The Coal Trader

Coal Mining Steel Industry Magnitogorsk Russia

Chinese engineers build coke plant in Russia

Magnitogorsk, in the Ural mountains, was developed as a symbol of Soviet industrial might and its capacity for economic modernization. Today, a new, 75 billion-ruble (roughly $840 million) coking plant in the steel town is being built by a Chinese engineering giant and hundreds of Chinese workers. The contract between Magnitogorsk Iron & Steel Works PJSC, known as MMK, and state-owned Sinosteel Engineering & Technology Co. was signed before Russia’s invasion of Ukraine and links between the two predate that. But since Chinese engineers and builders began arriving in large numbers to speed up construction last year, the project has been trumpeted by officials on both sides as emblematic of closer ties.

A hefty investment when compared to most past Chinese activity in Russia, Magnitogorsk is just one of dozens of examples from across the country of Beijing’s engineers and machines keeping Russian heavy industry alive. It’s a trend that owes much to China’s technological prowess, but also to overcapacity at home and to Moscow’s urgent need to keep producing the iron and steel its wartime economy requires.

With few choices for Russia, bonds are strengthening. Beyond the Urals, the country’s biggest mining company, MMC Norilsk Nickel PJSC, turned to China for help on a sulfur dioxide emissions-capture operation after European contractors stepped away in 2022, with the project still incomplete. Steelmaker Severstal PJSC has just signed up a Chinese equipment supplier for a near-$1 billion iron ore processing plant.

Chinese diggers and heavy dump trucks are taking a growing share of the market. Meanwhile both of the top two Chinese metallurgical service providers have pointed to significant overseas growth — Metallurgical Corp. of China Ltd. said the value of newly signed overseas contracts in 2023 amounted to 63 billion yuan ($8.8 billion), representing an increase of over 43% on the previous year, including a contract to build a production line for aluminum giant United Co. Rusal International PJSC. Sinosteel Engineering & Technology Co. also says it wants to boost its market share in Russia and its neighbors, among others.

“For Russia, Chinese equipment supply is a necessity now, as there is no alternative,” said Alexander Gabuev, director of the Carnegie Russia Eurasia Center. “China has a broad range of equipment. Most of the time it is not worse than other offerings and sometimes it is quite innovative.”

Beijing remains wary of violating wide-ranging US sanctions imposed in early 2022 and has avoided direct military support, but it also prefers to hold its northern neighbor close. Russia’s reliance on China has increased dramatically in the past two years as Western groups leave and its needs accumulate, from import substitution for basic electronics to project redesign, alternative spare parts and creative solutions for chronic worker shortages exacerbated by conscription and emigration.

The steel, mining and metal industry is among those seeing the biggest change. While oil and gas producers have been focused on replacing imported technology since 2014, when the US and the EU first imposed sectoral sanctions after Russia annexed Crimea, this corner of heavy industry was, relatively, a success story that leaned on external links. That left steelmakers and miners far more dependent on Western imports, prompting a scramble in early 2022 to find new suppliers for everything from reagents to drilling machines.

‘No limits’ friendship?

Chinese providers have stepped up. When Russia hosted its biggest Russian metals and mining annual conference in Moscow in November, Chinese outfits — mostly equipment makers and service providers — accounted for 364 out of 815 participants. Only Russia had more. In 2019, for a comparison outside the pandemic period that sealed China’s borders, there were 83.

“The demand for the participation of Chinese partners in Russian projects is growing,” Economic Development Minister Maxim Reshetnikov said in September at a separate Russia-China forum. “Among other things, it’s due to the switch to the Chinese technologies and the replacement of technologies of companies that are leaving Russia.”

Russian companies named in this story, including MMK, declined to comment, as did Sinosteel, a unit of China Baowu Steel Group Corp, the world’s largest steel producer. MCC, part of China Minmetals, could not be reached for comment. One immediate advantage is cost.

“Chinese partners can set low prices for equipment thanks to comprehensive support from their state, including tax breaks and subsidies, financial preferences from banks as well as administrative assistance from the Chinese authorities and trade unions,” said Daria Builova, director of strategy at Natek, a manufacturer of technological equipment for oil and petrochemical industries. But there is also technology. China completed massive investments in capacity in the past decades to produce metals for its own urbanization, building some of the world’s largest and most technically up-to-date metallurgical plants. Some are arguably greener too. Its companies are advanced partly because of the almost perennial glut at home that is also pushing them abroad.

In the first 10 months of last year, Chinese exports of electric vehicles and equipment to Russia grew 27% compared with the same period in pre-war 2021 to $13.3 billion, while the import of mechanical equipment and devices rose 79% to $20.3 billion, according to estimates published by the Moscow-based Gaidar Institute. Meanwhile machinery imports from countries like Germany have tumbled. And yet, there’s a difference between keeping Russia’s industry alive, especially in the context of an economy supported by state spending and military demand, and helping it to grow. While China is keeping furnaces firing, its support may not be enough for new production.

“In terms of maintaining and servicing existing units, we see that the current replacement of parts and machines is carried out relatively painlessly. If we look at operating results, there is good capacity utilization, including in sanctioned companies,” said Dmitry Kazakov, analyst at BCS in Moscow. But the picture is less certain for projects approved before 2022 which expected to include Western technology, “because in some cases China may not have sufficient competence.”

Sukhoi Log, a giant gold project in eastern Siberia that ranks among the world’s largest undeveloped deposits, is among those already held back. Polyus PJSC’s 2020 pre-feasibility study for the $3.3 billion project was partially based on European equipment and technology to produce around 2.3 million ounces of gold a year. It’s final study was due in 2022, and is still delayed.

For Russian firms, there is also the uncomfortable question of overreliance. Executives at resource companies surveyed by Bloomberg said they were concerned about becoming too dependent on China — just as some had perhaps leaned too heavily on Europe in the past. That may involve finding alternatives in Latin America or Turkey, or domestic production. And while China can capture market share, it is not filling the funding gap. Beijing’s support has limits and its companies have other choices when it comes to long-term financial bets. “In the mid-2010s, China entered the Russian market with dumping prices and captured significant market shares. This trend is being exponentially accelerated by the current situation with loss of Western competition due to sanctions,” said Monika Hollacher, foreign trade and Russia expert at Germany’s Mechanical Engineering Industry Association (VDMA), which includes of 3,600 German and European mechanical and plant engineering companies.

“The situation is quite different for direct investments.”

For now, back in Magnitogorsk — whose original furnace was also built with help from an outside provider, then from the US as Josef Stalin raced to emulate US Steel’s operation in Gary, Indiana — links with China are only expected to tighten. The plant’s modernization efforts continue, and the region’s governor has forged ties with Shandong province, a center for China’s privately owned oil refiners, food processors and state steel production.