HOW STEEL IS HARDENED

The Azerbaijani state will render all kinds of assistance to large enterprises which operate on its territory and have been affected by the consequences of the global economic crisis, Azerbaijani President Ilham Aliyev said at a cabinet meeting on the socioeconomic results of the first quarter of 2009. "For example, the cost price of alimunium production is higher than its sale price, which means that enterprises of this sector are working at a loss. However, we should try to solve the problems that emerged for reasons beyond our control in the aluminium, metallurgy, chemical and other industrial sectors so that people working there can get their wages in time," Aliyev said.

Indeed, the mortgage-financial crisis in the USA which began last summer inflicted the biggest damage to the construction sector, machinery construction and automobile industry, while shipbuilders and railways also had their orders scaled back. The work of metallurgy enterprises where output has sharply fallen and mass redundancies are being made around the world is directly linked to the production cycle of all these sectors.

The intensive development of the oil and gas sector and the construction boom of recent years created favourable conditions for the rebirth of Azerbaijan's metal industry. However, despite the high demand of recent years, local companies have failed to begin manufacturing the necessary volume of steel - mainly due to the shortage of domestic capacity to produce iron concentrate from ore. This year the sector has been affected by the consequences of the global economic crisis - a slump in demand and price for rolled metal on the world market and a shrinking in the volume of construction work carried out in the country.

The slump in demand

The flywheel of the mortgagefinancial crisis in the USA, which has been spinning since last summer, had engulfed more and more countries and economic sectors by the beginning of autumn. The worst affected were the construction sector, machine construction and the automobile industry. Orders from shipbuilders and railways also fell. The work of metal enterprises, in which production has slumped and redundancies made around the world, is linked directly to the production cycle of all these sectors.

For example, in November and December 2008, Russia's steel-casting and rolling industries registered the biggest slump in production in 10 years, the Financial Times reports. The overall fall in Russian production in January 2009 amounted to 16 per cent, and the list of the "most vulnerable" sectors includes the Russian metal industry, which was forced to cut volumes of production considerably due to the lack of orders from around the world. According to first quarter results this year, the "Big Four" Russian companies - Evraz, MMK, Severstal and NLMK - reduced production by one third, on average.

The situation is even worse in Ukraine: the slump in world prices for rolled metal and competition from Chinese and Russian manufacturers, which sell their products at lower prices, caused a metallurgical crisis. Ukrainian metal enterprises have been forced to drastically reduce production, and 20 of the 36 furnaces are no longer working, while the monthly volume of metal production has hit its lowest level in four years.

The world economic crisis has also affected metal enterprises in the city of Rustavi in neighbouring Georgia, where the manufacture of pipes and smaller products has almost ground to a halt due to the lack of demand.

Similar processes have been observed in most of the developing post-Soviet economies, as well as in China and India. Japan is also going through a tough crisis - its hi-tech metal industry is based upon imported raw materials and the export situation, while falling world prices give little chance for steelmakers from the Land of the Rising Sun. The fall in car production and deep crisis in the construction sector have plunged American steelmakers into a stupor. On the whole, the crisis has hurled steel production back four or five years, while metallurgy has suddenly become a risky and low-income sector. According to experts, the current situation will last for at least 18 months.

The objective realities of the market

What is the situation in Azerbaijan's metallurgical complex in conditions of global crisis? Unfortunately, the negative trends in this sector are also apparent in our country. For example, the Sumqayit-based pipe factory Azarboru laid off most of its 1,000 workers earlier this year. According to the head of the factory's administrative department, Mirsalam Mammadov, this was dictated by the consequences of the global economic crisis. "The sale of our products came to a halt, our main buyers were Russia and Kazakhstan, and our warehouses are packed with unsold pipes. For the time being, Azarboru is engaged in searching for new buyers and if contracts are signed, all the workers will return to work," he said.

