During the current time of global crisis, which has created a huge imbalance between supply and demand in the steel industry, CIS steel producers have also begun to draw up plans with specific measures geared towards coping with the consequences of the crisis. The weakening pricing environment has forced CIS steelmakers to reschedule their maintenance works, to cut product output, to shut down blast furnaces, and to suspend their investment programs in order to free up cash.
The Russian steelmaker Magnitogorsk Iron and Steel Works (MMK) was the first CIS producer to announce a decision to cut its monthly production output, decreasing it by 15 percent from around one million mt to 850,000-900,000 mt. Currently the company is implementing an anti-crisis program for the fourth quarter aimed at centralizing purchases, optimizing raw material stocks, reviewing terms and volumes of sales, suspending most of its investment projects, and reducing its capital spending by about 40 percent.
MMK was soon followed by Severstal, which announced its intention to cut production output by 25 percent at its Russia-based subsidiary and by around 30 percent at its North American and Italian subsidiaries, and to reduce spending "substantially" through 2009, as the global credit squeeze slows demand from main steel consumers.
Another big Russian steel producer Evraz plans to decrease its output in Russia and Ukraine by about 25 percent as of November and to revise its capital investment plan for 2009. Nevertheless, its North American and European plants will not be affected.
In order to cut costs, the CIS steel producers are also aiming to reduce to a minimum their purchases of raw materials. In November, MMK will purchase just the minimum volume of scrap from its main supplier Profit, as the steelmaker intends to mainly use scrap from its storage. Evraz intends to abstain from purchases of coal from other producers, and to rely on coke supplies from its own subsidiaries. By shutting down two of its coke batteries with a combined capacity of 1.04 million mt of coke per year, NLMK is also to decrease coal consumption and to cut coke production by 18 percent per year.
Experts are worried that the situation in the Russian steel industry could soon develop into something resembling the Ukrainian scenario. Out of Ukraine's 43 blast furnaces, 18 have been switched to "cold melting mode" or stopped for unplanned maintenance works; of 63 steel smelting units in Ukraine, 40 have been shut down; and most of the Ukrainian ferroalloy producers have suspended their operations beginning on November 1.
The Ukrainian flat steel producer Ilyich Iron and Steel Works of Mariupol (Ilyich) has stopped operations at its Interinvestugol coal mine and is trying to maintain operations at two of its five blast furnaces and at some of its steel smelting facilities, so as to produce about 100,000-120,000 mt of pig iron per month. Zaporizhstal shut down four of its nine open-hearth furnaces. The steelmaker Azovstal, a subsidiary of the Ukrainian iron ore and steel producing company Metinvest Holding, is to maintain operations at four of its six blast furnaces, while ArcelorMittal Kriviy Rih in October cut its rolled steel production by more than a half compared with September this year.
The production cuts in question have helped the Ukrainian steel producers to stabilize their situation somewhat - during this period when the steel price decreases did not really help to stir up demand. Thus, during the first ten months of 2008, the Ukrainian steelmakers registered only a six percent decrease year on year in their crude and finished steel production to 33.479 million mt and 28.123 million mt respectively. Ukrainian pig iron production decreased year on year by five percent to 28.037 million mt. Meanwhile, the forecast of the Ukrainian government for the 2008 crude steel output has been cut back to 42.8 million mt from the previously predicted figure of 43.7 million mt.
On the other hand, due to the current crisis, most Ukrainian steel producers have suspended their investment projects, waiting for the market to stabilize first. For example, the UK-based company Ferrexpo, whose main interests are in Ukrainian iron ore assets, has deferred a decision on investment in the expansion of its Yeristovskoye mine and the upgrading of beneficiation facilities at its Gorishne-Plavninskoye Lavrikovskoye mine. Ilyich has frozen all its investment projects and expects losses of UAH 250 million (approx. $43 million) for the month of October.
As production falls, most steelmakers have been forced to send workers on temporary leave, to reduce their salaries, or to decrease the working week to four days.
In order to minimize the consequences of the crisis in the industry, the Ukrainian government has signed a memorandum of understanding with the country's mining and metallurgical companies and trade unions. The government has made substantial concessions in order to prevent the loss of jobs at the companies.
Accordingly, the Ukrainian government has pledged to offer credits at minimum rates to mining and metallurgical companies, to contribute to the increase of steel demand in the domestic market by introducing a balance between production and consumption using stabilization funds and special purpose programs, to deliver natural gas at the prices of foreign suppliers taking into account the transportation costs on the territory of Ukraine, to compensate for VAT within five days after application, to reduce the tariffs on electricity, to impose new tariffs on cargo transportation by railway considering the decrease of steel product prices, and to implement the registration of domestic prices for mining, coal and steel production and to announce changes that occur in the prices.
On the other hand, the mining and metallurgical companies are to maintain production, even if at minimum levels, in order to keep production capacities ticking over, and are also to maintain jobs, salary levels and social securities for employees. Moreover, the companies have pledged to implement measures directed toward the decrease of steel production costs, to hasten the completion of negotiations with raw material, ferroalloys and fuel resource suppliers for the sale of supplies at prices not exceeding world prices which would thereby allow steelmakers to regain their costs, and to increase the use of coke in order to reduce the consumption of natural gas.
According to some optimistic experts, the situation in the CIS steel market will still continue to be fairly complicated during November, December and January. During this period most steelmakers, having certain stocks, will hardly display strong business activity as demand will surely be sluggish. Currently, mostly of them are selling from their stocks, which are not inconsiderable and need to be sold off, in order to avoid losses. By February, current stocks are expected to run low, while demand is expected to show signs of increase.