Market Know-how: The Bones of a Building

As with other building materials, metal constructions continue to rise in price. In the opinion of experts, the growing price of steel works is also to blame for the increase in exports from abroad.

"Metal constructions are used for the skeletons of buildings and other engineering constructions. Mainly they are made of steel. The use of metal in construction lowers the labour input of manufacturing and the cost of construction, thus reducing the period of construction and raising the efficiency of capital investments in construction,” says Dmitry Baranov, a senior expert at Finam investment holding.

According to him, metal constructions can be subdivided by purpose: bearing, fencing, and also mixed. In particular, as notes Konstantin Komissarov, head of the analytical research department at Region, metal constructions are actively applied in the construction of hypermarkets and industrial buildings. "Light but strong metal skeletons are covered with insulating sheets or sandwich panels. Such buildings do not demand such solid foundations, and to assemble them is quite simple and cheap," he says. As a result, according to Finam, the market of metal constructions is growing by 13-18 per cent annually.

A general plan

According to Index-Box, the volume of the Russian market for building metal constructions in 2007 was about 4.7 million tonnes. "This includes not only the volume of output by manufacturers of metal constructions but also the volume of metal constructions produced directly at building sites by assembly organizations," the company writes in a report on the Russian metal construction market for 2007. According to the Russian Statistics Agency (Rosstata), currently in Russia there are more than 1,000 enterprises, engaged in the production of metal constructions for building. There are about 10 large manufacturers with maximum geographic scope of the market.

"The main element of steel constructions is rolling steel, which is smelted at metallurgical works. The various elements are made at factories - beams, columns, trusses, etc and are then assembles at building sites. As a rule, the Russian manufacturers of metal beams and metal constructions use foreign equipment," note analysts at Index-Box. The main suppliers of this equipment are Italian companies Ficep and Awelko, German companies Messer and Behringer, and Japanese companies Yaskawa and Elephant. Russian equipment is mainly used at the finishing stages of manufacturing, such as in the processing and packing of a product. According to experts in the field they lose out to their foreign counterparts in terms of quality, failing to meet accepted standards of quality and safety.

According to Index-Box, the biggest consumer of metal constructions is builders of commercial real estate: retail premises, offices, office buildings, warehouses, logistics complexes, etc, the share of which, according to results from 2007, made up 31.8 per cent of the market. In second place by consumption are builders of industrial purpose buildings, with 15.9 per cent of the market. Agricultural purpose premises make up 15.4 per cent of the market, road construction makes up 22.8 per cent of the market, and use on residential buildings make up on 9.5 per cent.

The main players

"The leaders of the metal construction market are companies in the Central and Ural Federal Districts. In total they occupy 53-57 per cent of the market," says Baranov. According to him, they are mostly large metallurgical companies such as Severstal, Magnitogorsk metallurgical complex, Novolipetsky metallurgical complex, etc. "There are many leaders in the level of companies below these and to name them all is obviously not possible. There are almost no construction companies among them. Mainly they are companies engaged only in the manufacture and sale of metal constructions," he says. "In the Russian metal construction market there are many companies engaged in the manufacturing of metal constructions. As a rule, they are small enterprises, often part of a construction company or metal trader. The given companies are not public and consequently to estimate their share of the market and the market as a whole is not possible," notes Komissarov.

In general, it is noted in Index-Box's report that Russian manufacturers of metal constructions can be divided into three groups. The largest manufacturers are on the top level and have capacities from 40,000 to 80,000 tonnes. As a rule, these are old Soviet enterprises which successfully function now. "The only modern factory in this level is the Ventall factory, which is now part of the Ruukki holding,” the report states. National scale factories to a large degree are oriented to the market of the central part of Russia and the Ural Mountains. The largest orders are carried out by these factories.

The second level consists of large regional leaders that govern their local markets.

"It is possible to place all enterprises possessing small capacities of up to 10,000 tonnes in the lowest group. Such companies, as a rule, are not serious competition to large manufacturers," notes Index-Box.

Only players in the top level make metal frameworks - bearing metal constructions (trusses, beams, columns and connections). The majority of enterprises established during Soviet time are universal and new enterprises, for example Ventall and Stilar, specialize only in beam constructions.

