SLUGGISH SOVIET STEEL INDUSTRY HOLDS DOWN ECONOMIC GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83T00233R000200080001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 29
• Document Creation Date: December 22, 2016
• Document Release Date: May 24, 2010
• Sequence Number: 1
• Publication Date: June 1, 1982
• Content Type: REPORT

Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Directorate of Confidential
Intelligence
Sluggish Soviet Steel Industry
Holds Down Economic Growth
Confidential
SOV 82-10089
June 1982
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Intelligence
Sluggish Soviet Steel Industry
Holds Down Economic Growth
IIt/ormation available as of I May 1982
has been used in the preparation orthis report.
Division, SOVA
This assessment was prepared by
the Office of Soviet
Analysis. Comments and queries are welcome and
may be directed to the Chief, Soviet Economy
Confidential
SOV 82-10089
June 1981
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
-Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4 ~
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Sluggish Soviet Steel Industry
Holds Down Economic Growth
Key Judgments The Soviet steel industry has become a major drag on the economy.
Shortages of steel, especially high-quality products, are holding back the
growth of civilian machine building and other priority sectors of the
civilian economy. Planned cutbacks in the growth of new fixed investment
stem in large part from the lack of steel to support construction and the
manufacture of producer durables.
The 1981-85 Plan calls for production of crude steel and rolled steel
products to increase to 168 million metric tons and 118 million tons,
respectively, by 1985-roughly the same level originally planned for 1980.
These goals are beyond reach; we estimate that output of crude steel will be
about 155 million tons in 1985 and rolled steel output about 108 million
tons.
During the early 1980s at least, lagging steel production could well be the
most important bottleneck undercutting Soviet plans to provide steady
increases in the production of military hardware while satisfying the
demand for consumer durables and investment goods and maintaining
exports, primarily to Eastern Europe. Shortfalls in steel production are
likely to limit investment in key sectors of the economy such as electric
power, transportation, and nonferrous metallurgy. If Soviet steel produc-
tion continues at its present pace, military requirements could preempt
about half of the growth in Soviet production of rolled steel products
during the current plan and an even larger share of the increase in output
of high-quality steel products.
To fill part of the gap between the supply of and demand for steel products
in the USSR, Moscow has turned to Western suppliers. Net steel imports
(including pipe) from the West now rank second only to grain in the Soviet
import bill. Purchases of steel will have to continue well into the 1980s, ag-
gravating the USSR's prospective hard currency bind
The main cause of the deteriorating performance of the steel industry is in-
adequate past investment in all sectors of the industry-from mining to
rolling and finishing steel products. Investment allocations have not been
enough to support ambitious development plans, partly because real
investment costs have been rising and allocations do not stretch as far as
before. Although the USSR plans to increase investment in the steel
industry by almost one-third in 1981-85 compared with 1976-80, the plan
probably understates the amount of new investment required to achieve the
Confidential
SOV 82-10089
June /982
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
necessary capacity growth. In particular, the imbalances in capacity among
the components of the industry-iron ore, coking coal, crude steel, and
finished steel-are unlikely to be eliminated over the next several years
because of the long gestation periods involved in bringing new capacity on
line
In addition, shortfalls in the production of coking coal and iron ore and in
the collection of scrap metal have pulled steel production down. Raw
materials for the steel industry are likely to continue to be tight. Asa re-
sult, the USSR would have to trim plans for steel production, cut exports,
boost imports, or adopt some combination of these options. All of these
choices are unpalatable. Shaving production plans would aggravate the
steel shortages already plaguing many sectors of the economy. Cutting
exports would weaken client states in Eastern Europe. Boosting raw
material imports to tie level needed to support planned 1985 steel
production would cost at least $2 billion annually at current market
prices-this on top of the large amounts the Soviets will have to spend for
Western steel products.
Raw materials shortages also will interfere with plans to modernize
steelmaking capacity, thus depriving the USSR of potential savings of raw
materials, energy, and labor. A longstanding Soviet objective is to replace a
large share of older open-hearth furnaces with the basic oxygen furnaces
and electric furnaces predominant in the rest of the world. The unpredict-
ability of raw material supplies, however, will force the Soviets to keep the
open-hearth furnaces, in which pig iron and scrap metal are completely
substitutable.
Large purchases of steel products and Western processing technology will
be needed through most of the 1980s at least. Imports of large-diameter
pipe figure heavily in Soviet plans for the construction of oil and gas
pipelines-including the proposed Siberia-to-Europe line, which will re-
quire about 3 million tons of high-quality steel pipe. Until at least the mid-
1980s, the Soviets also will need to buy large amounts of cold-rolled steel
for machine building, automobiles, and consumer durables, tin plate for
canning and packaging, and various types of sheet products for use in
transformers and electric motors. During 1981-85 the total value of Soviet
steel imports will probably accumulate to about $17-20 billion (in 1981
prices), substantially more than during 1976-80.
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
The USSR is also seeking Western processing technology to reduce its
dependence on imports of Western specialty steel and as part of an overall
modernization program. The French are building the important Novoli-
petsk steel plant, which will produce 7 million tons of specialty steels per
year when full capacity is achieved (1986 at the earliest). When Novoli-
petsk is fully operational, the Soviets should be able to reduce, if not
eliminate, purchases of many types of Western steel (except large-diameter
pipe). The West Germans are building a large steel plant near Kursk with a
capacity to produce about 2 million tons annually. This plant, scheduled for
completion in the mid-1980s, will use a technology that does not rely on
blast furnaces and therefore uses much less coke. Both Novolipetsk and
Kursk are critical to Soviet steel development, especially to production of
specialty steels.
