We talked to Burak Soydan, general manager of NLMK Turkey, about how NLMK has come through the pandemic and about the current situation in the Russian steel market.
How has NLMK come through the pandemic period?
With the Covid-19 pandemic, the company faced a serious challenge: to ensure both the safety of employees and the smooth operation of plants. 90 percent of NLMK employees are involved in the production process: to protect their health, the company changed work shifts and plants, and provided complete sets of personal protective equipment.
Product diversification and flexible supply chains have allowed NLMK Group to overcome the crisis successfully. The company has continued to implement its main investment projects, while our investment program has almost remained at the pre-crisis level. However, it is obvious that NLMK will learn all the lessons of the pandemic in the future, and its new strategic cycle will be designed with the help of new mechanisms for maintaining competitive advantages in a rapidly-changing world.
What can you say about current demand and the rise in prices?
As steel demand began to gradually recover across developed markets at the end of the third quarter of 2020, the global steel market faced an obvious shortage of steel as some steelmaking capacity was idled. In the fourth quarter, apparent steel use in China, the EU and Russia was up 11 percent, six percent and five percent year on year respectively, while in the US it was down 15 percent year on year, but three percent higher quarter on quarter. At the same time, steel production in December continued to recover, posting six percent year-on-year growth. Chinese output increased by eight percent, Turkey was up 18 percent, Europe grew 11 percent, and Russia grew two percent, all year on year. North American production continued to lag, down seven percent year on year, led by a 12 percent decline in the US, but with more restarts planned in the first quarter of 2021 and new capacity due to come on stream mid-year. Global steel prices remained very strong in January and were at a multi-year high. Recently, Asian prices moderated with the start of the Chinese New Year, but the expectation is positive. We will have a better understanding of the market trend after the Chinese New Year holiday.
Most companies have turned to alternative markets due to the sluggishness of their domestic markets. Which alternatives were prominent for you?
In the second quarter of 2020, the Covid-19 pandemic caused serious headwinds for overall business activity, resulting in a significant weakening of demand for steel in our traditional sales markets and a drop in steel product prices. In order to keep capacity utilization rates high at our flagship production site NLMK Lipetsk, we made changes to our regional sales structure (for instance, we grew shipments to the Asian market in April and May), and diversified our product mix. At the end of April, we were already actively working on our export order book for June. In April, we were forced to decrease our output at the NLMK Russia Long Products division, as construction projects were frozen across key regions, and due to a shortage of scrap amid lockdown constraints in Russia.
In the third quarter of 2020, global business activity began to recover gradually, driving an uptick in demand for steel in our traditional sales markets and an increase in steel product prices. Consequently, our export share decreased to historical levels due to the demand recovery in Russia.
Talking about our business in Turkey, 2020 was a very successful year in terms of sales, after-sales, logistic services, customer satisfaction and business development. We hope to continue this positive trend in 2021 as well.
What are your expectations for local consumption, especially in the first half of the year, with the impact of Covid-19 in Russia? Also, given that prices in the global market are increasing rapidly, what comment would you make about Russia's exports?
All of the steel-consuming sectors in Russia were performing well already in the third and fourth quarters. Construction activity last year not only drove demand for long steels, but also for coated steels as a result of elevated individual construction activity (as people decided to spend money on renovation of their summer houses) and government-backed Covid-related construction. We expect that seasonally slow demand in Russia in the first quarter of 2021 coupled with sufficient stocks in the supply chain may cap price dynamics until the arrival of the spring construction season in March-April. However, it should be noted that the state mortgage-support program, which provides mortgages at a rate of 6.5 percent for new apartments, has been extended until July 2021. That might underpin new construction starts in Russia, not only in traditional regions such as Moscow or Saint-Petersburg, but also in other large cities. But there is a lot of uncertainty regarding the number of projects for new office buildings to be launched from 2021 onwards. Generally, we expect overall steel demand in Russia to improve moderately within the range of two to three percent in 2021. Export markets and especially Turkey are historically very important for our company. That is why we established a strong presence in Turkey with our NLMK Turkey office four years ago.
Do you expect an increase in the flow of scrap in the Russian domestic market and a decrease in scrap exports following the change in Russia’s tax on scrap exports?
We suppose that market supply and demand will still be the main factor for the strategies of scrap importers and exporters.
Another measure that Russia is considering to take on exports is an increase in the tax on billet and rebar. What are NLMK's views on the effects of this possible increase on the market in general?
NLMK is against any export restrictions on steel products, scrap or any raw materials used for steel production. Our group always supports free trade with no trade distortions.
What kind of geographical distribution for its pig iron exports does NLMK - one of the leading exporters of pig iron in the CIS - expect in the first half of 2021? Which markets will come to the fore? Will China remain important?
Strong demand in the fourth quarter of 2020 across our traditional export markets as well as restocking and limited supply drove global prices up. The share of sales to export markets from our Russian assets stood at 57 percent. In the fourth quarter of 2020, 33 percent of our Russian assets’ export volumes were sales to our captive assets in Europe. A significant portion of semis sales to third parties were in the form of pig iron and billets. However, the increase in crude steel capacities at the Lipetsk site and the expected growth of slab supply to our captive assets in the first half of 2021 might leave us with less pig iron available for export. We do not see the Chinese market as a top priority in 2021 as our traditional markets are expected to recover. However, we are permanently monitoring the attractiveness of all markets across the globe, aiming to benefit from a potential market rally wherever it may occur.
What are your expectations for 2021?
The first quarter of 2021 in the US and EU should be characterized by a strong price environment with lead times staying well above average. However, the lockdowns imposed in the EU may lead to price moderation in the second half of the quarter. As for Russia, seasonally slow demand coupled with sufficient stocks in the supply chain may cap price dynamics until the arrival of the spring construction season in March-April.