EU North America
Production volumes fell by 2.5 percent This was equivalent to around 10 percent In March 2018, the US Government slapped North American steel mills claim to have in EU countries in the first half of 2019 of quarterly rolled steel output in the EU a 25 percent tariff on all steel imports. expanded capacity by 10 million tonnes while weak demand on the market hampered and therefore had a major impact, Mexico and Canada responded with their per year. They will start operating in 2020, opportunities for steelmakers to sell especially on the spot market. Other own 25 percent tariffs on US steel. After the which will boost production. to the automotive industry. companies followed suit: US Steel left US, Canada, and Mexico signed the new USMCA EIU Experts expect output to increase around a third of its 4 million tonne capacity agreement, which replaces NAFTA. Canada and The bulk of decline was felt in the EU’s 3 percent in 2019 and are forecasting growth in Slovakia idle and the Czech Liberty Ostrava Mexico refused to ratify the deal until the issue main steel producing powerhouses (France of 1 percent in 2020. This will be followed was operating a 20 percent under full capacity. of steel tariffs has been resolved. In May 2019, and Germany) although other countries also by 2.5 percent growth in 2021. US output the USMCA signatories lifted all tariffs, resulting took a hit. In an attempt to stave off falling prices, EIU experts believe that this will lead will outpace that of the region as a whole. in an increase in steel output at existing plants. ArcelorMittal, the world’s biggest steel producer, to a 3 percent decline in steel production announced a 3 million tonne year-on-year cut in the EU in 2019 and 2020, with recovery Production increased 5.4 percent in steel production in Q3 2019 at its plants expected in 2021. year‑on‑year in H1 2019. However, demand in Spain, Poland and Italy. The steel giant then in the region was lower as output fell announced further curbs on production in Q4 in Canada, and especially Mexico. at plants across Europe, including in Germany.
Source: World Steel Association, EIU
10 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Consumption trends
According to EIU estimates, global consumption rose 1.8 percent in 2019. North America Recession in Europe, sluggish growth in the Middle East, Africa and the CIS, According to the American Iron and Steel Since the imposition by the US government and reduced demand in Asia are the main reasons behind the slowdown in growth. Institute (AISI), the US accounts for 75 percent of a 25 percent tariff on steel imports A weak automotive sector across the world and flagging capital investment, of steel consumption in North America, in mid‑2018, US companies that use steel driven down by the rise in trade tensions, are global concerns. While monetary with 43 percent of these steel products must pay at least 25 percent more for steel stimulus measures are keeping Chinese consumption up, the trade war is having consumed by the construction industry in 2018. purchases than their competitors as they a negative impact on production, which is in turn tempering growth. continue to rely on exports. This will have The large investment in infrastructure promised EIU experts forecast that faltering global trade, the end of stimulus in China, an impact on steel demand in the US from by the administration of President Trump problems with emerging market debt and the deterioration of relations between certain sectors, one example being steel is unlikely to materialize any time soon given developed economies will lead to a 0.2 percent reduction in steel demand wire products, where the protected wire the fall in budget incomes. in 2020. However, no major drop in demand is expected in the second half of 2019 rod accounts for a larger part of the final or before 2020 as a cyclical response to the strong figures from 2017–2019, suggesting Steel demand from the automotive industry, cost than the unprotected steel wire. that the decline will be small and 2021 could see a recovery of up to 3 percent. which account for 27 percent of demand The Federal Reserve System has backed in the US, will lose steam in the short-term away from expectations of a further tightening due to the use of aluminum as a replacement Figure 4. Global steel consumption of monetary policy, and has entered for steel and the development of high tensile into a cycle of loosening, starting by cutting steels, which are lighter and take up less space. 1,492 1,552 1,613 1,627 1,591 1,611 1,723 1,791 1,825 1,821 1,876 interest rates by 25 basis points in June 2019. Electric cars are a serious threat to long-term steel demand, as technological advances As a result, the EIU forecasts that steel 6.5% 6.9% and the longer service life of electric vehicles consumption in North America will rise 4.0% 3.9% 4.0% 3.0% will reduce demand for new cars. to around 2 percent in 2019, then fall 0.9% 1.3% 1.8% slightly in 2020 due to a slump in trading volumes and weak performance from -0.2% the manufacturing sector. -2.2%
2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020* 2021*
Steel consuption (mln tonnes) Growth (%, yoy)
* EIU forecast
Source: World Steel Association, EIU
11 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Consumption trends
Figure 5. Global steel consumption by region (%, 2018) Table 2. Forecast* steel consumption
China (47%) Africa (3%) 2019 2020 2021 Asia (excl. China) (21%) CIS (2%) Global consumption 1.8% -0.2% 3.0% EU (10%) Europe (non-EU) (2%) North America (8%) Australia and New Zealand (<1%) Asia 2.4% 0% 2.9% Middle East (4%) China 2.8% -1.0% 3.5% Latin America Asia (excl. China) 1.5% 1.5% 1.5% (excl. Mexico) (3%) EU -2.0% 1.0% 2.0% North America (US, Canada, Mexico) 2.0% -1.0% 3.0%
* EIU forecast
Asia
China accounts for 51 percent of global steel ship building and electronics all contributing EIU experts are forecasting that following The trade war between the US and China has demand while Asia as a whole comprises to this downturn. Demand in smaller South 4 percent growth in 2018, steel demand already had an impact on German industrial 70 percent. Consumption in these countries East Asian countries, which is largely centered in Asia will fall to 1.5 percent in 2019. production by reducing demand for high-added- is therefore of critical importance to the global on construction, will continue to accelerate. value goods. There is a risk that if the trade EU steel market. The construction sector, including Steel demand will rise by 5–10 percent dispute affects car production, an additional the infrastructure and real estate segments, in the Philippines and Vietnam. EIU experts expect the EU’s GDP growth blow will be dealt to steel consumption in the EU. is the most important driver of demand to fall to 1.2 percent in 2019 due to the issues India has one of the fastest growing steel Growth in steel demand will therefore in China, accounting for almost two-thirds