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Key Judgments
Background
Historical Development 1
Iron Ore Production Stagnates 6
Falling Production of Coking Coal 10
Coking Coal 12
2. Planned and Actual Steel Production, 1980
4. Purchases of Western Plant and Equipment for Steel Industry 5
Since 1976
7. Production of Coking Coal, by Basin
8. Actual and Planned Production of Steel and Related
Products, 1981-85
9. Real Capital Investment Per Ton of Additional Iron and 14
Steel Capacity
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
10. Pig Iron and Scrap Metal Requirements, by Type of
Steelmaking Furnace
11. Soviet, US, and Japanese Steelmaking Capacity, by
Type of Furnace
1. Major Iron and Steel Plants
2. Regional Resource Movements in the Iron and Steel Industry 7
3. Major Iron Ore and Coking Coal Deposits
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Sluggish Soviet Steel Industry
Holds Down Economic Growth
Steel production problems have gained a great deal of
attention in the internal debate over Soviet economic
policies and have significance for both economic
growth and the Soviet balance of payments. An
article in Sotsialisticheskaya industriya focused on
steel's dismal performance in the first two months of
1982:
The situation in the USSR oJ.Jerrous metallurgy
has not changed.for the better. The metallurgists
failed to full the two-month plan in terms oJpig
iron, steel, Iinished rolled metal products, and
coke. Production ojthese most important types of
output was 4 to 5 percent lower than it was in the
same months last year. A shortage of metal is now
beingJelt in all machine-building sectors and in
construction, and this is ct1lecting the rhythm and
coordination of the work of the entire national
economy.'
This report assesses the causes of the current lag in
production, giving special attention to problems in the
production of iron ore, coking coal, and scrap metal;
discusses the impact of raw materials supply on Soviet
efforts to modernize steelmaking capacity; and exam-
ines some of the adjustments that Moscow has made
and will have to make during the 1980s to cope with
steel shortages.2
Historical Development
By any yardstick, the Soviet iron and steel industry is
huge. Crude steel output was 149 million tons in
1981-roughly one-fifth of total world production and
some 40 million and 50 million tons more than output
in the United States and Japan, respectively (see table
1).' The USSR is the world's largest producer of
rolled steel products, steel pipe, coking coal, iron ore,
pig iron, and manganese." It has about 40 percent of
the world's proven reserves of iron ore and manganese
and about 20 percent of the world's reserves of coal,
much of which is suitable for coking. In 1980 the
Soviet iron and steel industry:
? Accounted for about 6 percent of the total value of
industrial output and about 9 percent of the value of
industrial capital stock.
? Employed about 1.4 million workers-about 4 per-
cent of the industrial labor force and more than
triple the number of ironworkers and steelworkers in
the United States.
? Consumed about 10 percent of the Soviet output of
electric power and natural gas and about 25 percent
of the country's production of coals (u)
France (see figure 1).
During the same period, the Soviets' ferrous metal
sectors included:
? One hundred thirty iron ore mines with a total
estimated capacity of 300 million tons of usable
ore.b
? Ninety-two beneficiating plants to concentrate iron
ore for shipment to blast furnaces.
? Thirty-six enterprises (with 138 blast furnaces) to
produce pig iron, including the world's largest blast
furnace at Krivoy Rog.
? Seventy-six steel mills, including the huge plants at
Magnitogorsk and Krivoy Rog, whose total output
exceeds the combined steel production of Italy and
With the backing of a leadership determined to
ensure that there would be enough steel to support a
broad range of ambitious military and industrial
programs, steel production grew without interruption
during 1950-75. The annual increments were steady,
averaging about 4 million tons in the 1950s and about
5 million tons from 1960 through 1975. In 1971 the
USSR achieved its longstanding goal of surpassing
the United States in steel production and becoming
the world's largest producer.
25X1
25X1
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Soviet, US, and Japanese Production of Crude Steel
1950
27.3
87.8
4.8
1960
65.3
90.1
22.1
1965
91.0
119.3
41.2
1970
115.9
119.3
93.3
1975
141.3
105.8
102.3
1980
147.9
101.5
111.4
1981
149.0
108.9
101.7
Source: Data for the USSR are taken from annual issues of
Narodnoye khozyaystvo SSSR. Data for the United States and
Japan are taken from various issues of the Annual Statistical
Report, American Iron and Steel Institute. Data for 1981 are
preliminary.
Production Peaks in Late 1970s
During 1976-80, the Soviet steel industry continued to
develop, adding about 134 million tons of raw iron ore
capacity, mainly in the Ukraine and Kursk; 5.6
million tons of pig iron capacity; 14.3 million tons of
crude steel capacity; and 7.4 million tons of rolled
steel capacity (all calculated in terms of potential
annual production). Total investment in the iron and
steel industry amounted to about 15 billion rubles-6
percent of total Soviet industrial investment and
about 25 percent more than allocations to the steel
industry during 1971-75.
Despite the capacity buildup, steel production faltered
during 1976-80 as all sectors of the iron and steel
industry fell considerably short of the original targets
for 1980 (see table 2). Production of crude steel
climbed from about 141 million tons in 1975 to a peak
of about 152 million tons in 1978. Following a
downturn in 1979 and 1980, output registered a slight
improvement last year (see table 3). In 1980 steel
production fell about 17 million tons short of plan.
The cumulative gain in production achieved during
Planned Actual Shortfall
(percent)
Iron ore 275 245 11
Coking coal 205 178 13
Pig iron 122 107 12
Crude steel 160 to 170 148 10 a
Rolled steel 115 to 120 103 12 a
Steel pipe 19.8 18.1 9
a Shortfall calculated on the midpoint of the range for the original
1980 target.
1976-80-less than 7 million tons-was not substan-
tially greater than annual gains posted during 1960-
75. Output of rolled steel products, pig iron, coking
coal, and iron ore also has stagnated or declined since
1978.
