RUSSIAN METALS: Please give us an assessment of the situation in the metals industry. Experts say domestic demand remains low. Are there any trends toward improvement?

ALEXANDER IZOTOV: In 2000, rolled-steel output was 46.9 million tons, up 14.8 percent from 1999 and up 20.3 percent from 1995. Ten companies accounted for 91 percent of the figure. These companies were formed on the basis of integrated metallurgical combines that have modern equipment and use modern technologies: Magnitogorsk Iron and Steel Works, Severstal, Novolipetsk Iron and Steel Works, Nizhny Tagil Iron and Steel Works, Mechel, NOSTA, Kuznetsk Iron and Steel Works, West-Siberian Iron and Steel Works and Oskol Electrometallurgical Combine.

Domestic demand has been increasing at a noticeable rate – from 15.6 million tons in 1999 to 21.8 million tons in 2000 and an estimated 24 million tons in 2001.

Specialists from our ministry forecast that if the government’s long-term plans for industrial development are successfully implemented, further growth of the domestic metals market is likely – to 26.5 million tons in 2005 and 32 million to 33 million tons by 2010; that’s a rise of 20.5 percent and 25-30 percent, respectively, from the year 2000.

RM: From which industries do you forecast increased demand for metals?

AI: Up to 2005, we expect heavy growth in the machine-building sector, specifically in the production of machine tools, railroad cars and equipment, harvesting equipment, construction eqiupment and road-building machines and equipment. Those are the sectors that suffered dramatic slumps during the 1990s. Later, from 2005-10, we expect strong growth in industries related to the high-tech sector.

Also, we expect demand to increase in the sectors related to oil and gas pipelines and road construction, repair and maintenance.

RM: Will there be structural changes in demand during this time?

AI: We expect structural changes in the demand for steel products caused by further development of the automotive industry and shipbuilding and the manufacture of train cars, large-diameter tubes, etc. Hence, the proportion of rolled-steel sheets will reach 48-50 percent by 2005 and 53-55 percent by 2010.

Plans call for increased production of metal for the oil and gas industry, including tubes of up to 1,420 mm in diameter. These tubes will require highly cold-resistant, corrosion-resistant and low-alloyed steels with a breaking point of up to 590 N/mm2 for terrestrial, underground and underwater pipelines to be laid in the areas of the Far North.

RM: What happens if the United States imposes more restrictions on steel imports from Russia?

AI: The present structure of Russia’s steel exports is far from ideal. The proportion of low-processed items, specifically pig iron, bars and sections, is too high. At the same time, the proportions of sophisticated items, such as rolled steel, steel sheets, tubes and metal-ware, is on the rise.

In July 2001, Russian metallurgists submitted a memorandum to the U.S. Commerce Department requesting that it recognize Russia as a country with a market economy. On Sept. 27, 2001, the Department of Commerce replied to the effect that the request would be granted, but that the formal procedure would take 270 days.

The participation of Russian metallurgists in the meeting of the Steel Committee of the OECD held in Paris from Sept. 17-19, 2001, was a positive sign.

In all likelihood, the problems of Russia’s steel exports to the United States will be discussed within the framework of the talks on Russia’s entry into the WTO.

RM: The vast majority of Russia’s metallurgical enterprises posted pitiful performance indicators during the first half of this year. What are your forecasts for the second half and for next year?

AI: Stagnation and decline in the economies of the world’s most-developed countries have led to a considerable reduction in the consumption of both ferrous and non-ferrous metals.

In the first half of 2001, the steel industry showed a profit of 20.9 billion rubles, while the corresponding figure for the previous year was 37.8 billion rubles. In 2002, we expect the industry to make a profit of 44.5 billion rubles, compared with 72 billion rubles in 2000.

If the negative macroeconomic trends continue, the rate of return of the steel industry’s leading enterprises will reach 5-7 percent.

RM: Why are investments so low and what needs to be done to attract more?

AI: The country’s transition from a central-planning system to a free market has drastically affected the structure of the industry’s funding. In 1989 and 1990, some 25 percent of investment came from the budget, 50 percent from the depreciation fund and the remainder from company profits. Now we are not getting any centralized financing, and the proportion of owned funds of enterprises has jumped to 96 percent. From 1995 to 1998, credits from foreign banks constituted 15 percent of investments in the industry, but due to the August 1998 financial crisis, the figure dropped to 3 percent as of 2000.

The Metals Department of the Ministry of Industry, Science and Technology, together with relevant research institutes and representatives of the industry, has elaborated the "Strategy for Development of Russia’s Steel Industry to 2010." The document is awaiting consideration and approval by the ministry and the government.

The problem is that projects in the steel industry pay back in five to eight years, which represents a pretty high investment risk.

Up to 2010, steel-industry investments will come mainly at the expense of depreciation deductions, profits, issued-share capital, credits raised from both domestic and foreign banks, bond issues and equipment leasing. The percentage breakdown between these sources will depend on specific conditions and performance indicators of specific investment projects.

According to expert estimates, depreciation deductions in the industry will average about 13 billion to 14 billion rubles this year, and the year’s average investments from all sources combined will be 37 billion to 38 billion rubles. This would come to about $16 per ton of steel production.The corresponding figures in the United States, Japan and the EU were $35, $40 and $29, respectively, during the 1990s.

Attracting investments from foreign banks as well as direct foreign investments in Russia’s steel industry is strongly complicated by the fact that Russia’s foreign-debt problems remain unresolved. It would be advisable to apply the internationally recognized practice of debt repayment in production supplies.