still faced by the automotive sector. markets in the world. GDP growth picked contract by 2 percent in 2019, with modest of the country’s steel consumption. The introduction of new emissions testing up speed in 2018, driven by major spending rises of 1 percent and 2 percent in 2020 standards on 1 September 2018 are largely Steel demand in Asia (excluding China) rose on infrastructure and rising production. Steel and 2021 respectively. to blame for this instability, which have led 4 percent in 2018: Rapid growth in India consumption in India increased by around to discounting and the sale of second-hand and emerging Asian economies was partially 7.5 percent in 2018, leading to a decline vehicles as new cars do not yet comply offset by stagnant demand in Japan and in exports and an increase in imports. However, with the new standards. In the last quarter a slowdown in the growth of demand in South demand will be considerably weaker in 2019. of 2018 and the first quarter of 2019, European Korea and Taiwan. According to EIU estimates, Indian manufacturing grew only 2 percent car production wound down, resulting not one of Asia’s developed economies will see year-on-year in June 2019 and was well below in the cancellation of steel orders. growth in 2019, with the automotive sector, 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. Source: World Steel Association, EIU
12 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Prices for raw materials
Figure 6. Iron ore, USD/tonne, 2018–2019 Despite a rebound in August, prices for iron ore (Fe 62% CFR, Tianjin, China) shot up faster than for any other raw material 120 109 in 2019. Iron ore prices reached a six year high 99 93 91 93 in July 2019 (USD 123/tonne), Rising by almost 87 86 70 percent since the start of the year, then 76 77 76 70 69 73 72 65 66 65 64 67 69 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. July 2018 July 2019 May 2018 June 2018 May 2019 April 2018 June 2019 April 2019
March 2018 In spring 2019, a tropical cyclone also March 2019 August 2019 August 2018 January 2018 January 2019 October 2018 February 2018
February 2019 interrupted shipments from Australia, shutting December 2018 December November 2018 November September 2019 September September 2018 September down the country’s main export terminals. Reduced supply from Brazil and Australia coincided with record steel production in China. Figure 7. Iron ore, USD/tonne, consensus forecast through 2024 The balance of supply and demand has been recovering since August 2019 80 as a result of Brazil’s Vale launching 78 78 74 production and increased output in China. This has led to lower prices. 69 2021 2024 2020 2022 2023
Source: Investing.com, EIU, MetalBulletin
13 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Prices for raw materials
Figure 8. Coking coal, USD/tonne, 2018–2019 (FOB, Australia) High demand from Chinese metals companies, which showed record performance in the first half of 2019, temporarily kept 245 233 prices for premium-grade coking coal afloat. 225 217 222 226 214 208 201 203 205 However, between June-September, prices had 197 193 196 189 183 191 185 184 fallen by 30% to USD 145 per tonne. 158 The expected continuation of China’s current policy, along with decelerated growth, will lead to lower prices in the medium term, July 2018 July 2019 May 2018
June 2018 which should stabilize at around May 2019 April 2018 June 2019 April 2019 March 2018 March 2019 August 2019 August 2018 January 2018
January 2019 USD 140–160 per tonne. October 2018 February 2018 February 2019 December 2018 December November 2018 November September 2018 September
Figure 9. Coking coal, USD/tonne, consensus forecast up to 2024
166 151 143
116 117 2021 2024 2020 2022 2023
Source: The Steel Index S&P Platts, EIU, MetalBulletin
14 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Prices for raw materials
Figure 10. Ferrous scrap, USD/tonne, 2018–2019 (Steel Scrap Futures – (SSCc1)) From 1 September 2019 Russia enacted 364 372 restrictions on the export of the raw 353 351 348 348 342 331 materials, most notably, a 1.009 million 320 330 321 312 320 310 300 299 295 tonne quota was placed on ferrous 289 289 282 scrap exports outside the Eurasian 238 Economic Union (EAEU) from 1 September to 31 December 2019. July 2018 July 2019 May 2018 June 2018 May 2019 April 2018 June 2019 April 2019 March 2018 March 2019 August 2019 August 2018 January 2018 January 2019 October 2018 February 2018 February 2019 December 2018 December November 2018 November September 2019 September September 2018 September
The ferrous scrap market has been extremely US steel output fell as several companies, There is also concern about how trade Although it is true that relations between unstable this year, with sluggish steel demand including US Steel and ArcelorMittal, wars and various trade restrictions will the US and Turkey have soured somewhat driving down market prices for most of H1. cut their production in response to the affect the flow of goods and make it more recently, Turkey has been reducing its scrap According to data from Fastmarket MB, total recent fall in the profitability of hot-rolled expensive for market players to ship scrap imports from all sources, not only the US. ferrous scrap sales in the US rose 5 percent steel compared with scrap, with the price abroad. Turkey, which traditionally purchases This is because Turkish steel companies from May 2018 to May 2019 as domestic of hot‑rolled coil (HRC) continuing to fall. around 40 percent of US ferrous scrap are finding it increasingly difficult to sell rebar demand increased 9 percent and exports exports, and therefore remains the key at the prices they had planned to customers Compounding this, data from the World fell 9 percent. market for US scrap, has considerably scaled in South East Asia due to serious competition Steel Association shows that US mills have down its orders recently. Turkey has only from other countries in the Middle East Demand for scrap in the US was boosted announced plans to increase their steelmaking bought around 20 percent of US ferrous and Asia, where cheaper semi-finished by the strong and consistent performance capacity by 13.9 million tonnes by 2023 scrap exports since the start of the year, products are readily available. of Alter Trading Corp steel plant, with average compared with 2018 and virtually all this which has had a major impact on the scrap capacity utilization of around 80 percent capacity will be electric arc furnace (EAF). market, including US export prices. However, for most of this year. However, both US steel US scrap metal exports are expected this reduction has yet to be reflected production and the operational performance to fall as demand for steel, and therefore in the latest data from the US Census Bureau, of the rolling mill declined in September 2019. for ferrous scrap, will be stifled which reported a 3.3 percent increase by the global economic slowdown. in US scrap exports to Turkey in 7M 2019.