There is little prospect for anear-term recovery.
Indeed, performance in all sectors of the steel industry
was lackluster at best in 1981. Production of crude
steel rose slightly to 149 million tons, about 8 million
tons below the 1981 plan.' Output of rolled steel
products held at 103 million tons, about the same level
achieved in 1977 and 6 million tons short of the 1981
target. Production of iron ore and coking coal leveled
off or declined. Output of coking coal dropped to an
estimated 175 million tons, about 6 percent below the
1977 peak. Moreover, the availability of scrap metal
for steelmaking stagnated during the 1976-80 period
at around 75-80 million metric tons.
Turnaround in Soviet Trade
The shortfalls in domestic steel production have led
Soviet planners to increase markedly their imports
from the West of both steel products and Western
steelmaking equipment and technology. In 1970 the
USSR was a net exporter of steel, but by the late
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Figure 1
Major Iron and Steel Plants
` ;?~,KrivoY R
U o L
~S~/~~ is-~Z~
Northwest
~ Central
_, Novplipetsk fie&t $1~78P1F?
zAnyy Fep
~helya6m
Urals
9A.~
Kazakhstan
./
Soviet
Union
vosihirsk
~ ~Ku:n
~I(eregande
- Economic
boundary
1970s imports and exports were roughly in balance-
about 7 million tons on each side.e Buying expensive
steel from the West and selling less expensive types to
other Communist countries and the LDCs, however,
caused the USSR's annual net steel hard currency
import bill to rise from about $2.5 billion in 1975 to
about $3.5 billion in 1981. Steel now ranks second
only to grain in the Soviet import bill.
To compensate for domestic shortcomings, primarily
in the production of rolled steel products, Moscow has
sought Western steelmaking equipment and technol-
ogy. Since 1975 the Soviets have spent at least $1.5
billion on Western technology, primarily from West
Germany, France, Italy, and Japan (see table 4).
About half of Soviet expenditures since 1975 have
been earmarked for the huge Novolipetsk specialty
steel plant, being built by the French, and the large
steel plant near Kursk, being built with West German
assistance.
Planning Errors
Soviet publications advance a number of reasons for
the poor performance of the steel industry and the
resulting shortages of steel products throughout the
economy. A major problem has been the industry's
inability to provide a broader assortment of high-
quality steel products. This situation did not occur
suddenly; it has been emerging for the last 20 years
and stems directly from the consistent priority that
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Table 3
Production of Rolled Steel an
d Relate
d Produ
cts a
M
illion Metric Tons
1975
1976
1977
1978
1979
1980
19816
1985
Plan ~
Estimated
Crude steel
141.3
144.7
146.7
151.5
149.0
147.9
149.0
168
155
Rolled steel products
98.7
101.4
102.1
105.4
103.2
102.9
103.0
118
108
Steel pipe
15.9
16.8
17.0
17.5
18.1
18.1
18.5
21.9
21
Iron ore
232.8
239.1
239.7
244.2
241.0
245.0
243
275
255
Pig iron
103.0
105.4
107.4
110.7
109.0
107.0
107.0
118
xn
Coking coal a
181.0
186.2
186.3
182.0
181.0
178
175
193
170
a All data taken from Narodnoye khozyaystvo SSSR v godu, unless
otherwise indicated.
6 Preliminary.
Data for rolled steel products based on oft"icial Soviet plans. Data
for all other products based on recent statements by I. Kazanets,
Minister of Ferrous Metals, and Summary oJ' World Broadcasts,
SU/W1164/A/10, 11 December 1981.
n Data for 1975-78 are taken from the No. 4 issue of Ugol' (the
Soviet coal journal). Data for 1979-81 are estimated.
the USSR has given crude steel production. Despite
rhetoric to the contrary, little priority has been ac-
corded to improving the quality of steel products and
modernizing steelmaking capacity. Thus the Soviets
are paying the price for unbalanced investment deci-
sions made at least a decade ago.
Despite the urgent advice of Soviet specialists, prog-
ress in reorienting investment priorities has been slow.
According to a Soviet analysis, about 90 percent of
annual investment in the steel industry in the late
1970s was earmarked for facilities to boost crude steel
production.9 Other studies indicate that if investment
priorities were changed in favor of qualitative im-
provement and modernization, demand for steel prod-
ucts could be met for the foreseeable future with no
increase in crude steel production or total capital
investment.10 While these claims may be exaggerated,
the industry would benefit greatly from greater steel-
making efficiency.
A basic measure of the efficiency of steelmaking
operations is the yield obtained in the production of
rolled steel products." A longstanding Soviet objective
has been to improve the yield in steelmaking oper-
ations to at least the level achieved in the United
States. In 1981 the Soviet yield was 69 percent, a
ratio that has not changed much since 1950. The yield
in the United States and Japan was about 74 percent
and 87 percent, respectively, in 1981. In other words,
the Soviets had to produce about 1.45 tons of crude
steel to obtain 1 ton of rolled product in 1981,
compared with about 1.35 tons in the United States
and 1.15 tons in Japan.
If the Soviets could increase the yield in steelmaking,
they would realize substantial benefits-an increased
availability of steel products and a reduction in iron
ore, coking coal, and scrap metal requirements. For
example, at the 1981 level of production, every per-
centage point of increase in the yield would result in
about 1.5 million tons of additional rolled steel prod-
ucts. Looked at in a different way, if the yield did not
increase, an additional 1.5 million tons of rolled steel
products could only be obtained by producing an
additional 2.2 million tons of crude steel.
25X1
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Year (Contract
Signed)
Supplier
Details of Equipment
Value
(million US $)
Destination
1976
ASEA, Sweden
Plant for the production of powder-based high-speed steel
by the ASEA-Stora process. Capacity of 3,500 tons per
annum (tpa) high-alloy tool steel.
