New Market Research Report: Russia Metals Report Q4 2013

The Russian metals sector will face headwinds over the coming quarters as European and US demand remain weak and global oversupply weakens metal prices. We expect production of key metals to remain modest, with company investment plans focusing on improving processing plant efficiency and reducing costs rather than building new plants or expanding production capacity. Despite the weak growth, Russia will remain one of the world's largest producers of key base and industrial metals such as nickel, steel and aluminium.

Steel, Aluminium & Nickel Supply Glut To Weigh On Growth

We expect Russia's rank among global steel producers to come under threat, as the country's largest steel makers experience squeeze margins resulting in production cuts. Russian steel consumption will be boosted by the country being awarded a number of large-scale events to host in the country, which has brought substantial investment into construction. However, the global steel market will remain mired in significant overcapacity, sluggish demand and weak margins.

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Global aluminium oversupply will continue to ensure weak aluminium prices. We expect prices to head modestly higher over the period to 2017, but fail to return to their 2011 peaks. Aluminium prices averaged US$2,421/tonne in 2011, while we forecast prices to average US$2,090/tonne over the period 2013-2017. Russia's largest aluminium producer, Rusal, has demonstrated weak performance over the past financial year as a result of low prices.

We expect weak growth in Russian nickel production of just 1.1% y-o-y from 2013 to 2017, reaching 282.5kt in 2017. Global nickel inventories continue to rise, compounding what is an already oversupplied market. LME stockpiles reached 212kt in Q313, with no reversal of this trend in sight.

Dependence On European Exports

In 2012, Russia's accession into the World Trade Organization (WTO) took effect. Although on the surface the move will boost the Russian metals industry's image on the world trade stage, its entrance into the global body does not come without downside risks to the sector. Industry trade group Russian Steel's president, Vladimir Lisin, has indicated that steelmakers are anticipating tough competition, anti-dumping investigations and a reduction in steel exports and raw materials consumption, as cited by Russia Beyond The Headlines. Metals producers' profits have shrunk in recent years due to the steady rise in the prices of natural gas and electric power.

Oligopolies To Remain In Place

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