China may give opportunity to Ukrainian steel makers

The projected increase in procurement prices of iron ore for Chinese steel makers will be favorable for Ukrainian steel makers.

According Steelguru, Vale, Rio Tinto and BHP Billiton, the world's leading exporters of ore, reachred agreement with Japanese steel company Nippon Steel and Sumitomo Metal Industries regarding 90% increase in price for iron ore to $ 100-110 per ton at the II quarter of 2010, with subsequent quarterly review.

Chinese steel makers consume about 75% of total world iron ore traded. Syncom Capital investment company forecasts that if they are “convinced” in a similar price increase for iron ore, then China may become netto-impoter of steel in next months, especially considering substantial increase in prices for coke for China.

This created possibilities for Ukrainian steel producers to increase their market share in world steel market.

Steel and chemical industry get subsidized electricity

National Electricity Regulation Committee decided to leave the electricity prices for chemical and steel industry intact at least till March 2010. Electricity prices remain stable for these industries since October 2008. Currently, depending on volume of consumption these industries pay UAH 0.4221 per kWt/h or UAH 0.5624 per kWt/h.

Despite promises to reform its energy sector and increase tariffs to cost-covering levels the practices of cross-subsidization in the energy sector persist in Ukraine.

Steelmakers keep losses low

Ukrainian steelmakers' 2009 preliminary net loss reached UAH 5bln (USD 600mln), down from the 2008 net income of UAH 17bln (approx. USD 3bln), according to Vasiliy Kharahulah, CEO of the Metallurgprom Association. We consider this a comparatively good result, taking to account the fact that 2009 sales dramaticall dropped (almost by 37%).

According to opinion of Astrum investment company, the drop of rolled steel output by 16% and rolled steel prices by 24% (in hryvnia terms) will result in a 36% drop of Ukrainian steelmakers’ net sales in 2009. Expert expect Azovstal, ArcelorMittal Kryvyi Rih and Mariupol Illich will be the only profitable steelmakers in 2009 in terms of net income.

In 2010, growth is predicted: net sales should grow by 39%, driven by output growth by 11% and prices growth of 25%. The 2010 net income margin should be 4%-6% on average.

We would like to outline that it is sharp devaluation of grivna gave a nice chance to steelmakers to increase their profitability and keep the losses low. Ukrainian currency lost almost 40% of its value since the beginning of financial crisis, softening the effect global downturn on local exporters.

Steelmakers are number one Ukraine’s exporting sector, traditionally accounting for about 40% export sales. This is compatible to share of oil in Russia’s exports.

Steel demand ready to rebound?

Recently many signs point to a chance of a recovery in the steel industry. Chinese demand drives iron ore prices upwards, however, there are reservations wrt to sustainability of this demand. Capacity utilization in steel industry grew in 2009 compared to 2008 and steel production shows an upward trend in the recent months according to World Steel Association (see graph below).