68
NA
1976
Schloemann-Siemag and
Siemens, W. Germany
Continuous five-strand and tandem cold-rolling mill
capacity of 2.5 million tpa. Steel strip for the production
of sheets.
98
Novolipetsk
1976
Lurgi Chemie and Hut-
tentechnik, W. Germany
Mechanical and electrical equipment for pelletizing
plant. Capacity 8 million tpa of blast furnace pellets.
50
Krivoy Rog
1976
Nippon Kokan, Japan
Plant for continuous annealing of cold-rolled steel sheets
by the NKK-Cal process. Capacity of 500,000 tpa.
52
Novolipetsk
1976
Schloemann-Siemag and
Siemens, W. Germany
and Rutner Industrie-
Anlagen, Austria
Two high-capacity pickling lines for steel strip. Joint
capacity of 4.5 million tpa.
50
Novolipetsk
1977
Creusot-Loire, France
Two tubemaking lines and atension-leveling line to
handle stainless steel strip.
5
Chelyabinsk
1977
Korf-Stahl and Lurgi
Chemie, W. Germany
Four direct-reduction plants using the Midrex process.
Total capacity of 1.7 million tpa sponge iron.
240
Kursk/Oskol
1977
Salzgitter, W. Germany
Pelletizing plant. Capacity of 2.5 million tpa.
90
Kursk/Oskol
1977
Finn-Stroi Consortium,
Finland
Construction of iron ore mine, concentration, and pellet
plants.
NA
Kostomuksha
1978
Nippon Steel, Japan
Continuous galvanizing line for sheet steel. Capacity of
500,000 tpa.
NA
Novolipetsk
1978
Creusot-Loire, France
Carbon steel longitudinal and transverse cutting line for
steel strips and sheets, and lines to make steel bracing
strip.
22
Novolipetsk
1978
Danieli, Italy
Two-strand continuous casting machine for high-alloy
steel in both slab and billet form.
5
Serp i Molot
1979
Krupp, W. Germany
Electric steelmaking plant. Capacity of 1.45 million tpa.
Includes four UHP electric arc furnaces, vacuum treat-
ment equipment, and desulphurizing plant.
185
Kursk/Oskol
1979
'
Creusot-Loire, France
Electric steel plant to produce 480,000 tpa of cold-rolled
steel sheet.
350
Novolipetsk
1980
Italimpianti, Italy
Two continuous annealing lines for heat treatment of
large steel castings.
NA
Cheboksary
1980
Creusot-Loire, France
Extruded tube plant.
NA
NA
1980
Pont-a-Mousson, France
Equipment for manufacturing cast-iron tubes. Capacity
180,000 tons tubes pa.
45
NA
Rhetoric aside, Moscow seems not to be counting on
an improvement in yield to ease steel shortages, at
least during the current plan. Soviet plans call for
crude steel production to increase to 168 million tons
by 1985 and rolled steel output to 118 million tons in
that year-for an implied yield of about 70 percent.
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Transportation Bottlenecks
The ferrous metals industry also has been hurt by
increasing transportation delays-especially in the
rail transport system. Transportation snarls are espe-
cially troublesome because Soviet steel plants typical-
ly operate with low inventories of iron ore and coking
coal. According to the Minister of Ferrous Metals,
I. Kazanets, Soviet steel plants normally maintain an
iron ore inventory equivalent to 15 days of production.
Steel plants in the United States and Japan usually
maintain stockpiles adequate for several months.
Similarly, Soviet steel plants usually operate with a
week's supply of coking coal; US plants normally hold
a 60-day stock.12 Consequently, even small supply
disruptions can limit Soviet steelmaking operations.
There also have been reports that spot shortages of
fuel and brownouts caused by electric power interrup-
tions (the latter caused by transportation foulups)
have curbed steel production, mainly in the western
USSR. On balance, however, shortages of fuel or
electric power probably have not been a primary
cause of the shortfalls in Soviet steel production.
Iron Ore Deposits, by Region
Billion Percentage
Metric Tons Share
41.2
Kursk Magnetic Anomaly 16.7
Krivoy Rog 15.9
Other 8.6
Urals 6.1 9
Eastern USSR 16.4 26
Siberia 4.9
Kazakhstan 7.6
Other 2.2
Source: P. A. Shiryaev, Metallurgicheskaya i ekonomicheskaya
otsenka ihelezorudnoi bazy SSSR, Moscow, 1978, p. 9. See also V.
A. Boyarskiy, Razvitiye otkrytoy dobychi rud, Moscow: 1975,
PP? 28-32.
Because of transportation delays it is becoming diffi-
cult for the Soviets to deliver iron ore to the blast
furnaces. The volume and the distance of iron ore
shipments have increased greatly, straining an already
overtaxed rail transport system. The production defi-
cit in the Urals is especially troublesome for Soviet
planners. Iron ore mined in the Urals presently ac-
counts for only half of the region's requirements. For
example, about one-third of the annual output of the
Kursk Magnetic Anomaly (some 13 million tons) must
be shipped to blast furnaces in the Urals, a distance of
over 1,000 kilometers. Additional amounts of ore
must be shipped to the Urals from the Kola Peninsula,
the Ukraine, and Kazakhstan (deliveries of coking
coal pose analogous problems, as discussed below).
West Siberia also has become more dependent on ore
from other regions to meet its requirements. About
3 million tons of ore must be shipped to Novokuznetsk
from Rudnyy in Kazakhstan (see figure 2). Because no
major expansion is slated in iron ore production in
either Siberia or Kazakhstan, the Soviets may have to
tap ore producers in the western USSR to provide
Siberian blast furnaces with adequate amounts of iron
ore."
