The city of Magnitogorsk in the Ural Mountains was designed and built to become a symbol of Soviet industrial power and economic modernization. Today, a Chinese engineering giant and hundreds of Chinese workers are building a new coking plant for 75 billion rubles (19 billion CZK) in this steel city, reports Bloomberg.

The contract between the company Magnitogorsk Iron & Steel Works (MMK) and the Chinese state-owned company Sinosteel Engineering & Technology was signed even before the Russian invasion of Ukraine, but business ties existed there before that. Since Chinese engineers and construction workers began arriving in large numbers last year to speed up construction, officials from both sides have hailed the project as a symbol of closer ties.

Magnitogorsk is one of dozens of investments by which China keeps Russian heavy industry alive thanks to its engineers and machinery. It’s a trend that owes much to China’s technological prowess, but also to excess domestic capacity and Moscow’s urgent need to continue producing the iron and steel the economy needs.

As Russia has few options, ties are strengthening. The largest mining group MMC Norilsk Nickel has turned to China for help in capturing sulfur dioxide emissions when European suppliers pulled out of the project in 2022 and it is still not completed. Severstal Steel recently signed a contract with a Chinese company for the supply of equipment for an iron ore processing plant worth almost one billion USD (almost 23 billion CZK).

Chinese excavators and heavy dump trucks are taking increasing market share, and both of China’s largest metallurgical service providers are pointing to significant growth abroad. The Metallurgical Corporation of China said the value of newly signed foreign contracts rose 43 percent to 63 billion yuan (CZK 201 billion) last year. Among them is a contract for the construction of a line for the aluminum giant Rusal. Sinosteel Engineering & Technology also says it wants to increase its share in Russia and its neighboring markets, among other things.

“For Russia, the supply of equipment from China is now a necessity, because there is no alternative,” said the director of the Carnegie Russia Eurasia Center, Alexander Gabuyev. “China has a wide range of equipment. Mostly it’s no worse than other offers and sometimes it’s quite innovative,” he added.

Russia’s dependence on China

Beijing is concerned about violating extensive US sanctions imposed in early 2022 and is avoiding direct military support. But at the same time, it is careful to maintain close ties with its northern neighbor. Russia’s dependence on China has increased dramatically in the past two years as Western firms leave and Russia’s needs pile up – from replacing imports of basic electronics to the need to rework projects and source alternative spare parts to the need to find solutions to chronic labor shortages. While some employees had to join the army, some emigrated.

The steel, mining and metal industries are among those where the biggest changes are taking place. While oil and gas producers have focused on substituting imported technology since 2014, when the United States and the European Union first imposed sanctions on the sector following Russia’s annexation of Crimea, other sectors of heavy industry have relied more on external ties. This left steelmakers and miners much more dependent on Western imports, prompting a scramble in early 2022 to find new suppliers of everything from reagents to drilling rigs.

One benefit of this change is cost. “Chinese partners can set low equipment prices thanks to the comprehensive support of their state, including tax breaks and subsidies, financial benefits from banks, as well as administrative assistance from Chinese authorities and trade unions,” said Darja Builovová, Natek’s strategy director. Natek is a manufacturer of technological equipment for the oil and petrochemical industry.

But there is also technology. Over the past decade, China has completed massive investments in metal production capacity for its own urbanization, building some of the largest and most technologically advanced metallurgical plants in the world. Some of them are apparently even the most ecological.

China’s exports of electric vehicles and equipment to Russia rose 27 percent to $13.3 billion in the first ten months of last year compared to the pre-war period in 2021, according to an estimate by Moscow’s Yegor Gaidar Institute of Economic Policy. Imports of mechanical equipment and devices to Russia then rose by 79 percent to USD 20.3 billion. At the same time, imports of machinery from countries such as Germany fell sharply.

Uncertainty in new projects

For now, Russia is struggling to maintain its industrial sector in an economy supported by government spending and military needs. Although China keeps the blast furnaces running, its support may not be enough for new production. BCS analyst Dmitrij Kazakov points out that uncertainties arise in projects approved before 2022, which counted on the incorporation of Western technologies. In some cases, China may not have the appropriate skills and experience.

One project that has been delayed is the Sukhoi Log in eastern Siberia, one of the largest undeveloped gold deposits in the world. The project relied on European equipment and technology, according to a 2020 preliminary feasibility study. The final study was supposed to be completed in 2022, but it is still being postponed.

Russian companies are also concerned about over-dependence on China, just as there was a similar dependence on Europe in the past. This may lead to the need to look for alternatives in Latin America, Turkey or in the domestic market, i.e. Russia.

But China is not completely filling the funding gap. Beijing’s support has its limitations, and Chinese companies have other options for directing long-term financial investments. China entered the Russian market at dumped prices in 2010 and gained significant market shares, which was accelerated by the loss of Western competition due to sanctions. However, the situation is different with direct investments, pointed out Monika Hollacherová, an expert from the German industry association VDMA.

2024-02-04 09:45:56
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