Source: Investing.com, The Steel Index S&P Platts, Metal Market
15 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Steel prices trends
Figure 11. Prices for hot-rolled steel, USD/tonne, 2018–2019 As China remains the world’s biggest exporter, (CIS exports, FOB Black Sea) its prices set the level for most of the global market. At the beginning of the year hot‑rolled 615 586 598 products were selling at USD 475/tonne 574 568 566 564 553 538 526 518 FOB. Prices recovered by more than USD 50 496 499 487 475 481 489 476 466 452 to USD 525/tonne FOB after Chinese New Year 434 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 July 2018 July 2019 May 2018
June 2018 by a more dramatic drop in July and August May 2019 April 2018 June 2019 April 2019 March 2018 March 2019 August 2019 August 2018 January 2018
January 2019 to the current level of USD 460/tonne FOB. October 2018 February 2018 February 2019 December 2018 December November 2018 November September 2019 September September 2018 September 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.
Source: EIU, MetalBulletin
16 Overview of the steel and iron ore market | Overview of the global steel and iron ore market
Global steel trade in figures
The 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.
Table 4. Table 3. International trade Table 5. Top 20 steel exporters (2018, million tonnes) Top 20 steel importers (2018, million tonnes) Импорт (2018, million tonnes) million tonnes million tonnes 1 China 68.8 1 EU (1) 44.9 2 Japan 35.8 2 US 31.7 3 Russia 33.3 3 Germany (2) 26.6 4 South Korea 30.1 4 Italy (2) 20.6 5 EU (1) 28.4 5 Thailand 15.5 6 Germany (2) 26.0 6 South Korea 14.9
7 Turkey 19.9 EU Europe (excl. EU) CIS North America America, other Africa and the Middle East China Japan Asia (excl. China) Oceania imports Total Non-regional imports 7 France (2) 14.9 8 Italy (2) 18.2 EU 118.5 11.4 15.4 0.6 2.1 1.5 4 0.2 9.4 0.2 163.3 44.9 8 Belgium (2) 14 .8. 9 Belgium (2) 18.0 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 9 China 14 .4. 10 Ukraine 15.1 10 Vietnam 14.1 CIS 1.3 0.4 9.2 0 0 1.7 2 0.1 0.5 0 15.1 5.9 11 France (2) 14.4 11 Turkey 14.0 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 12 Brazil 13.9 12 Mexico 13.1 13 Taiwan 12.3 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 13 Poland (2) 12.1
14 India 11.1 Экспорт Africa 3.9 2.6 5.8 0.1 0.1 3.2 5.9 0.8 1.2 0 23.6 20.4 14 Indonesia 11.7 15 Netherlands (2) 11.0 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 15 Spain (2) 10.8 16 Iran 9.3 16 Netherlands (2) 10.3 China 1.5 0 0.1 0.1 0.1 0.1 - 5.4 7.1 0 14.4 14.4 17 Spain (2) 8.6 17 Canada 9.1 18 USA 8.6 Japan 0.1 0 0 0 0 0 1 - 4.8 0 5.9 5.9 18 Philippines 9.1 19 Austria (2) 7.5 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 19 India 9.0 20 Canada 6.4 Oceania 0.3 0.2 0 0 0 0 0.9 0.2 1.7 0.2 3.5 3.2 20 Malaysia 8.0 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 (1) excluding intra-European trade Non-regional exports 28.4 23 43.5 3.8 11.3 12.9 68.8 35.8 38.6 1 267.1 (2) including intra-European trade 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
17 Overview of the Russian steel and iron ore market Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market
Production trends
Russia was the sixth biggest steel producer in 2018; it fell one place and Figure 12. Metal products shipped was overtaken by South Korea. Annual Russian steel output totaled 71.7 million (RUB billion) tonnes, a slight increase on the previous year (+0.2 million t tonnes). 545 535 In January-August 2018, Russian companies produced 48.3 million tonnes 512 512 495 494 of steel, 0.4 percent less than in the same period last year. July and August 528 458 515 527 519 520 504 were not the best months for Russian steel producers. According 436 496 480 477 478 to WSA estimates, Russian steel production fell 4.0 percent year-on-year to 6.0 and 5.9 million tonnes respectively. 419 422
The Russian Economic Development Ministry estimates that GDP growth July May June April was 1.6 percent in August (1.8 percent in July). GDP rose 1.1 percent March August January October February
year‑on‑year in January-August. A slight increase in industrial production December November September in August to 2.9 percent year-on-year (from 2.8 percent in July) gave 2019 2018 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). Figure 13. Russian steel production in 2018–2019 Manufacturing growth was 2.7 percent year-on-year in August 6,335 (following 2.8 percent year-on-year in July). Seasonality hurt the manufacturing 6,217 6,293 6,251 6,110 6,115 6,147 6,180 sector in August: there was one less working day this year (while July 6,066 6,029 6,099 6,046 6,046 5,900 5,812 5,883 5,738 5,846 had one more working day). Seasonally adjusted growth is estimated 6% 5,786 5% 4% at 3.4 percent year‑on-year (compared to 2.1 percent year-on-year in July). 5,473 3% 3% Median manufacturing growth, which also felt the effects of seasonality, 2% 1% 4% 3% 0% 0% -2% -1% -3% -1% 0% was 3.0 percent year‑on‑year in August following a near zero figure -2% -4% -4% -4% 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 July 2018 July 2019 May 2018 June 2018 May 2019 April 2018 June 2019 April 2019
by 4.6 percent compared to the same period in 2018 (in current prices). March 2018 March 2019 August 2019 August 2018 January 2018 January 2019 October 2018 February 2018 February 2019 December 2018 December November 2018 November September 2018 September Steel production (‘000 tonnes) Growth (%, yoy)
Source: World Steel Association, Rosstat, the Russian Ministry of Economic Development “On industrial production. September 2019
19 Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market
Production trends
Table 6. Financial performance of the top Russian steelmakers Figure 14. Steel output by the top steelmakers, 2017/2016 (‘000 tonnes)
Revenue, USD million EBITDA, USD million Margin (%) 1H 2019 8,594 8,594 H1 2019 H1 2018 H1 2019 H1 2018 H1 2019 H1 2018 8,175 1H 2018 6,994 EVRAZ 6,140 6,343 1,482 1,906 24% 30% 6,832 6,176 6,198 6,304 6,101 NLMK 5,666 5,906 1,430 1,727 25% 29% Severstal 4,208 4,432 1,416 1,580 34% 36% 2,496 2,430 2,051 2,051 MMK 3,835 4,161 937 1,210 24% 29% 1,861 Metalloinvest 3,584 3,779 1,410 1,491 39% 39% Mechel 2,353 2,639 466 696 20% 26% NLMK EVRAZ Severstal MMK Metalloinvest Mechel
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.
