April 2, 2007 — Russian, Brazilian and Indian steel producers are the most profitable, while Chinese producers struggle with high raw material prices, according to the latest report just released from Integer Research. The new report, the 2007 Steel Financial Insight, examines the world's leading 55 steel producers.

"The most profitable producers are the ones able to produce slab or semi-finished steel at lower costs," says Integer Research Director, Philip Radbourne. "The ten most profitable producers are nearly all located in areas with access to iron ore or coal, or both—mainly Russia, Brazil and India."

"In the past, companies would buy iron ore and coke, or even scrap, at reasonably stable prices, but through 2004 and 2005 iron ore prices increased sharply," says Radbourne. "This rapid rise in raw material prices has highlighted the importance for steel producers to invest in upstream integration in order to secure the supply of low-cost raw materials. This has unleashed a stream of iron ore and coke expansion projects in the last couple of years, with the world's three leading iron ore producers—BHP Billiton, Rio Tinto and CVRD—in the forefront."

The emerging global strategy, says Integer Research, is for companies to establish upstream facilities close to low-cost raw material sources, and set up downstream manufacturing and finishing facilities close to their end-user markets. For most producers, this is a complete reversal of corporate strategy.

"Tata in India is a good example of a company close to both iron ore and coal resources, as well as booming domestic demand," says Integer analyst, Nora Gombos. "The company has also been expanding overseas. The most recent acquisition of Corus gives Tata access to the European markets, close to end users, while still enjoying the benefits of producing low-cost slab in India."

Russian steelmakers are also entering key export markets by acquiring downstream operations overseas, mainly in Europe and North America. Examples include Severstal, Evraz and NLMK.

"With this advanced level of vertical integration, combined with access to relatively cheap energy, it is not surprising that four of the five Russian producers featured in our survey are in the top ten based on operating profit margin," says Gombos. "NLMK is the most profitable producer, with a net profit margin of 31%."

Radbourne says, "With easy access to iron ore, Brazilian steelmakers belong to the lowest-cost slab producers in the world, and the three Brazilian producers in our survey—CSN, Gerdau and Usiminas—rank in the top ten in terms of profitability."

"However, China relies heavily on iron ore imports and the dramatic price increases of iron ore affect its steel producers. Out of the 15 Chinese producers featured in our survey, most of them rank in the bottom half of the top 55 in terms of net profit margin."

Much of the fate of the steel industry in the shorter term depends on the future developments of China says Integer Research, noting that it will be interesting to see what direction it takes in the next few years. However, securing raw material supply will continue to be an important factor for steelmakers in the near future.