Raw Materials Squeeze
During the 1970s, imbalances between steel produc-
tion and the supply of essential raw materials for
steelmaking, which have their origin partly in plan-
ning errors and transportation bottlenecks, were the
decisive, immediate constraint on the growth of the
Soviet steel industry. Problems in providing sufficient
iron ore, coking coal, and scrap metal have been
building for years and are likely to limit gains in
Soviet steel production well into the 1980s.
Iron Ore Production Stagnates. The Soviets estimate
that their reserves of iron ore are about 60 billion
tons-40 percent of the world's total and enough to
support the current level of ore production for well
over two centuries (see figure 3). About two-thirds of
the iron ore reserves are located in the western
USSR-mainly at Krivoy Rog and the Kursk Mag-
netic Anomaly (see table 5). Moreover, about 70
percent of the country's iron ore deposits can be
exploited by inexpensive open pit mining methods."
Depending on a variety of circumstances, production
- Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Conl;dential
Figure 3
Major Iron Ore and Coking Coal Deposits
MOSCOW ~
..; Central
``Urals
6ekel
77)Mapnitog Y
West Siberia
Soviet
the cost of underground operations.
During 1976-80, however, the iron ore sector turned
in its worst performance since World War II. Output
of usable iron ore amounted to 245 million tons in
1980, 12 million tons more than production in 1975,
but 30 million tons below plan. Annual increments in
production during 1976-80-2.4 million tons-were
only about one-third of the average annual gain
registered routinely during 1950-75. Production
dropped to 243 million tons in 1981, 2 million tons less
than a year earlier, and about 9 million tons below the
1981 target. Production of iron ore has leveled off in
the Urals, Krivoy Rog, and the Kursk Magnetic
Anomaly-basins that account for about 80 percent
of total Soviet iron ore production (see table 6).
The stagnation in iron ore production apparently
caught Soviet planners by surprise. As recently as
1977, Soviet officials confidently predicted that pro-
duction would easily reach 275 million tons by 1980
and 350 million tons by the mid-1980s.'s They over-
looked two unfavorable trends of long standing:
Annual additions of new mining capacity have been
increasingly offset by rising mine depletion in older
basins.16
? Declining ore grades have resulted in a sharp in-
crease in production costs as well as a growing share
of investment that must be devoted to building new
ore-enriching facilities.
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Figure 2
Regional Resource Movements in the Iron and Steel Industry
These trends cannot be reversed quickly or cheaply.
Gross annual additions of new iron ore capacity
amounted to about 8 million tons of usable ore during
1976-80, about the same amount achieved yearly
since the mid-1960s. At the same time, mine deple-
tions rose to about 6 million tons per year during
1976-80, compared with about 3 million tons a decade
earlier. The Soviet data suggest that about three-
fourths of annual gross additions of new capacity now
simply offset mine depletion.
The Soviets are plagued by increasing delays between
the announced startup of new mines and the time
those mines reach full capacity. These delays are
caused by a failure to appreciate the increasingly poor
quality of the iron ore, the greater depths that must be
mined, and the increasing investment in ore-enrich-
ment facilities. In 1976 the Soviets announced the
startup of new mines at Krivoy Rog and the Kursk
Magnetic Anomaly with a combined annual capacity
of 12 million tons. By 1979 these mines were produc-
ing annually only 4.5 million tons of ore." The
Kostomuksha deposit in the Kola Peninsula originally
was scheduled to reach full capacity of 24 million tons
per year by the mid-1970s. The Soviets now claim
that this deposit will be fully operational in 1985.
Meanwhile, the average ferrous content of working
deposits declined from 50 percent in 1950 to 44
percent in 1970 and 35 percent in 1980.18 Almost
nine-tenths of Soviet iron ore must now be enriched
compared with only one-third in the late 1950s."
25X1
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Kola Peninsula
8
10
10
9
]0
9
NA
Kursk Magnetic Anomaly
18
36
37
38
40
40
41 a
Urals
26
26
27
27
27
27
NA
Siberia
13
16
16
15
15
14
NA
Kazakhstan
18
21
22
23
25
24
26 a
Ukraine (Krivoy Rog)
111
123
127
126
127
126
126 a
a Because of rounding, components may not add to the totals shown.
n Soviet Geography: Review and Translation, April 1979, p. 269.
Data for total production taken from Narodnoye khozyaystvo
SSSR. Regional breakdown interpolated.
a SSSR i soyuzniye respubliki v 1980 godu, Moscow: 1981.
Because of the steady fall in ore quality, the Soviets
have had to divert increasing amounts of investment
to building beneficiating facilities, raising both costs
and labor requirements. Investment in ore beneficia-
tion jumped from about 2 billion rubles during 1970-
75 to more than 3 billion rubles during 1976-80.20
About 70 percent of investment in the iron ore sector
currently is going into these facilities, compared with
about 40 percent in the late 1960s.21 There are fewer
rubles left for construction of new mines and modern-
ization of older facilities
The increase in the volume of raw ore that must be
processed to obtain a ton of usable ore has resulted in
a large rise in real investment costs-to about 102
rubles per ton of usable ore in the late 1970s com-
pared with 61 rubles per ton a decade earlier (see
table 9).22 According to a Soviet estimate the average
grade of iron ore will drop by 10 to 15 percent during
the 1980s, pushing up costs and investment require-
ments even more.23
To meet the 1985 target for usable iron ore (275
million tons), production would have to increase by
about 8 million tons per year during the remainder of
the current plan, roughly three times the average
annual increase achieved during 1976-80. Because of
the long leadtimes involved between the decision to
build a new mine and bringing the mine up to full-
capacity operation (seven to 12 years), the Soviets
would have to accelerate the completion of new
capacity to reach projected 1985 output. Even if the
depletion rate does not increase, gross capacity of
about 60 million tons would have to be put on line
during the current plan (1981-85}-12 million tons
per year-to achieve the 1985 target. The USSR 25X1
never has been able to commission this much capacity
in any plan period. Gross annual commissionings
averaged about 8 million tons per year during 1976-
80, fell to about 6 million tons in 1980, and probably
did not exceed 4 million tons in 1981.