Metalloinvest develops rolled steel production Severstal increases sales of new products five-fold in H1 EVRAZ will use solar power to produce green steel capabilities at OEMK Severstal, one of the world’s leading vertically integrated EVRAZ North America, energy trader Xcel Energy and solar Metalloinvest, a leading global producer and supplier of iron steel and mining companies, sold 192,000 tonnes of new power company Lightsource BP have reached a long-term ore and hot-rolled steel, has commissioned a new reduction products in H1 2019 as part of its Product Innovation project. agreement to develop a new 240-megawatt solar facility in Pueblo. and calibration unit at OEMK. The reduction and calibration Agile business principles and work in scrum teams radically This innovative agreement makes possible EVRAZ North America’s unit can produce hot-calibrated rolled steel products reduced the time needed to develop new products, with 67 planned long-term investment in its new rail mill at EVRAZ Pueblo. at temperatures starting from 950 degrees Celsius. such products currently in the active stage of development. Lightsource BP and project investors on its side will For example, TEMPO produced its first batch of a linear pipe Investments in the project totaled more than RUB 600 million. invest an estimated USD 250 million into the solar facility. from an innovative corrosion-resistant steel grade Severkor, The electricity generated will be sold to Xcel Energy which is also used in field development by Gazpromneft. under a long‑term power purchase agreement.
The project is expected to go online by the end of 2021.
Source: company data
20 Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market
Consumption trends
Figure 15. Russian Purchasing Managers Index (PMI), 2018–2019 World Steel Association figures show that Russian steel consumption 52.8 52.1 52.6 51.7 51.8 was 41.2 million tonnes in 2018 51.3 51.3 50.9 (+0.7 percent compared to 2017). 49.8 Output from the Russian steel segment 50.6 49.5 49.3 50.2 50.0 49.8 50.1 rose 2.6 percent in H1 2019, higher than 48.9 the average for the manufacturing sector. 48.6 48.1 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). July 2019 July 2018 May 2019 May 2018 June 2019 June 2018 April 2019 April 2018 March 2019 March 2018 August 2018 January 2019 January 2018 Steel demand is continuing to rise in Russia, October 2018 February 2019 February 2018 December 2018 December November 2018 November September 2018 September mainly driven by domestic consumption of rolled steel. The World Steel Association forecasts that consumption of ferrous Figure 16. Consumption of finished steel products since 2011 (million tonnes) metal products will grow 1.0 percent in 2019 and 1.5 percent in 2020. Experts from Severstal 43.3 think that a significant proportion of rising 42.8 43.1 42.2 41.6 demand in H1 2019 was fueled by an increase 41.5 41.2 40.9 in construction activity in anticipation 39.8 of changes to laws governing escrow 38.7 accounts (Severstal is forecast a 4 percent increase in demand in 2019). 2011 2012 2013 2017 2015 2014 2016 2018 2019* 2020*
* World Steel Association forecast ** Purcharsing Managers Index (PMI) is an indicator characterizing economic trend in the manufacturing sector.