Construction companies consider manufacturers of metal constructions differently. "It is a very serious specialization demanding large manufacturing areas and the corresponding equipment of the highest level. For our projects we buy metal constructions at a market," says Mikhail Chizhenok, vice chairman of the board at Mirax Group. "Our company buys metal separately, and builds metal constructions ourselves in our work shops on our building sites if it is framework, or on our industrial base if it is fencing constructions or block-containers," says Gernot Klammer, the managing director at Alpenbau, part of Peresvet-Group. According to him, on the construction market there are a number of companies with various structures that offer a wide spectrum of services on the manufacture of metal constructions - both Russian and those that import. "It is difficult to say whether these companies are affiliated with industrial giants because the concept of metal constructions includes a wide spectrum of products which differ significantly from each other," adds Klammer. "Now we also buy metal rolling for the production of ferro-concrete products," says Mikhail Popov, head of the department of material and technical support at Mospromstroimaterial.

Many industrial giants in view of the increase in demand for metal constructions are actively increasing their potential in this field. In particular, the Urals Metallurgical Company plans to invest 550 million euros in the construction of an electro-metal works in Tyumen. At the beginning of 2009 it already intends to start installing equipment, and completion of construction of the factory according to the schedule will be in 2010. The company started constructing the factory in December 2006. It is expected that it will have a capacity to produce 550,000 tonnes of high-quality rolled metal a year. Smelting will be carried out by electro steel smelters. The enterprise will mainly focus on the domestic market: the Tyumen region, the Khanti-Mansiisky and Yamalo-Nenets regions, and the Omsk, Kurgan and Sverdlovsk regions.

In turn, the St. Petersburg metallurgical company, an affiliated structure of Komtex, will invest 3.2 billion rubles in the construction of a new factory that will produce metal constructions. The company intends to deliver production to local builders and hopes to obtain a third of the St. Petersburg market and in connection to this has already made an application to obtain the status of a strategic investor. The project assumes the construction of a metal construction factory with a capacity of 50,000 tonnes per year, three service centers for processing rolled metal for the building industry and mechanical engineering, and also a warehouse. The complex is planned to be built within seven years: work will begin in the third quarter of 2008, and the total volume of investments in the project will be 3.217 billion rubles. The first phase, which will allow for metal rolling to be produced, will be put into operation 1.5 years after the start of construction.

Magnitogorsk Metallurgical Complex is realizing a similar project. Finnish holding Ruukki also has its own service center for processing metal in St. Petersburg, and plans to invest 20 million euros in expanding production.

Payment for metal

Like the majority of building materials, metal constructions rise in price every year. "Prices in the metal construction market at the moment are quite stable although builders also complain that constantly rising prices for metal constructions raise the cost of construction. There is no monopolistic environment in this market - there are many manufacturers. And still new manufactures plan to open. As a result the end user always has a choice," says Baranov.

According to his data, in 2007 the price for metal constructions grew 15-20 per cent. "Naturally, such an increase could have reoriented some builders to the use of finished ferro-concrete designs, but a mass transition has not occurred - for technological reasons and in connection with the fact that prices for ferro-concrete have also grown. The metal construction market has all the same shown growth in 2007 in comparison with 2006," he approves. Construction companies also agree with this point of view, however they name much higher figures for the rise in prices. "Prices depend on the cost of the raw material - metal. Prices for metal in the last half a month have grown 20 per cent, and they are continuing to grow. Now the average price for 1 ton averages 32,000-34,000 rubles, but at the beginning of the year on average was 16,000-17,000 rubles. So since the beginning of the year metal has risen more than 90 per cent in price," says Chizhenok.

In his opinion, this proceeds from abroad; in European countries and the US a rise in prices for reinforced rolled metal caused by increased demand from western and Turkish metallurgical complexes, has stimulated Russian complexes to also increase their prices. "The increase will continue as long as there is increased demand for reinforced rolled metal abroad. These are the consequences of globalization of the rolled market for Russia," he explains. According to Klammer, "now in the metal construction market there is a stable situation. Constantly changing prices do not allow us talk about any suspended prices. Today in Russia one tonne of rolled metal costs 28,000-40,000 rubles. In comparison with 2007 prices have increased by 25-30 per cent," he estimates.

Experts of the market name the main reason for the rise in prices as the ever increasing aggravated deficit of rolled metal, despite the volume of rolled metal released in the country constantly increasing. "A significant volume of production is exported. Exports are more favourable to metallurgical complexes as prices in the world market grow more quickly than in the domestic market," Klammer explains.

