IN GENERAL, the capacity of a country's steel market will be primarily dependent on its basic metals-consuming industries, such as machine building, construction and the fuel and energy sector.

From 1991 to 1998, Russia's annual consumption of steel shrank from 59 million tons to 15.7 million tons. The most dramatic reduction occurred in machine-building – by more than 80 percent. The production of economically vital machines and equipment had fallen below all tolerable limits. The most catastrophic slump was reported in the production of harvesting machines and equipment where the 1998 output was only equal to 4.2 percent of the corresponding 1990 figure. At the same time, the automobile industry's output was slashed by half.

With the rapidly shrinking domestic market, the only way to save the domestic steel industry was to boost exports. In a very brief period, Russia became the world's leading exporter of ferrous metals, which became an important component in the country's exports overall. The money thus generated helped the industry to pull through the crisis and keep on maintaining and modernizing its production facilities. During the past several years, Russia has exported some 60 percent of its rolled-steel output. Thanks to that, it has been possible to maintain stable production of rolled steel since 1994 (See Figure 1, below).

In 2000, Russian exported steel-industry products amounted to a total of 28.7 million tons. As can be seen in Figure 2, Russia has kept its exports of semi-finished steel products stable, while exports of flat steel sheets have been increasing over the last five years, which is a positive sign.

The positive trends of economic invigoration and growth that have been in effect since 1999 have positively affected the situation on the domestic market for metal products. In 2000, domestic demand posted approximately 22 million tons, 40 percent up from 1998. Demand has continued to increase this year, though the tempo of growth has considerably decelerated compared to last year's.

Figure 3 shows a breakdown of domestic demand for steel-industry products in 2000.

The following basic factors have stimulated domestic demand for steel-industry products:

• Increase in purchasing power of large enterprises producing cars, harvesting machines and equipment for heavy industry;

• The ruble devaluation caused by the August 1998 crisis, which led to a slump in imports and stimulated domestic production of similar items, including those requiring metals to produce.

Over the past two years, Russia's imports of steel-industry products have been increasing and posted approximately 3 million tons in 2000. The structure of these imports breaks down as follows: Steel tubes accounted for 37 percent, steel sections for 29 percent, flat steel sheets for 21 percent and coated metals for 12.5 percent. Russia imports steel-industry products mainly from Ukraine, which is largely due to Ukraine's industrial "specialization" in the former Soviet Union.

Research studies conducted at the Economics Institute at the Bardin Research Institute of the Ferrous-Metals Industry conclude that domestic demand for steel-industry products may climb to 26 million to 27 million tons per year by 2005.

The machine-building sector is forecast to increase its steel consumption to 14 million tons per year by 2005, up 24 percent from 2000. Its most metal-consuming branches – production of heavy machines and equipment for electrical power plants, transport, agriculture and roadwork vehicles, such as excavators, tractors, etc. – are forecast to show the highest rates of growth. From 2005 on, high-tech machine building is predicted to take the lead.

Demand for steel products for oil and gas pipelines, road-building materials (reinforced concrete, for example), reconstruction and repairs is forecast to reach 6.7 million to 7 million tons per year by 2005, 12-15 percent up from 2000.

The regional structure of ferrous-metals consumption is not predicted to undergo any significant changes. The main consumers of ferrous metals will continue to be the Urals, central region, Volga area and northwestern region, which are centers for the production of cars, railroad cars, rails, equipment for power plants and agriculture. West Siberia, with its oil and gas industries, will also continue to consume a significant amount.

Positive trends will continue in the structure of consumption: The proportion of rolled steel will increase, pushed up by increasing demand from the automobile industry, train-car manufacturing, shipbuilding and tube manufacturing. The proportion of flat-sheet steel will probably climb from 43 percent in 2000 to 48-50 percent by 2005. Demand should also increase for stainless, alloyed and tool-grade steels.

The unfavorable situation on the world market and the restrictions imposed by a number of countries against Russia's steel supplies could cause Russia's steel exports to fall to 23 million to 24 million tons per year by the year 2005 and stabilize at 20 million to 22 million tons per year thereafter.

According to estimates, beginning in 2004-05 more than 50 percent of Russia's ferrous-metal products output will be sold on the domestic market, while in 2000 the corresponding figure was 43.8 percent (see Fig. 4).

It has to be noted that although it is the world's fourth steel producer and world's first steel exporter, Russia lags far behind the main steel-producing countries in terms of steel consumption (see Fig. 5).

In the near future, the following factors will determine the development of Russia's domestic market for steel products:

• Increased competitiveness of domestically produced rolled steel and articles thereof;

Restructuring of the steel industry to rid it of inefficient enterprises;

• Attraction of investments and credits to modernize domestic machine-building enterprises, including setting up joint ventures with world leaders;

• Protection of the domestic market, especially in view of Russia's planned entry in the World Trade Organization, which is expected to stimulate further industrial-production growth.

In general, Russia's market for steel-industry products is potentially quite large, but properly targeted industrial and financial policies are required to make this potential a reality.

Data sources: Institute of Economics at the Bardin Research Institute of Ferrous-Metals Industry, State Statistics Committee, State Customs Commettee, International Iron & Steel Institute.

(The author is the head of the Metals Market Analysis and Forecast Department of the Institute of Economics at the Bardin Research Institute of the Ferrous-Metals Industry.)