Source: Markit Economics, metalinfo
21 Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market
Steel exports in figures
In monetary terms, rolled steel exports fell 23 percent year-on-year in H1 2019 Steel pipe exports plummeted 51 percent year-on-year in the first to USD 1,944 billion and decreased 17 percent in volume terms to 3,442 million tonnes. half of 2019 in both monetary to USD 827 million and rose 39 percent Reduced exports to Turkey (down 38 percent in monetary terms) physical terms to 910,000 tonnes respectively. The slump was mainly was primarily responsible for this downturn. 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 17. Exports of flat-rolled products by quarter Figure 18. Exports of tube products by quarter
885 2,222 2,025 2,203 798 1,902 1,737 1,705 Weight (‘000 tonnes) Weight (‘000 tonnes) 496 446 477 Value (USD mln) 734 761 351 Value (USD mln) 1,150 1,368 1,246 1,269 971 973 514 469 404 506
Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2
2018 2019 2018 2019
Table 7. Exports of flat-rolled products Table 8. Exports of tube products
Value (USD mln) Weight (‘000 tonnes) Value (USD mln) Weight (‘000 tonnes) 1H 2019 1H 2019 1H 2018 1H 2018 1H 2019 1H 2019 1H 2018 1H 2018
Turkey 435 702 905 1,207 Kazakhstan 261 193 278 207 Uzbekistan 207 114 290 150 US 155 86 169 99 Belarus 192 212 283 301 Belarus 102 115 120 120 Poland 171 169 308 300 Serbia 53 3 41 3 Latvia 148 131 243 208 Uzbekistan 41 55 38 45 Kazakhstan 122 136 182 190 Azerbaijan 36 34 44 41 Ukraine 86 76 149 112 Ukraine 22 21 25 21 Vietnam 62 112 127 209 Kyrgyzstan 18 19 28 25 Italy 55 83 116 146 Poland 13 16 17 21 Germany 53 80 91 123 India 12 14 1 2
Flat-rolled products: HS 7208, 7209, 7210, 7211, 7212; tube products: HS 7303, 7304, 7305, 7306 Source: Russian Federal Customs Service
22 Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market
Steel imports in figures
In monetary terms, rolled steel imports remained unchanged Pipe imports shot up by 43 percent year-on-year in monetary terms to USD 671 million year-on-year in H1 2019 at USD 1,059 billion but rose 8 percent and rose 86 percent in volume terms to 491,000 tonnes. The considerable increase in volume terms to 1,573 million tonnes. 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 19. Imports of flat-rolled products by quarter Figure 20. Imports of tube products by quarter
1,005 408 853 807 344 600 Weight (‘000 tonnes) Weight (‘000 tonnes) 592 568 234 235 249 263 Value (USD mln) 344 Value (USD mln) 626 676 432 581 400 384 172 134 129 139 148
Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2
2018 2019 2018 2019
Table 9. Imports of flat-rolled products by country of origin Table 10. Imports of tube products by country of origin
Value (USD mln) Weight (‘000 tonnes) Value (USD mln) Weight (‘000 tonnes) 1H 2019 1H 2019 1H 2018 1H 2018 1H 2019 1H 2019 1H 2018 1H 2018
Kazakhstan 376 495 635 766 China 172 101 79 44 Ukraine 264 190 483 322 Finland 150 3 202 1 China 181 131 240 153 Kazakhstan 89 88 90 78 South Korea 83 76 84 71 Belarus 34 32 37 35 Germany 47 44 41 34 South Korea 33 9 15 2 Belgium 31 27 29 25 Japan 28 26 11 12 Hungary 14 15 10 10 Ukraine 26 52 12 38 Finland 13 14 10 12 Germany 26 21 4 5 France 11 12 10 10 Italy 25 34 8 9 Slovakia 9 7 8 6 Austria 15 19 11 10
Flat-rolled products: HS 7208, 7209, 7210, 7211, 7212; tube products: HS 7303, 7304, 7305, 7306 Source: Russian Federal Customs Service
23 Overview of the steel and iron ore market | Overview of the Russian steel and iron ore market
Key industry events
Severstal announces sale of Mini-Mill EVRAZ develops rails that meet Korean Delivering Severstal products to Evraz Severstal to build third bar-rolling mill Balakovo standards along with new rolled product warehouses will reduce logistics costs Severstal will build bar-rolling mill PAO Severstal has closed a deal worth EVRAZ West Siberian Metallurgical Plant (ZSMK) and delivery time, a key goal of the No. 3 at Cherepovets Steel Mill. USD 215 million to sell Mini-Mill Balakovo has developed a new type of rail for subway company’s new strategy. In turn, Evraz Metal The new mill will help the company develop new to Abinsk Electric Steel Works. systems that meets Korean standards. Inprom can boost its own online sales products to meet the needs of the construction while developing similar projects with other The sale of Mini-Mill Balakovo will enable EVRAZ ZSMK specialists designed a new, and extractive industries, thereby expanding manufacturers: the trader plans to grow the site Severstal to focus on developing steel innovative roll-dressing technique and rail the potential markets for grinding ball sales. into a marketplace for large manufacturers. production at its main asset, Cherepovets straightening/tempering technology for this The grinding ball unit will manufacture products Steel Mill and streamline its internal product. The EVRAZ Nizhniy Tagil Integrated with a diameter of 60–100 mm and produce processes to execute the Company’s Metallurgical Plant (NTMK) has produced its first Metalloinvest launches Fine Screening 70,000 tonnes of grinding balls per year. updated strategic priorities successfully. batch of hot-rolled steel rods (diameter 95 mm). Technology at Mikhailovsky GOK Total investment will total RUB 840 billion. The rods can be used by various industries: Metalloinvest has launched Derrick Fine Despite the sale, Severstal will maintain The unit is slated for launch in H2 2020. mechanical engineering, construction and pipe Screening Technology at Mikhailovsky GOK a presence on the long products market manufacturing. The heavy mill department to improve the quality of iron ore concentrate. through its long product facilities at CherMK. is also now working on producing rods During the first stage of the project, with a diameter of 125 mm. the screening technology was Zagorsk Pipe Plant to start production introduced at four technological sections of seamless pipes with VTB funding Evraz and Severstal team of the benefication plant. The budget The Zagorsk Pipe Plant (ZTZ) will build a new up for online trading for the first stage was over RUB 1.2 billion. facility for the production of seamless pipes The two companies collaborated to create As a result of the first stage of implementation, in for RUB 35 billion. Its expected capacity Online Storefront, a new trading platform 2020, over 3.7 million tonnes of iron concentrate is 400,000–450,000 tonnes of pipes per year, for joint sales. The purpose of the project will be produced at the fine screening which should be attained by 2022. is to expand the geographical range of sales technology section with an increased iron level using Evraz warehouse infrastructure. of 67% (up from 65.1%). Evraz Metal Inprom is a metals trader The second stage of the project, launched with a network of 48 offices throughout in August 2019, will see construction Russia, while the Severstal distribution of a new building for the beneficiation network has only 26. With the help of Online of concentrate. Following the second Storefront, Severstal customers can now stage, the company expects to produce buy hot-rolled sheet from Evraz warehouses 16.9 million tonnes of high-quality concentrate in Tula, where Severstal has none. with an iron content of 68.7% in 2022.