Soviet calculations, moreover, indicate that 60 million
tons of additional iron ore capacity would require, at a
minimum, a capital investment of about 6 billion
rubles, which is equivalent to 30 percent of cumula- 25X1
tive investment the Minister of Ferrous Metals said
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Total b
164.8
181.0
186.2
186.3
182
181
178
170
168
Donets
84.3
88.5
89.1
86.8
82
80
74
67
68
Kuznets
46.9
56.1
59.4
59.9
60
60
55
53
53
Karaganda
16.9
18.1
18.9
19.0
19
19
27
26
23
Pechora
12.1
14.1
16.0
16.7
17
18
18
19
19
Other
4.6
4.0
3.8
3.9
4
4
4
5
5
e Source: 1970, 1975-78 data are from No. 4 issues of Ugol', 1968-
78. Because of rounding, components may not sum to the total
shown.
n Dces not include output at Neryungri in the South Yakutsk coal
basin. Coking coal production is scheduled to increase to 6 million
tons by 1985 and 13 million tons by 1990. All of the output will be
exported to Japan under along-term contract and thus has no effect
on domestic supply.
Estimated.
was earmarked for the whole ferrous metals sector
during 1981-85.24 (This estimate does not include
planned investment for ore beneficiating plants.). The
Soviets cannot afford to devote such a large portion of
investment to iron ore mining, given competing de-
mands from other sectors of the steel industry.
Falling Production of Coking Coal. Soviet reserves of
coking coal, like the ore reserves, are enormous-65
to 70 billion tons, an amount sufficient to support the
current volume of production for well over three
centuries.25 The bulk of Soviet coking coal deposits are
located in heavily industrialized regions of the Donets
and Kuznets basins close to major blast furnaces.26~
Nonetheless, during 1976-80 the Soviet coal industry
turned in its worst performance in the postwar era.
Coking coal production slipped from a peak of 186
million tons in 1977 to 175 million tons in 1981 (see
table 7). Production is stagnant or in decline at the
Donets and Kuznets basins, which account for nearly
three-fourths of Soviet coking coal production.
Two developments, similar to those in the iron ore
sector, are hampering coking coal production: 2'
? Mining conditions are deteriorating rapidly, espe-
cially in the Donets and Kuznets basins.
? Because of insufficient past investment, large
amounts of new capacity are not coming on stream
fast enough to offset stagnant or declining produc-
tion elsewhere.
In the Donets basin, which currently accounts for
about 40 percent of total Soviet coking coal produc-
tion, mining conditions are among the worst in the
world. In terms of mine depth, thinness of the coal
(seams, and methane concentrations, most of the Don-
ets mines would not belong in the category of proven
reserves by Western standards. Production of coking
coal in the Donets basin fell from 88 million tons in
1976 to 74 million tons in 1980. We estimate that this
decline will continue well into the 1980s and that
production will drop below 70 million tons by the end
of the decade. At best, the Soviets may be able to
stabilize coking coal production in other basins.
25X1
25X1
25X1
25X1
25X1
_ _ Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Falling production in the Donets basin and reduced
imports from Poland have hampered production of pig
iron and crude steel, especially in the Ukraine where
steel production declined by about 6 percent during
1978-80.28 To offset part of the coking coal shortages
.in the western USSR, the Soviets have been forced to
move coking coal from the Kuznets basin, a distance
of about 4,000 kilometers.29
The present problems in the coal industry stem from
years of insufficient investment allocations. Since the
mid-1960s the coal industry has taken a back seat to
oil and gas in investment priority. During the last 20
years, investment in oil and gas has increased by
about 300 percent and 400 percent, respectively, and
investment in the coal industry by only 50 percent.
The coal industry's relatively low priority seems likely
to continue during the 1980s. Up to three-fourths of
the investment in energy during 1981-85 will be
devoted to oil and gas, while a large portion of the
remainder will go to support Moscow's ambitious
nuclear power program. As a result, coal's share of
investment in energy will continue to decline.
Because of lagging investment in the coal industry,
the introduction of new capacity has slowed. We
estimate that about 80 percent of gross annual com-
missionings in the coal industry simply offsets deple-
tion, compared with about 50 percent a decade ago.30
Scrap Metal in Short Supply. About half of the steel
produced in the USSR is smelted from scrap metal, a
share that has not changed much in the last decade."
According to a Soviet calculation, the cost of produc-
ing steel from scrap is about one-fifth that of produc-
ing steel from pig iron.J2 Investment per ton of scrap-
based steel is claimed to be dramatically less than the
investment needed to smelt steel from pig iron," while
transport costs to move scrap metal are reported to be
far less than the cost of moving iron ore and coking
coal." Accordingly, the industry has been urged to use
more scrap metal in steel production. This proved to
be easier said than done because the supply of scrap
metal stayed at about 75-80 million tons per year in
the late 1970s.'
The lack of success in collecting more scrap metal
seems to stem primarily from shortages of equipment
to sort scrap metal and shortages of labor, especially
skilled engineers. Soviet commentaries indicate that
scrap-sorting procedures are slipshod; in many cases,
only a perfunctory check is made to determine the
type of scrap.36 Wages in the scrap metal industry are
reported to be low by Soviet standards, and it tends to
attract low-quality engineers.
