[ Journal - Economy of Belarus, March 2015 ] - Go rowing in calm sea
BMZ increased volume of export in 2014, despite the crisis in the market of ferrous metals.
Global steel making experienced at least three serious recessions within the last fifteen years. Every time the main aftereffect of the crisis was sharp fall in prices for metal products, i.e. 30% to 70%. Moreover this process, being specific, was not always simultaneous with the same occurrence in the global economy.
For example, practically all analysts agree that the problems of late are caused by the fact that a lot of steel making capacities had been put into operation in China by 2010 (700 thou t.). As expected, it resulted in overproduction of ferrous metals, and, as a consequence, in price reduction, severe competition, bankruptcy of companies.
Byelorussian Steel Works, exporting up to 85% of manufactured products, which is known in 114 countries worldwide in all continents of our planet, objectively can not stay away from the storm in global markets, but at the same time following its own strategy on how to stand up to risks. The policy implemented in the company, in principle, makes it possible for the leader of domestic steel making to overcome the difficulties of the crisis, showing sustainability of its economic model.
Leveling the losses
— Within these years, thanks to management decisions taken in good time, — says general director of OJSC "BSW - management company of "BMC" holding"Anatoly Savenok, — such issues as, for example, job cuts or cancellation of technical upgrading were never raised. Buttherearelosses, inanyway. Theyarenoticeableinfinancialfield. Reduction of global price for product first of all decreases inflow of currency into the country, and BMZ is one of the five major providers of hard currency into the country, and secondly, it slows implementation of important investment projects aimed to upgrade production facilities.
In this context, the results of 2014 are quite characteristic. The company exported more than 2 mln t. of metal products, physical volume of this is 114,6% comparing with the level of the previous year, but growth rate of product delivery outside the country in monetary terms amounted to only 105,6%. The explanation is purely the global market situation for ferrous metals within the reported period.
As for domestic market: last year showed slight recovery in metal consumption. Consumption of metal in machine-building and construction sectors was maintained, mostly, by means of investments and inflows from the state. Price-wise, short time of price growing finished in autumn, and it had actually no time to start properly.
Continuing stagnation of the global economy, reduction of global consumption and competition first of all with Chinese producers, froze low prices for metal. For this reason BMZ losses of currency earnings caused by global price reduction over 2013 amounted to more than $100 mln., over 2014 $65,4 mln.
Similar performance in 2014 is typical for most of metallurgical companies in the world. Moreover, last year was extremely difficult for some of them. Many big corporations reduced production, froze investment projects, closed down their plants, reduced the workforce and other expenses, so that to keep afloat in this difficult time. Nevertheless, not all decisions taken in these conditions made it possible to avoid mistakes, which turned some of them into bankruptcy.
For example, this applies to ‘stepbrother’ of Byelorussian Steel Works, namelyOJSC "Amurmetall" (Komsomolsk-on-Amur, Habarovsky krai). The history of this company started at the same time with BMZ back then. This company from Far East was recognized as bankrupt and offered for sale. Both pants were initially constructed according to the same project back in early 80s of last century. They were similar in their steel-making capacity, but time shows that their destinies turned out to be different.
Experts evaluated metal market of last year as very slow, with constant forecasts for decline. It reminds a bit of calm sea, which dooms sailing boats to be fully inactive. Their activity can resume only when the weather changes considerably. ‘Definitely, this kind of developments for our company with dynamic ongoing production upgrading and need of additional funds was absolutely inappropriate. Beside, as we all know, in case of calm sea, it is still possible to carry on moving by rowing. That is why, despite the limited action field, we were increasing export persistently, focusing on selling the products with higher added value, as well as searching for new markets’, says Anatoly Savenok.
Last year our company managed to share the markets of five new countries, including Algeria and Sri Lanka. Deliveries of various products were resumed to 10 countries; Denmark, Tunisia, India, Cyprus, Austria, etc are among them. This being said, the main increase is caused by increased shipping of steel cord and steel wire, namely by 7,2% and by 8,6% correspondingly. For example, steel cord sales growth rate to the plants of one of the biggest transnational corporation "Continental" amounted to 122,3% versus last year. On the whole, BMZ increased deliveries to Germany and the USA, i.e. from 7,4% to 11,7% and from 5,6% to 7,1% correspondingly, which made it possible for them to be in top-5 consumers of BMZ products on a level with Russia, Poland and Lithuania.
According to general director, the main criteria when building export policy was sales efficiency, in other words, their profitability. Though, with a view to strengthen the position in new markets, in some cases it was necessary to make concessions with buyers, making our only minimum profits. ‘The work targeted to diversify supplies, implementation of a number of investment projects, aimed to lower costs of production, made it possible, to some degree, to level financial losses caused by external factors. Although, unfortunately, it was not possible to make it to the full extent’, said Anatoly Savenok.
The fog in metal market has not cleared away as yet
Specialists forecast that global steel market in 2015 will still be not very active, that is why market price for metal products definitely will not recover in short-term outlook. This means that all main trends of last year will remain: excess of iron-ore supplies, making the price for them cheaper then for metal scrap, increased risks for steel works,shutdown of certain facilities, protectionism of the states aimed to encourage domestic producers.
These forecasts are confirmed by incoming info. Thus, for example, iron ore company Northland Resources with assets in Scandinavia in January announced bankruptcy after it failed to re-finance $650 mln debt.