Source: Corporate press-releases
24 Development strategies in the steel industry Overview of the steel and iron ore market | Development strategies in the steel industry
Investment options
Investment in Russian or foreign assets: Develop steel-making capacity or diversification: Creation of in-house R&D pipelines or acquisition of turn‑key technology solutions: •• Leading Russian steelmakers have both core and non-core •• NLMK Group has production assets in Russia, assets. Mechel sells and leases its non-core real estate •• On the one hand, Russian steelmakers have their own the US, Belgium, Denmark, Italy and France. assets. MMK Group has a sanatorium, a vacation retreat R&D structures and design divisions: •• EVRAZ owns assets in Russia, the US, Canada, and other resort infrastructure, incorporated as MMK-Kurort. ––Severstal has KO VNIIMETMASH (a design and development the Czech Republic, Italy and Kazakhstan. Aviapredpriyatiye Severstal LLC is the operator of Cherepovets company for rolling mills and equipment), Sevestal‑Proekt Airport and operates domestic and international flights. (Severstal’s chief designer), SPB‑Giproshakht •• Severstal has its core assets in Russia and a small Metalloinvestleasing, a subsidiary of Metalloinvest, leases LLC (a design and development company number of enterprises abroad. technical equipment, custom machinery, transportation for the comprehensive design of mining facilities). •• MMK Metalürji San.Tic. ve Liman İşletmeciliği A.Ş., and railway wagons to companies in various industries. ––Metalloinvest has GIPROMEZ LLC (City Institution MMK Group’s investment project in Turkey, for Designing Metallurgical Plants, which main activities has production sites in industrial zones in Dortyol Investment in raw materials, basic or final processes include rendering engineering and consulting services (Iskenderun) and Gebze (Istanbul). of the industry value chain: for metallurgical production, developing and implementing reconstruction projects, technical revamps •• Metalloinvest operates mining and steel-making segments •• The majority of leading steelmakers are vertically integrated. and the construction of the new industrial facilities). with assets in Russia. • Vertically integrated companies are built on large steel mills ––NLMK-Engineering is one of the largest design institutes •• Mechel’s steel segment includes assets in Russia, that manufacture basic types of metal products. in the Russian steel sector. The company designs facilities Ukraine and Lithuania. for the metallurgical, energy, mechanical engineering •• They invest in developing the production of feedstock (iron ore, and transport sectors. •• TMK has three divisions: Russian (six plants HBI, coal, coke and scrap), transportation and logistics, service ––On the other hand, 58.5 percent of the Russian steel in Russia and one in Kazakhstan), American and sales assets and the production of downstream products. sector’s spending on technological innovation goes (12 plants in the US and Canada) and European on purchasing machinery and equipment, with only (two plants in Romania and sales units). 14.1 percent spent on R&D and 12.9 percent on engineering. •• 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.
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 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 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 Association of joint projects and promote common interest in government and in the business community of Russia and other countries. (founded in 2001) 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 The Foundation’s founding members are the Volzhsky, Seversky, The Foundation was set up to promote and defend the interests of pipe producers on the Russian, EAEU and international markets. for Development Sinarsky and Almetyevsk pipe plants, the Taganrog and Vyksa steel The Foundation includes working groups covering the following areas: Trade protection measures; PR; technical regulation; of Tube Industry plants, Chelyabinsk Pipe Rolling Plant and Pervouralsk New Pipe Plant, limiting the use of used pipes; logistics and rail tariffs; purchases from state-owned companies; research cooperation. (founded in 1999) which are part of the holdings: TMK, OMK and ChelPipe Group
Prommetiz Association AESW, Bekaert Wire, BelZAN, EvrazHolding, Beloretsk Iron and Steel Works, Goals: of Manufacturers Vyartsilya Metal Products Plant, VMZ, Kamskaya Kuznitsa, Catter Group, •• Metalware information center: a one-stop source of information for federal agencies about the state and prospects of the metalware of Metal Products Lepse, Metroprom-Ural, MMK-METIZ, Parallel, PromStroyInvest, Rechickij segment (monthly operational data on sales by product type and company, staff numbers and average salaries for each company, (founded in 1996) Metiznyj Zavod, Severstal-Metiz, SMS export and import reports); •• Аdvocacy for companies in the industry (formation of protective measures, standardization policies and technical regulations).
Russian Union of Metal 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. and Steel Suppliers Objectives: (founded in 1997, •• represent and protect the interests of Union members domestically and abroad, coordinate their activities, resolve complex issues; renamed in 2005) •• 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 Overview of the steel and iron ore market | Development strategies in the steel industry
Corporate, competitive and functional strategies
Company Corporate strategy Competitive strategy Functional Strategies
NLMK Group Strategy 2022 is a balanced strategy that combines investment •• Global leadership in operational efficiency •• Key activities: Debottlenecking steelmaking operations, minimization in growth projects with financial stability and a highly competitive and the cash cost of steel production. of environmental footprint dividend policy. • Target EBITDA gain of USD 0.5 billion per year •• Finances: Financial stability, maximizing stakeholder value Horizontal integration: Growth of steel output at NLMK Lipetsk • (in 2023 compared to 2018). •• Marketing: Growth of steel product sales to 18 million tonnes per year site by 1 million tonnes to 14.2 million tonnes per year. Vertical integration: •• HR: High level of personnel motivation and engagement, reduction of the injury rate to LTIFR 0.5. •• 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%.
