(c) 2007 Metal Bulletin plc

New electric steelmaking capacity in Russia is outpacing raw material supply, placing a question mark beside the long-term management of the country's scrap fund, writes Sandra Buchanan.

Russia's steel industry is expanding, although not by quite as much as the figures might suggest. Part of the effect is achieved by modernisation. Of the additional 18.7m tpy of electric arc furnace capacity planned for installation between 2006 and 2010, almost 6m tpy is replacing outdated open-hearth furnace (OHF) capacity.

This estimate by Metal Expert Group, based in Kiev, Ukraine, includes brownfield developments at integrated mills, pipemakers with steelmaking capacity and a few small greenfield proposals from independent steelmakers.

But Denis Ilatovsky, director of the Mair Group of scrap companies, says that a number of projects are delayed and there are doubts that some will ever be implemented.

Aleksei Morozov, research analyst at Brunswick UBS in Moscow, agrees that replacing OHF capacity at integrated mills is the main driver. "Some pipe mills are in a similar situation," he says.

Of the raft of smaller projects, most will remain on the drawing board. "Only brownfields have been implemented so far. Greenfield projects require more time and effort," he adds.

Adding EAF capacity to a site with blast furnace ironmaking has become an attractive proposition. Yuri Mishin, marketing director at iron ore miner and steelmaking group Metalloinvest, says that by next year the group's Urals Steel mill, in the Orenburg region, will be using liquid iron from the blast furnace for about 40% of the feed for the existing 1m tpy EAF and a similar proportion for its second 1m tpy EAF, due to come on stream in 2008. The plant makes long products and heavy plate.

Scrap problems

But Russia's EAF production is straining scrap supply even before new capacity is brought on stream. Mishin is aware of this: "Consumption is going up; collections are going down; prices are on an international level," he says.

Metalloinvest has taken a common route to security of scrap supply by acquiring a scrap company. Late last year Urals Steel acquired Vtorchermet Orenburg, a company with 19 scrap yards and the potential to supply 400,000 tpy of ferrous scrap, from the electric steel producer Maxi Group.

Metalloinvest's second steel asset after Urals Steel is arguably the country's most modern steel mill and does not use scrap at all. Founded in 1999, Oskol Electro Metallurgical Kombinat (OEMK) in Oskol produced 2.65m tonnes of steel from EAFs in 2006, fed entirely from its own direct-reduced iron plant and iron ore mines. It specialises in engineering bar.

The plant will increase output by about 10,000 tpy this year. Although the company has announced $1bn investment in the site, this is aimed more at keeping pace with technological innovations than at expansion.

Severstal's subsidiary Severstal Resurs procures raw materials and has included a scrap unit since 2004. Ilatovsky says that Severstal receives about 50,000 tpm of scrap this way, but consumes between 300,000 and 400,000 tpm. In a country where scrap is crushed, but rarely shredded, Severstal is taking a lead. A spokesperson says that the company is going to install plant for shredding and sorting scrap in Cherepovets.

Integrated steelmaker Severstal has already completed an EAF investment programme with two Siemens VAI furnaces comprising 2.4m tpy of capacity, installed in 2005 and ramped up to full capacity in 2006. The group makes hot-rolled coil and long products from these furnaces using a mix of pig iron and scrap for feed.

Last year integrated steelmaker MMK in Magnitogorsk started up its revamped long products complex - two continuous casters for billet, and three rolling mills from Danieli - fed by two new 120-tonne electric arc furnaces. The EAFs also feed a new 2m tpy slab caster.

In 2006, 2.0m tonnes of rod, rebar and wire from the new EAFs were marketed on the domestic market, and MMK's long products sales rose by 84.6%, according to the company.

Some pipemaking companies are also investing in EAFs. Those with open-hearth furnaces are replacing them, and some of those without any steelmaking capacity are planning to build them.

Electric steelmaking is the obvious route to satisfying the domestic market where immediate growth in demand for steel is from the construction and machine-building industries.

The Maxi Group has ambitions to build enough mini-mills to become a 10m tpy electric steel producer, but so far has only renovated two existing mills with a combined capacity of 2m tpy. Morozov comments: "[Steel] prices are high and demand is growing fast, so smaller companies think there is enough space for everyone."

Scrap supply

"Russia is historically long on scrap, and is a net exporter. Russia has huge scrap reserves - about 1bn tonnes," Ilatovsky says. But the domestic scrap supply chain is in difficulty: "It is not easy to supply enough to the EAFs," he says.

Ferrous scrap collection in 2005 was 32m tonnes and 13m tonnes were exported; Ilatovsky estimates that 2006 collections will amount to about 29m tonnes and, because domestic demand is high and so are domestic prices, exports will fall to 9m tonnes.

For the present, the reduction of exports is enough to stabilise domestic demand. But Russia will soon be in the same situation as Ukraine, where, Ilatovsky says, "they are collecting from the future.

"Only 20m tpy of steel production is consumed in Russia; if we take the European ratio of collecting 75% of available scrap [and apply it to Russia], that's 15m tpy of scrap to be collected 30 years from now - but we collect 30m tpy now!" he says. Russia is, in effect, exporting a large part of its future scrap fund.

With a lower scrap fund and greater competition among collectors, Ilatovsky says that some merchants will quit the business, making collections more difficult still. "In the future we will probably import more. Already imports from Kazakhstan are growing."

The tight market is reflected in the price. In 2006, scrap cost $220 per tonne on the domestic market, but Ilatovsky says that the current price for a cut grade like 3A Gost 2787-75 (HMS 1,2) delivered to Severstal, is $260/tonne and will rise by $30 or $40/tonne per year.

"Russian steelmakers are losing their advantage in the scrap price: it used to be $100 cheaper than [the international price]. Now they are paying almost the same price," he says.

While Ilatovsky agrees that it is a good idea for steelmakers to invest in scrap companies, he doubts that all of them benefit financially from the situation. "They are rich at the moment, and don't analyse the expenses of managing a scrap company," he says.

But the most serious problem is the structure of the scrap industry. Ilatovsky says the amount of scrap collected is going down because of inefficiencies and a large number of unreliable, non-professionals in the sector. "The number of scrap dealers increased 10 times since 1995 - now there are between 3,000 and 5,000 companies."

Power supply

The low cost of electricity in Russia is an advantage to Russian EAF steelmaking. According to Mishin, Urals Steel generates electricity at a cost of 2 cents/kWh. While the cost from the grid - between 3 and 4.5 cents/kWh - will inevitably rise when the sector is privatised, analysts still expect power costs to remain a competitive advantage for Russia.

OEMK is probably the most intensive user of electricity, but has no generating plant of its own. However, all the large integrated mills have a captive supply. Severstal says that half its needs are covered in this way.

Mishin reports that Urals Steel generates 1.18m kWh each year from its power station. But consumption of electricity for each tonne of EAF steel produced will fall considerably as the proportion of hot pig iron used in the melt rises. In 2006 it took 467 kWh/tonne; this year that will fall to 353 kWh/tonne and next year to 272 kWh/tonne.

No doubt Russia will solve the scrap supply problems in time. Immense progress has been made since 1997, when 30% of steelmaking capacity was based on open-hearth furnaces. The new emphasis on electric steelmaking will see that fall to nil, and marks a decisive stage in the modernisation of the country's steel industry.

Russia's EAF capacity is about to reach the global average of 30% of its total steelmaking capacity.