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The Russian metals industry is facing a slump in demand and prices, with debt problems likely to lead to a delay or abandonment of investment projects over the next 18 months, according to BMI's Russia Metals Report. Russian steel output dipped sharply by 36.5% y-o-y in Q408 as the impact of the international financial crisis, bringing the total for the year to 68.51mn tonnes, a fall of 5.4% year-on-year (y-o-y). As a result, over-leveraged steelmakers also face severe financial difficulties. For example, in Q408, Magnitogorsk Iron and Steel Works (MMK), burdened with high short-term debt and falling sales, cut production by 50% over the previous quarter. A recovery in output was reported by other producers. In late January 2009, Mechel restarted a 4.32mn tonnes per annum (tpa) steel melt shop and would increase output at a furnace which has capacity of 900,000tpa of pig iron. The restoration of production came in response to an improvement in longs demand. However, several producers have warned that ramping up production now could impair the gains made in Q109. Concerns are also mounting for the future of the aluminium industry as Russian producer United Companies RUSAL faces a massive debt problem caused in part due to its ill-timed acquisition a 25% stake in Norilsk Nickel. RUSAL's debt is estimated at around US$16.3bn, of which US$7.4bn is owed to foreign banks, about US$6.1bn to Russian banks and US$2.8bn owed to Russian metals tycoon Mikhail Prokhorov, for his stake in Norilsk Nickel. RUSAL, in which industrial oligarch Oleg Deripaska has a majority share, has won a two-month reprieve from debt repayments, giving it some breathing space for restructuring the debt. However, poor aluminium prices and falling demand mean that bankruptcy remains a significant threat to the company.

In spite of the signs of a recovery or stabilisation in Q109, BMI still believes that the Russian metallurgical industry will decline in 2009, with steel undergoing a 25.9% contraction owing to the state of the economy and serious weaknesses observed in the automotive industry. A systemic crisis has thus far only been avoided through proactive government intervention facilitated by a large stockpile in foreign currency reserves. This has helped steelmakers restructure their debts, with the assistance of state-owned bail-out banks. The greatest danger is over-confidence. If steelmakers ramp up production there is a risk they could saturate the market, leading to a return to the conditions seen in Q408, with high inventories leading to massive destocking. By end-Q109 there were signs that some Russian producers were keen to raise production to pre-crisis levels as demand recovered. BMI does not believe the conditions are right and that pre-crisis levels cannot possibly be sustained. As such, Russian metallurgical companies will struggle to reach market equilibrium. While the construction season will start in Q209, leading to a growth in output, particularly of longs, the availability of scrap will also increase, thereby pulling down product prices. Steelmakers are bidding on exports to lead recovery, but BMI foresees a 29.5% fall in steel export volume to 20.58mn tonnes in 2009. Meanwhile, imports are set to slump 26.7% to 4.5mn tonnes as domestic demand diminishes. Aluminium is also suffering as a result of a plunge in prices; by Q109, the aluminium price on the London Metals Exchange (LME) dipped below US$1,300 per tonne from above US$3,000 in mid-2008. According to UC RUSAL's majority owner Oleg Deripaska, the break-even point is US$1,600, below which aluminium is produced at a loss. Aluminium production is likely to be scaled back over 2009.

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