EVRAZ EVRAZ’s strategy vision is to be a global steel and mining company •• low-cost production across the value chain; •• R&D and key activities: Application of new technologies and cost efficiency and the leading producer of infrastructure steel products with low- self-sufficiency (79% for iron ore and 239% •• Corporate governance: A culture of continuous improvement to ensure cost production across the value chain. for coal). long‑term competitiveness EVRAZ’s strategy is based on five key success factors, • Focus on infrastructure steel products (rails, •• Finances: Debt management, stable dividends and prudent capex which are crucial in achieving our corporate vision: • beams and construction steel productions) •• Health, safety and environment •• Marketing: Respond to the evolving needs of customers, create new products •• Human capital and solutions that unlock additional value •• Customer focus •• Human Capital: Level of personnel engagement is in line with industry leaders, •• Asset development safe work (LTIFR ≤ 1.0х) •• EVRAZ’s business system
Metalloinvest Metalloinvest’s development strategy focuses on strengthening the •• Boost operational efficiency (low production •• R&D Introduce energy-efficient technologies Company’s position as one of the world’s leading producers of high costs for pellets and HBI/DRI*) •• Key activities: Produce the highest quality iron ore products in Russia added value iron ore products. •• Focus on HBI production (maintain •• Corporate governance: Continuously improve corporate governance, promptly respond the Company’s position as a leading global to changes in the internal and external environments, conclude long-term partnership producer of HBI) 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)
28 Overview of the steel and iron ore market | Development strategies in the steel industry
Corporate, competitive and functional strategies
Company Corporate strategy Competitive strategy Functional Strategies
Mechel Mechel’s strategy aims to improve the company’s financial results, •• Mining segment: Focus on the production •• Key activities: Ensure low production and transportation costs increase its shareholder value and decrease its debt portfolio. of metallurgical coal. •• Finances: Improve financial performance, increase shareholder value, reduce debt burden Elements of the strategy: •• Metals segment: Focus on the production •• Marketing: Develop the service and sales network, maintain a leading position •• Consolidate the company’s leadership in the production of long products. on the metal products market in Russia and the CIS. 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.
MMK Strategy 2025 Strategic goal: to become a leader •• Strengthen position on priority markets •• Key activities: Implement lean production, punctual delivery, improve material among global metal companies with comparable (the Russian automotive industry). flow accounts, minimize stocks. production volumes and shareholder value. Increase the share of domestic sales •• Corporate governance: Simplify the Group’s structure, increasing transparency in the sales structure to 84 percent by 2025. Strategic initiatives portfolio: and manageability. Roll out Big Data systems (comprehensive modeling and mathematic optimization of key processes). •• strengthen position on priority markets; •• Increase operational and functional •• increase operational and functional efficiency; efficiency (to decrease the cost •• Finances: Increase attractiveness for investors. Adhere to specialization criteria, •• increase attractiveness for investors; of sales by 2–3% per year). cost recovery and liquidity when implementing projects. Continue a conservative •• safe operations; financial policy and focus on regular value creation for its shareholders. •• professional personnel development; •• Marketing: Punctual delivery, remain the number one supplier for automotive industry •• social strategy. 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 •• Differentiation: Enhance product quality, •• R&D Support Defensive Growth by developing Big Data, Internet of Things and predictive quality rather than increasing production. create added value by boosting efficiency maintenance. Develop and nurture digital projects that have the potential to become and monitoring costs. independent businesses.
•• Reduce production costs for core products •• Key activities: Modernize facilities at Cherepovets to expand product mix by at least 10 percent. •• 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
29 Overview of the steel and iron ore market | Development strategies in the steel industry
Development strategies of foreign steelmaker
Company Global ranking Steel production Share of global steel Strategy in 2018, mln tonnes production in 2018, %
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 2 67.43 3.73 Strategic vision: to be the world’s leading steel company and a world-class business conglomerate. Steel Group Strategy: develop iron and steel production as the company’s core activities and coordinate the development Corporation Limited of interrelated types of operation.
Nippon Steel 3 49.22 2.72 Strategic priorities: Corporation •• 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).
Source: WSA, company websites (baowugroup.com, corporate.arcelormittal.com, nipponsteel.com, hbisco.com, posco.com)
30 Overview of the steel and iron ore market | Development strategies in the steel industry
Comparative analysis of strategies of Russian and foreign steelmakers
Differences and similarities •• Ensuring safe working conditions Foreign steel-makers Russian steelmakers (reduce industrial injuries and workplace fatalities); •• Reducing environmental impact; •• Reducing costs (increase Improving steel production, resolving business operational efficiency); Achieving national economic goals problems, developing the domestic market: and global expansion: •• Ensuring financial stability, • Increasing self-sufficiency in key raw materials • Integrating sustainability goals into the business; • reducing debt burden; • and energy; •• Contributing to national industrial development •• Developing products • Modernizing process units, IT infrastructure (e.g. Chinese, South Korean and Indian companies). • with high added value. and management systems; •• Supporting the implementation •• Expanding the product mix, boosting the quality of national social and economic development plans of steel products; (e.g. Chinese and Iranian state‑owned companies); •• Developing sales and service networks, improving •• Using innovative technologies to drive economic growth; customer service; •• Achieving aggressive growth and extensive •• Strengthening positions in priority segments expansion on foreign markets, building on the domestic market; global production and processing platforms •• Increasing employee motivation and engagement; (Chinese, Indian and Japanese companies); •• Increasing attractiveness for investors; •• Concluding strategic partnerships with foreign steelmakers; •• Maximizing returns for shareholders (consistently high dividends). •• Developing non-core businesses (Chinese and Indian conglomerates) •• Boosting business continuity during periods of weak steel demand.