The rise in prices of rolled metal is directly influenced by the cost of ferro-concrete. "Two-three months after the price of rolled metal increases, manufacturers of metal constructions also raise their prices. The reason for the so "slow reaction" is the desire to keep clients or to maintain the necessary volume of orders as sharp increases in prices lead to changes in the structure of demand of other building materials also," he says. Komissarov adheres to the same point of view. "The metal construction market is characterized by high competition, and prices for metal constructions, in many respects, depend on the prices of raw materials. The raw material in this case is metal sheet and high-quality rolled metal produced by steelmaking companies. Prices are strongly differentiated and depend on the form of design, the size, material, etc. Since the beginning of this year the price for the main types of metal products have grown more than 60 per cent, and possibly, the rise in prices for metal constructions on average are similar," the expert says.

According to Popov, from January to April 2008 metal has risen in price by 32 per cent and it is not stopping. The average price for metal in April was 26,290 rubles per ton and in May was already 28,585 rubles per ton. So only for April 2008 the increase in the cost of production on average is estimated at 9 per cent. In Popov's opinion, this growth has also resulted in a rise in prices for all demanded groups of ferro-concrete products in the Moscow market. "From January to April the price for wall blocks, aerodrome tiles, engineering ferro-concrete, etc, have grown on average 5-10 per cent," he says.

Trade will make demand

As a result, those who have decided to invest in this segment made the right choice. It will remain just as profitable, in the opinion of experts, to produce metal constructions in the future. "Expansion of domestic demand and the positive dynamics of industrial production allow us to talk about increases in demand for metal construction. Industrial production figures are characterized by the expansion of capacities due to new construction and reconstruction, and accordingly, reveal the most dynamic fields of consumption of metal constructions. In turn, the deterioration of the fixed capital of industrial enterprises and an increase in the investment expenditures are expanding the commodity market," notes Index-Box.

According to Klammer, today the profitability in the metal construction segment in Russia averages 9-18 per cent, but as analysts predict, this may reach 30-40 per cent. "It is quite a good prospect for our country," the expert approves. According to him, in the last few years more and more manufacturers have been aspiring to create specialized factories, for example bridge building factories, which expand the choice of offered production. "Universal manufacturers form approximately 50-52 per cent of the total supply in the market. Large enterprises located in the main territory of the central federal region and in the Urals, account for more than 70 per cent of the total volume of the market," says Klammer.

According to Chizhenok, prices in the next 6 months are forecast to continue to increase. "In December it is possible to expect a seasonal recession, which in view of larger scales of construction in Russia will be no more than 20 per cent. The cost of ferro-concrete, of course, depends on the prices for metal and cement - and prices for it will also rise, but with a delay: this is connected with the fact that manufacturers of ferro-concrete always have a certain stock of raw material. Since January to the beginning of May 2008 the cost of ferro-concrete has increased by 11 per cent," he says.

"Proceeding from predicted rates of growth of various segments of the real estate market, by 2012 the share of commercial real estate in the structure of the consumption of metal constructions will increase to about 42 per cent, and the share of industrial premises will decrease to about 14 per cent, and the share of residential buildings will practically not change. The current situation in the field of road construction does not give a reason for a positive forecast in this segment. Most likely the share of constructions of road construction, for example bridges and flyovers, will considerably decrease," experts at Index-Box note.

According to analysts, in the last few years in Russia a boom in the construction of retail premises has been observed and consequently the share of this segment may increase. "Development of trade has been accompanied by intensive development of the material and technical base of this field and has changed the structure of the given services. For example, the volume of consumption of metal constructions by retail enterprises was 147,000 tonnes according to results for 2007, and the rate of growth of retail areas in 2005-2007 was 120 per cent.

In view of a significant increase in the potential market capacity of retail enterprises at a level of 110 per cent in the medium term, a corresponding growth of consumption of metal constructions is also predicted,” experts at Index-Box approve. "The prospects of the metal construction market in Russia are very good. In view of increasing construction, attention of the state on the development of the infrastructure of the country will also increase demand for metal constructions, although prices, of course, will grow. On the basis of the trends in this market the creation of new kinds of metal constructions and the use of new technologies is possible," notes Baranov.