Fitch Ratings said Russian steel producers are well positioned to face off the looming competition from China's steel exports to the international markets. This is because of their competitive advantages and strong Russian demand for steel, as well as the consolidation driven by the Chinese government to rationalise national steel production and restrain exports.

First, Russian steel producers are able to retain their cost competitiveness even in the face of mostly low-end commodity steel exports from China. They have high self-sufficiency in the main raw materials (including iron ore and coking coal) for steel production whereas China imports 50% of its iron ore needs and some grades of coal. Further, the Chinese steel industry remains highly fragmented, which limits its bargaining power in negotiations with major raw materials suppliers. Overall, Russian steel industry benefits from low cost production amid relatively low energy and labour costs. Although labour costs in China are low, Chinese steelmakers face relatively high and rising energy costs.

Second, Russian steel producers could be shielded against any downturn in the global industry by buoyant domestic demand due to rapid construction expansion and strong industrial production growth. Steel makers in Russia also benefit from high prices as a result of the strong domestic demand and the concentrated nature of the Russian steel industry, which adds to the pricing power of its major players. Furthermore, Russian steel companies enjoy even sales diversification across domestic and international markets. In contrast to their Chinese counterparts, Russian steel makers are extending their footprint in international markets (primarily the EU and US) through acquisitions. Although competition from the Chinese steel producers could intensify in southeast Asia and the Middle East, it should be mitigated by the limited exposure of Russian steel companies to these markets.

Third, the Chinese government has sought to curb the rapid expansion of Chinese steel capacity, in light of inefficient steel operations and potential anti-dumping actions in the EU and US. Measures include reduction in steel export tax rebates and introduction of taxes on some steel product exports. In Fitch's view, the fragmentation and overcapacity in the Chinese steel industry may improve further in the coming years, although it has been slower than expected so far. Overall, Fitch notes that some global steel players are adopting a more disciplined approach to production to adjust output to demand changes.

Finally, Russian steel producers have strong credit metrics relative to their international counterparts, including Chinese peers, which reflect their competitive advantages. The average net leverage of the largest Russian steel producers rated by Fitch amounted to 0.3x in 2006 versus an average 0.9x for the Chinese steel producers rated by the agency. At the same time the average EBITDAR margin of Russian steel companies was 32.1% in 2006, compared to 22.3% for their Chinese competitors. This provides additional financial flexibility for leading Russian steel companies to weather any industry downturn. Nonetheless, Fitch notes that Russian steel companies are rated in the 'BB' range whereas their Chinese counterparts are rated in the 'BBB' range, due to corporate governance concerns linked to the Russian domicile.

China's surging demand for steel products over the last decade has played a vital role in reviving the world steel industry. In 2006, it accounted for more than one-third of the world's steel production and consumption. In the first seven months of 2007, exports of steel products amounted to 39.7 million tonnes, up 92% yoy. However, strong growth in China's steel exports has raised concerns of potential price weakness and intensifying competition in the international markets.