Sources: company websites
31 Temperature check of the Russian steel and iron ore market 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 industry
In 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 Figure 22. Pulse survey of company and industry growth prospects
Situation in the industry Situation in their company Growth prospects for the industry Growth prospects for their company
55% 48% +13 p.p. 50% +10 p.p. 38% 59% 38% +8 p.p. +12 p.p. 38% 20%
17% 12% 14% 7% 38% Positive The situation will probably improve 33% 13% 7% 4% 7% 29% 4% 21% Quite positive 4% 3% The situation will definitely improve Quite negative The situation will probably get worse 46% 45% 7% 42% 17% 13% Negative The situation will definitely get worse 29% 31% 3% 4% The situation will not change much 4% 2019 2019 2019 2019 2018 2018 2018 2018
The majority of respondents (80 percent) have positive opinions about Almost two thirds of those surveyed in the steel industry (62 percent) the current state of affairs in the industry, while 93 percent are optimistic were positive about the growth prospects for their companies. about the standing of their companies. The share of respondents optimistic Notably, this figure is up on last year (by 12 p.p.). about the industry increased by 13 p.p. compared to last year. The share of respondents optimistic about the growth prospects Respondents from steel companies were more optimistic the about of the Russian steel industry rose by 8 p.p. (45 percent). current situation in their industry than that of the manufacturing sector Another 45 percent said that the situation will not change much. as a whole (9 p.p. above the average). The remaining 10 percent see the industry situation getting worse.
33 Overview of the steel and iron ore market | Temperature check of the Russian steel and iron ore market
Issues, competitiveness and priority strategies
Figure 23. Top four drivers of global competitiveness Figure 25. Top three issues faced by metallurgical companies for the Russian steel industry Gaps in government regulation of the industry (administrative, trade, economic and other barriers) 25% Government support 30% Insufficience of production and technical capacity Lower geopolitical risks 26% 18% Lower customs duties for imported raw High tax ratio materials and components 23% 17% Cost of Raw Materials 23% Gaps in government regulation of the industry was named the top problem faced by the Russian steel industry this year (25 percent). Insufficience Figure 24. Top four drivers of competitiveness of production and technical capacity (18 percent) and high tax ratio for companies on the Russian market (17 percent) also made it into the top three this year. Improved manufacturing capacity (launching 30% new facilties) 30% Stronger demand in Russia Figure 26. Top five priority development strategies for companies in 2019 Stronger demand on foreign markets 15% Expanding into new markets 76% Vertical integration 15% Implementing advanced technologies and innovations 69% Production upgrades and modernization Experts named government financing and subsidies as the main driver of global 66% Improving manufacturing capacity (launching new facilities, competitiveness this year while improved manufacturing capacity and strong 62% demand in Russia were cited as the key drivers on the domestic market. increasing production) Import substitution on the Russian market 45%
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).
34 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 27. Level of maturity by complexity Figure 28. Level of maturity by complexity of technology implemented* of technology to be implemented*
Technology, media and telecommunications (TMT) 0.35 Steel industry 0.46
Steel industry 0.24 Transportation 0.31
Financial services 0.17 Construction and E&R (Energy and Resources) 0.24 Construction and E&R (Energy and Resources) 0.16 Technology, media and telecommunications (TMT) 0.20
Retail 0.15 Retail 0.20
Transportation 0.10 Financial services 0.17
Life sciences and health care (LSHC) 0.08 Life sciences and health care (LSHC) 0.08
Figure 29. Advanced technology implementation Neither implemented Implemented Planning to implement nor planning to implement Electronic document management (EDM) 72% 21% 7% The metals industry is currently
Energy saving technologies 48% 52% 0% the second most digitalized sector in Russia, behind the TMT sector (the level Advanced ERP systems (CRM, SAP, etc.) 45% 28% 27% of innovation** of the metallurgical industry Full automation of selected business processes 38% 48% 14% of 0.24, the average level of innovation Eco technologies 35% 48% 17% in Russia of 0.17).
Video analytics and computer vision 24% 52% 24% Electronic document flow is the most Alternative energy sources 24% 41% 35% widely‑used technology among steelmaking Internet of Things (machine-to-machine 24% 35% 41% companies (72 percent). communication, IoT technologies, sensors) Smart manufacturing 21% 72% 7% The most commonly planned technologies
Full automation of business process chain 21% 62% 17% are smart manufacturing and automation of business processes (72 percent Big Data 21% 45% 34% and 62 percent respectively). Blockchain (distributed encrypted ledger technology) 21% 34% 45% Augmented/virtual reality technologies RPA 17% 52% 31% are the least sought‑after for both Artificial intelligence 14% 48% 38% the steel industry and the Russian Augmented/ virtual reality 10% 31% 59% manufacturing sector as a whole.
* 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)
35 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
1.0% in 2018 Average innovation and digitalization strategy investments by steel 1.5% companies (% of revenue) in 2019–2020
Figure 30. Innovation
66% 69% Acquisition of advanced equipment and machinery Steel companies focus most of their innovation 52% 62% Staff training and development efforts on acquiring advanced equipment and 52% 45% Technology acquisition machinery (66 percent). Moreover, 62 percent 28% 52% R&D are planning to conduct staff training 24% 38% Market research and analysis and development more regularly in 2019–2020. 21% 24% Acquisition of rights to patents, licenses, etc. 17% 20% Business process digitalization
Implemented by the end of 2018 Planning to implement in 2019–2020
36 Contacts
Andrew Sedov Kamila Zhalilova Ekaterina Trofimova Partner, CIS Energy & Resources Leader, CIS Financial Services Leader of the Metals Group, Deloitte CIS Industry Leader, Deloitte CIS [email protected] Head of the credit risk, [email protected] rating advisory and corporate governance practice, Deloitte CIS [email protected]
Alexander Sinitsyn Lora Nakoryakova President, Center for Strategic Head of the Center Research Foundation for Socio‑Economic Research [email protected] at the Center for Strategic Research Foundation [email protected]
Dmitriy Kasatkin Victoria Pigalkina Deputy Head of the Center Analyst, Center for Strategic for Socio-Economic Research Research Foundation at the Center for Strategic [email protected] Research Foundation [email protected]
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