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We maintain our view that Ukrainian steel production growth will be more subdued in 2011 and 2012 following strong growth in 2010. Indeed, a combination of cost pressures, caused by the rising price of gas and scrap, which will continue to erode margins, as well as slower global demand, particularly in the eurozone, lead us to believe that output growth will slow. Moreover, output levels in Ukraine will only reach pre-crisis levels by the end of the forecast period in 2015 and 2016.

According to the latest data for Ukraine, crude steel output for the period between January and November 2011 rose by 7.0% to 32mn tonnes. Similarly, the country recorded a 5.3% rise in its finished steel output and a 6.2% increase in its pig iron production. Although these growth rates are strong compared to other countries, which saw production weaken as the European sovereign crisis unfolded, it remains below precrisis levels. Indeed, average monthly output of crude steel came in at 2,961 tonnes for the first 10 months of 2011, which is significantly below the average of 3,569 recorded in 2007 and suggests that there is still significant overcapacity in Ukraines steel market. Looking more upstream, it is reported that the countrys production of metallurgical coke rose by 6.3% y-o-y to 17.95mn tonnes during the first 11 months of 2011. Over the same period, Ukraine produced 60.05mn tonnes of iron ore concentrate and 12.6mn tonnes of sintering ore - up 2.7% and 2.9% compared to the same period last year.

In terms of trade we note that exports have slowed in recent months, a trend that may continue. Indeed, steel import applications have been falling in several large trade partners and this suggests a weaker export picture. Reports indicate that applications to import steel from Ukraine fell to 161,000 tonnes in October from 214,000 tonnes a month earlier. This broadly reflects Ukraines performance on the export front, which, according to metal trading enterprise Ukrainian Mining and Metallurgical Company, have risen by 0.5% y-o-y in the first 10 months of the year, but fell by 3.5% month-on-month to 1.782mn tonnes in October alone.

Although we expect a full recovery in aluminium by 2015 and 2016, this is dependent on RusAl maintaining its operations in Ukraine. Debt-ridden RusAl indicated even before the financial crisis that it may close the 130,000tpa Zaporizhsky Alyuminievy Kombinat (Zalk) smelter as it is unprofitable due to high electricity prices. Output from the smelter has declined from 112,800 tonnes in 2008 to 50,000 tonnes in 2009 and just 25,000 tonnes in 2010.