Finally, scrap collection is poorly coordinated and
ineffective because of the diffusion of responsibility
for collection among many ministries for which the
assignment is an unwelcome sideline. Press reports
cite numerous instances in which scrap metal has
been sent hundreds of kilometers to a metallurgical
plant even though a similar plant may be nearby but
subordinated to a different ministry." Some Soviet
studies suggest that the amount of scrap "irretrieva-
bly lost" amounts to from 10-20 million tons per year
in the machine-building and metalworking (MBMW)
sector alone.38 Because MBMW accounts for about 40
percent of annual Soviet steel consumption, the total
amount of scrap metal wasted annually nationwide is
much higher.39
Planners have complained about tight supplies of
scrap metal for years, but in the past, planners had a
fallback position. If supplies of scrap became uncom-
fortably tight, more pig iron could be used in the
open-hearth furnaces (OHFs), which operate flexibly
on pig iron and scrap. This option has become less
available because of tight supplies of pig iron. Short-
ages of scrap metal curtail the operations of electric
furnaces (EFs), which operate almost exclusively on it.
These furnaces account for about 10 percent of Soviet
steelmaking capacity.
Production
The goals of the 11th Five-Year Plan (1981-85)
resemble the production targets originally planned for
1980. Production of crude steel is scheduled to in-
crease to 168 million tons by 1985, some 20 million
25X1
25X1
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
tons more than 1980. Output of both rolled steel
products and pig iron is to reach 118 million tons by
1985, while production of coking coal and iron ore is
slated to rise by about 10 percent during the same
period.?? These goals are extremely dubious. The
increments in production of crude steel, rolled steel,
and pig iron would have to triple during 1981-85
compared with the increments during 1976-80. Cok-
ing coal production would have to jump by about 15
million tons during the current plan-another goal we
consider unrealistic (see table 8). We expect shortfalls
in the production of raw materials and in the intro-
duction of new steelmaking capacity as well as strin-
gent investment allocations that will probably limit
Soviet production of crude steel and rolled steel
products to 155 million tons and 108 million tons,
respectively, by 1985-about the same tonnage in-
crease achieved during 1976-80
Iron Ore. We believe that Soviet production of iron
ore will not exceed 255 million tons by 1985-about
10 million tons more than the 1980 total but some 20
million tons below the 1985 target. If the Soviets
achieve planned 1985 iron ore production-275 mil-
lion tons-the supply of ore would be sufficient to
meet planned steel production in that year and main-
tain exports at 19801evels. However, if our production
estimate is reasonably accurate, the Soviets face an
apparent supply gap of about 20 million tons by 1985.
To help balance domestic supply and demand of iron
ore, the Soviets could trim exports (about 45 million
tons per year),41 boost imports (about 2 million tons
per year), or try to make greater use of scrap metal in
the OHFs and EFs. The last option will probably be
limited by tight supplies of scrap metal.
Eastern Europe presently accounts for about 90 per-
cent of Soviet exports of iron ore. The Soviets could
cover anticipated domestic requirements by cutting
exports to Eastern Europe by 50 percent. But this
policy would reduce Moscow's economic leverage over
its client states, and any Soviet decision to lower iron
ore exports to Eastern Europe is likely to be based
mainly on political rather than strictly economic
considerations. The Soviets might phase out exports to
Actual and Planned Production of Steel
and Related Products, 1981-85
Production Approximate
Increments in Production
Actual
Plan
Actual
Plan
1980
1985
1976-80
(1981-85)
Crude steel
148
168
7
20
Rolled steel
103
118
4
I S
Iron ore
245
275
12
30
Pig iron
107
118
4
11
Coking coal
178
193
-3
I S
the West, but the amounts involved are comparatively
small-about 3 million tons per year-and most of
the shipments are covered by long-term contracts
Although the Soviets could boost imports of iron ore,
an increase from about 2 million tons in 1980 to 20
million tons by 1985 would push the cost up to
roughly $1 billion at current market prices. The
Soviets in fact have been negotiating with Brazil to
import iron ore in return for Soviet-manufactured
products. Although the possibility of a sharp jump in
Soviet iron ore imports cannot be dismissed, we still
consider it unlikely because of the hard currency
stringencies the USSR will face during the 1980s.
Unless some remedy is taken, lagging production of
iron ore would by itself limit Soviet steel production to
160 million tons by 1985, some 8 million tons less
than planned. This estimate assumes that supplies of
coking coal and scrap metal are adequate to meet the
planned goal for steel production.
Coking Coal. The Soviets will need about 210-215
million tons of coking coal to meet the 1985 Plan for
steel production and to hold allocations to other
industrial users at 1980 levels, including export com-
mitments. To reach this goal, Soviet production of
coking coal would have to increase by about 35
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
million tons by 1985. If our estimate of mine depletion
is reasonably correct, gross commissionings of new
capacity would have to jump to about 170 million tons
during 1981-85. Such an amount is unrealistic; it is
almost twice the total commissionings in the coal
industry during 1976-80 (including commissionings of
steam coal). According to a rough calculation, the
Soviets would have to invest from 5-9 billion rubles
during 1981-85 to support commissionings of coking
coal at this level.?Z The implied volume of investment
is also unrealistic; at the upper end of the range it is
about equal to total cumulative investment in all
sectors of the coal industry during 1976-80.
Coking coal production probably will decline from
about 175 million tons in 1981 to less than 170 million
tons by the late 1980s because of reduced production
in the Donets basin. As in the case of iron ore, the
Soviets will be forced to adjust by trimming plans for
steel production, increasing imports, cutting exports,
changing the pattern of domestic allocations, or
adopting some combination of these options.