A similar situation has arisen at the country's leading steelworks - the Baku Steel Company (BSC). The head of the BSC's press service, Namiq Ahmadov, says that its enforced idleness is linked to difficulties in acquiring the necessary amount of scrap metal. He said that secondary metal sellers are not happy with the purchase price offered by the BSC. For example, whereas earlier the factory bought one tonne of scrap metal for 200 manats, it now offers only 115, which is the result of the fall in the price of the reinforcement rods offered by the factory. Previously, the factory sold one tonne of reinforcement rods for 1,100 manats, but now the price has fallen to 620. The fall in the price of rolled metal is caused by the fall in demand from the country's construction sector and extremely cheap imported rods - from Russia and Ukraine.

It is notable that, despite the lack of raw material and the constant suspension of work at the BSC, last year we smelted 200,500 tonnes of steel and produced 193,100 tonnes of rods. Almost the same amount as produced in 2007. However, the lack of scrap metal did not allow the enterprise to attain its projected capacity of 350,000 tonnes per year. It seems that this year will be no exception: today the enterprises receive 350-500 tonnes of secondary metal per day on average, however, 1,500 tonnes of metal are needed every day to ensure the factory works at full capacity.

A full cycle is needed

As a matter of fact, the main problem for Azerbaijani metallurgists is that there is still no full cycle of metal production in the country. Local steelmakers are forced to use scrap metal as their raw material, the lack of which has repeatedly caused serious problems. Despite the suspension of exports of ferrous and non-ferrous metal waste in 2001, tough competition for secondary raw material resulted in companies being forced to buy high quality scrap metal for higher prices from 2005 to 2007. This was caused mainly by a hike in the price of secondary raw materials abroad, which exceeded 280 dollars in 2007. Today there is a slightly different tendency: the world crisis and the fall in energy prices have lowered the cost of finished rolled steel considerably, reducing the difference in price with secondary metal. This is an extremely negative factor for our country, where available reserves of scrap metal are used in production and suppliers are not prepared to reduce their prices. In essence, today it is much more profitable to buy cheap steel products on the world market than smelt expensive Azerbaijani scrap metal and produce metal at non-competitive prices.

It is quite clear that the problems of the country's steel complex require a radical solution. To this end, specialists believe that it is necessary to reconstruct the whole technological chain - ore extraction from local deposits, processing into high-grade iron concentrate and, finally, steel smelting.

Our country has very few industrial iron ore deposits, and the only hope for metallurgists is the restoration of the Daskasan ore-dressing and processing enterprise (now Dashkesan Filiz-saflashdirma open joint-stock company) which was established in 1954. About three years ago, 99.22 per cent of the shares in this enterprise were purchased by Det.Al Holding Limited, which promised to invest 235.1 million dollars in the development of the enterprise over three years. The investment programme envisages the extraction of ore and the production of iron concentrate at granulation and consistent reduction factories. In Daskasan, it is planned to build a factory to produce iron granules containing 64-67 per cent of iron. It is estimated that the extractable reserves of iron ore in Daskasan total 250 million tonnes. If 2.5-5 million tonnes are extracted per year, there will be enough work for several decades.

Commenting on the company's plans at the end of the last year, the director-general of Dashkesan Filizsaflashdirma, Mehmet Kaya, said: "We plan to extract up to 5 million tonnes of ore per year in Daskasan and, following refinement, one million tonnes of pure iron will be produced per year." The enterprise's investment programme plans to combine ore and concentrate production with the production of pipes, construction rods, shapes and other types of rolled metal using new technology. Last year Det.Al Holding Limited signed a memorandum with the Azerbaijan Investment Company (AIC) to buy the remaining shares in the metallurgical project. Today it is difficult to judge how the world crisis will affect Det.Al Holding Limited's investment plans. For the time being, world steel prices are tending to fall and experts predict a growth in production in this sector no earlier than by the end of next year. A similar situation is observed in Azerbaijan. For example, according to the State Statistics Committee, in January-March production at the country's steelworks fell by 34.6 per cent compared to the same period of the last year. It must be noted that according to the State Statistics Committee of Azerbaijan, 11,879 people worked in Azerbaijan's metallurgy sector in January-February 2009 and the average monthly salary reached 346.8 manats. One way or another, only the development of a full metallurgical cycle and, first and foremost, the creation of our own raw material base, will allow our manufacturers to withstand all the risks and fluctuations in prices for rolled steel and scrap metal.