* Devaluation would give competitive boost
* But financial turmoil would increase financing risks
* Russian competitors fret about Ukrainian imports
* Barriers to entry to Russia-led Customs Union
By Alessandra Prentice and Douglas Busvine
MOSCOW, Dec 5 Ukraine's choice of closer ties
with Moscow, spurning a trade pact with the EU, could rub its
struggling steelmakers up against Russia's own beleaguered
metals firms, who will resist Kiev's attempts to export its way
out of trouble.
Since President Viktor Yanukovich pulled out of the deal
with the European Union, a key market for the steel industry,
the former Soviet country of 46 million has been in turmoil,
with mass protests in the capital and markets hammered by fears
of currency devaluation or sovereign bond default.
The protests will make it harder for Yanukovich to accept
President Vladimir Putin's invitation to join a regional Customs
Union and the advantages that would bring to its exporters.
Russian steelmakers are also unlikely to feel warmly towards
the political rapprochement.
"Steelmakers in Russia certainly see Ukrainian competition
as a threat," said Sergey Donskoy, an industry analyst at
Societe Generale in Moscow.
Ukraine produced 33 million tonnes of raw steel in 2012 -
down 10 million from its 2007 peak - and exported a total of 24
million tonnes of steel mill products, accounting for 28 percent
of the country's entire exports.
Russian output, 70 million tonnes last year, has been more
stable. The former Soviet Union has the biggest steel surplus of
any region and, with global demand depressed, freer trade
between the neighbours would only intensify competition.
Russian steelmakers have aggressively lobbied their
government to implement measures to defend domestic producers
from Ukrainian imports, which exceeded 3 million tonnes last
In July, Russia scrapped duty-free quotas on Ukrainian steel
pipes, while last month it launched an anti-dumping probe into
steel rod imports from Ukraine into the Customs Union that also
includes Belarus and Kazakhstan.
"The lack of prospects for domestic demand growth as well as
the huge amount of spare capacity will cause Ukrainian firms to
boost exports, including to the Customs Union," said a
representative for Russia's No.2 steel firm Severstal.
Ukraine is likely to account for around 65 percent of total
Russian steel imports this year, the representative said.
"We see a significant rise in imports of construction steel
and coated steel. Of course, this affects the growth of the
domestic metals industry," he said.
"Such a huge rise in supply volumes can only happen with a
serious fall in price ... We're fighting against unfair imports
such as the Ukrainian supplies." Severstal estimates that
Ukrainian wire rods are being sold into the Customs Union at
prices 12.6 percent lower than charged on other markets.
Indebted Russian metals and mining firms - including Mechel
and Evraz - recently petitioned their
government for financial help so they can restructure and regain
Ukraine is running wide external deficits, with a current
account shortfall of 7 percent of gross domestic product,
reflecting the fact that it pays a high price for Russian gas
imports, while prices for steel exports are depressed.
This has drained the Ukrainian central bank's reserves to
around $20 billion - just 2-1/2 months of import cover -
fuelling speculation that a devaluation of the hryvnia currency
may be in the offing.
Devaluation would give its steel exporters a boost to their
competitiveness, but metals traders say they would struggle to
capitalise on it as the financial turmoil would make it harder
to raise trade financing from banks typically used to complete
"A depreciation of the currency is absolutely possible,"
said a senior executive at a European steel trading firm with
strong ties to Ukraine.
"Depreciation of the currency, defaulting on the bonds are
all issues which affect the steel industry's ability to borrow
but ultimately makes them more competitive."
Global steel prices have recovered from a
three-year low hit in June, but the rise has since stalled in
Europe, while prices in Asia softened in November.
Players whose costs are chiefly denominated in the local
currency would benefit from a cheaper hryvnia, such as
London-listed iron ore miner Ferrexpo, said Boris
Krasnojenov, a sector analyst at Renaissance Capital in Moscow.
Ferrexpo has said, however, that a hryvnia-denominated tax
credit that it holds, now worth $300 million, would also take a
hit if the currency was devalued.
Ukraine's largest steelmaker, Metinvest, controls
about 50 percent of Ukraine's steel market, while the biggest
foreign player is ArcelorMittal, the world's largest
steelmaker, which has 12 percent. Both firms' Ukrainian
operations are vertically integrated, meaning they supply much
of their own scrap, iron ore and coking coal rather than having
to buy inputs on the market at dollar prices.
If Ukraine did join the Customs Union, that would give its
steelmakers greater market access but would also increase
pressure for cross-border consolidation to achieve economies of
scale and upgrade their outdated facilities.
Metinvest, with production of 12.5 million tonnes in 2012,
ranks behind Russian producers Evraz (15.9 million), Severstal
(15.1 million), NLMK (14.9 million) and MMK
(13 million). All are dwarfed by ArcelorMittal's 93.6 million
tonnes. Severstal's main owner and CEO, Alexei Mordashov, has
spoken approvingly of consolidation but given no hints as to who
would make a potential partner.
"If Ukraine throws its lot in with Russia, there would
probably be a round of consolidation," said a fund manager based
in Moscow. "But Yanukovich, politically, can't justify this