Another big company China Steel Corporation (CSC) increased sales volume in January to 825 thou. t., but return on sales decreased by 9,01% in yearly comparison.
Moreover, iron ore in January became cheaper by 13% in addition to 47% of that decline, occurred during 2014. In early February quotation for Australian material with 62% of iron (CFR to China) again set the minimum from May 2009, having gone down below $62 per ton, which corresponds to the level of crisis year 2009.
Oil price drop made its negative contribution into steel making, as well. Termination of investments for exploration of new oilfields decreased orders for pipes for oil industry. For example, the second biggest American steel corporation U.S. Steel plans to decrease production in two pipe plants. Due to weak demand from oil industry, the company decided to close down two plants in Illinois and Indiana. Asaresult, 545 employeeswilllosetheirjobs.
For BMZ all the above tendencies are very important, especially for financial field. For example, swift reduction of prices for iron ore is an advantage for the plants producing steel in a classical way, i.e. from iron ore. Raw material of the domestic plant with electric arc melting facilities is metal scrap. Earlyin2014 scrappricewasapprox. 2,9-3,0 times more expensive than iron-ore concentrate, then a year later this ratio reached 4,6 times, in favor of scrap. As a result, the companies equipped with electric arc furnaces are still in disadvantage from raw material point of view, and have to bear higher costs than competitors.
The following external factors should also be not forgotten: devaluation of national currencies of Russia and Ukraine, oversupply in China, unfavorable state of global economics and general drop of quotation for raw materials. Thus, planned in 2015 reduction of sales share to CIS region, which will amount to minus 7,7% , is connected with the crisis in this region. ‘Devaluation of national currencies of big countries of CIS (Russia and Ukraine) resulted in the prices in these markets decreased in dollar equivalent, that is why to sell metal products efficiently, the decision was taken to redirect sales to other markets’, says the director.
True, the situation is not easy. However, Anatoly Savenok says, ‘nobody in the company is sitting on their hands just waiting for better time’. The supposition is that the decline in EU countries is already at its lowest point, however recovery is expected to be relatively moderate. That is why the main market for BMZ in 2015 will be Europe. According to European Association of Producers the main metal consuming sectors will be construction sector and automobile industry.
Add-on sales in this market, assessed as 3,5%, will take place due to increase of sales of new type of product from the new Bar & Wire Rod Mill (Rolling mill – 2). The first product from this mill will be manufactured in March 2015. Sales of new types of products should level probable negative tendencies of this market.
Add-on sales in the markets of Middle East is planned to be 2,0%, and the same for the countries of North Africa. This is mostly connected with reallocation of rebar volumes from the market of Russian Federation, as well as with startup of new commodity distribution network partner ‘Belmet steel’ (Dubai, United Arab Emirates), in charge of sales in this region.
Presently, the most stable regional metal products market is America, where prices are also the highest. That is why, based on the current sales situation, and taking into account sales of products from the new mill, the market share growth, being optimistic, is forecast by 0,4%.
Commodity distribution networks play special role in promotion of products produced by Byelorussian Steel Works to foreign markets. Commodity distribution network is now represented by joint ventures in more than 10 countries in Europe, America and Asia. ‘We hope that these very structures will make it possible to sell successfully metal products from the new rolling mill. For this it will be necessary to increase supplies to the USA by 10 thou. t., to Europe by 185 thou.t and to other regions by more than 150 thou. t. At the same time the plans to sell other types of products are never cancelled’, said general director.
Hitting the target
Repeatability in global economy development is taken nearly as the norm. In other words, upsurge is followed by slump and vice versa. The fact that global market of metals is at its bottom peak, is upsetting for steel-makers. At the same time it is a true indicator that upturn will start sooner or later. Then, the question will come: who and with what kind of results in hand will compete in new conditions.
It is also a very important position for Byelorussian Steel Works. Started in 2012, large-scale upgrading of production facilities is in progress and approaching the final stage. ‘Our target is to complete 4 important facilities this year.The most important project for BMZ in 2015is ‘Organization of production of rolled sections with construction of Bar & Wire Rod Mill’. So far, design and civil works have been finished, the equipment is being installed, as well as commissioning where representatives of the foreign company participate. Investments in fixed capital from the beginning of the project implementation as of February the 1st amounted to 342,1 mln euro’, noted Anatoly Savenok.
Besides, it is required to implement the following projects: increase in productivity of secondary metallurgy in melting shop – 2, complex reconstruction of Gas-treatment plant-3 and construction of air-separation plant №3. Now they are all at the stage of construction and installation. It should be noted that despite financial difficulties, based on results of 2014, volume of BMZ investments in fixed capital amounted to Br3,717 trillion. This is one of the biggest contributions into production upgrade in the history of BMZ.
BMZ intention is to accomplish plant technical upgrade plans in full. These plans were set for the ongoing five year period. ‘Thisisanaffairofhonourforus. As part of modernization program implementation we have already reconstructed Bronze-plated bead wire unit in SW shop-1, Pipe finishing line-3 was started, new lime kiln-3 was constructed, complex reconstruction of electric arc furnace-1 was completed, as well as gas-treatment plant №1 and continuous caster №2. A number of other technical issues wereresolved. I think that even in this situation of recession in global metal market, we will have enough resources to hit the target. Because BMZ future for the near ten years is in these projects’, said Anatoly Savenok.