Although we cannot predict how the Soviets will deal
with shortages of coking coal, we can size the prob-
lems planners face. If the needs of the steel industry
are fully met and the demands of all other consumers
are held at or near 1980 levels (including export
commitments), Soviet imports of clean coking coal
would be about 30 million tons by 1985, about triple
the average annual imports during the 1970s.?' At
current market prices-$60 per ton-these imports
would cost nearly $2 billion. If imports are not
increased and the needs of the steel industry are fully
met, coking coal allocations to nonsteel users would
have to be cut by 25 percent by 1985-an infeasible
solution since these sectors include electric power,
petrochemicals, and nonferrous metals. Conversely, if
allocations to nonsteel users are held at 1980 levels
and imports are not increased, the supply of coking
coal available for ferrous metallurgy would drop by
about 4 percent by 1985, compared with 1980.E
The USSR could also trim exports,, especially to
Eastern Europe, to help avert part of the supply
crunch. This policy, however, would aggravate an
already unstable situation caused by uncertainties in
coal exports from Poland-a major supplier to other
East European countries. Some reductions in sales to
hard currency countries are possible but would not
help much; the amounts involved are small. Moreover,
most Soviet coking coal exports to hard currency
countries are covered by long-term contracts.
Investment. The priority to be given to investment in
the steel industry is still unclear. In early 1981
Minister of Ferrous Metals I. Kazanets said that
investment in the industry would increase by 30
percent during 1981-85 compared with that during
1976-80, suggesting cumulative investment would
have to be about 20 billion rubles in the current plan.?? 25X1
More recently, however, President Brezhnev an-
nounced that total fixed investment in the country
would be cut by 30 billion rubles during 1981-85.
Whether this overall cut would affect allocations for
ferrous metals is unknown. The Soviets claim in
addition that the share of investment allocated for
improvement in quality of steel products will be
doubled during the 1981-85 Plan, with emphasis on
substantially increasing production of cold-rolled 25X1
steel, large-diameter steel pipe, and transformer
steel.45 Such claims, however, are not new; they have
been a hallmark of Soviet plans since the mid-1960s.
We think, however, that because capital costs are
increasing rapidly, investment increments at least on
the order of those suggested by Minister Kazanets
would be needed to recover the pre-1975 momentum
of the industry. Indeed, according to Soviet studies
investment requirements have been climbing in all
important activities of steelmaking since the mid-
1960s (see table 9). Investment per ton of rolled steel
has almost doubled in the last 15 years. The Soviets
cite a number of reasons for the increase in invest-
ment requirements. In ore mining, the steady decline
in the average grade of the ore resulted in a 70-
percent increase in investment per ton of ore during
the 1970s alone. Although progress has been slow, the
Soviets are producing relatively more sophisticated
steel products (for example, cold-rolled sheet and tin
plate) which requires additional rolling equipment,
labor, and energy. Meanwhile, air and water pollution
control equipment are taking a greater share of
annual investments. The Soviets report that about 5
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Con>Fidential
percent of annual investment in the steel industry is
currently earmarked for pollution control; as recently
as the mid-1960s the Soviets probably invested even
less in pollution control equipment.46
Raw Materials Shortages Hold Back Modernization
Tight supplies of raw materials will retard the mod-
ernization of Soviet steelmaking capacity. A long-
standing objective has been to replace much of the
largely obsolete open-hearth-furnace steelmaking ca-
pacity with the basic oxygen furnaces (BOF) and
electric furnaces that are dominant in the rest of the
world. Nonetheless, open-hearth furnaces still account
for most of Soviet steel output. The BOF, despite its
low operating cost and higher efficiency, requires
about one-half more pig iron per ton of steel than an
OHF. To the extent that pig iron output is held back
by slow growth in iron ore and coking coal supplies,
conversions to the BOF will be delayed. Similarly, the
availability of scrap metal will limit the pace at which
the Soviets can install new EF capacity. Despite the
fact that the EF requires less labor and is easier to
maintain, it uses about twice as much scrap per ton of
steel as an OHF and nearly five times more than a
BOF (see table 10). Therefore, the Soviets will prob-
ably continue to rely heavily on the OHF, which
operates flexibly on pig iron or scrap metal.
According to original Soviet plans, electric furnace
capacity was to increase by 60 percent during 1981-
85-an increase from roughly 15 million tons in 1980
to more than 25 million tons in 1985.^' This total
probably includes about 2 million tons of new electric
furnace capacity scheduled for the Stary Oskol plant
near Kursk. Stary Oskol will use adirect-reduction
iron process that eliminates the need for blast fur-
naces. In this process, an iron sponge with a ferrous
content of about 92 percent is produced, which can be
used in electric furnaces with small amounts of scrap
metal. Originally set for completion in 1979, the plant
is unlikely to begin turning out steel before 1985
because of construction problems.48 Aside from Stary
Oskol, Soviet plans call for installation of about 5-6
million tons of scrap-based electric furnace capacity
by 1985. To do this, however, would entail the
commissioning of as much new electric furnace capac-
ity during 1981-85 as was installed during the last
decade, an unlikely outcome.49 Part of the Soviet plan,
Real Capital Investment Per Ton of Additional
Iron and Steel Capacity
Iron Ore b
Crude Steel ~
Rolled Steel
Products d
1966-70 61
431.3
543
1971-75 NA
586.1
797
1976-80 102
760.5
1,005
a Although the sources are not specific, we believe that these prices
are 1969 estimate prices for construction and 1973 wholesale prices
for equipment adjusted by 1976 coefficients for construction and
installation work.
b Planovoye khozyaystvo, No. 8, 1979, p. 56.
Vestnik akademii nauk SSSR, No. 10, 1981, p. 72.
a N. P. Barmy, Ekonomika chernoy metallurgic SSSR, Moscow:
1978, p. 137.
for example, hinges on commissioning three scrap-
based electric furnace plants in Moldavia, Belorussia,
and the Soviet Far East. These plants, which will have
a combined annual capacity of 1.5 million tons and
require a capital investment of about 1 billion rubles,
are scheduled for completion in 1984.50 But because
work on~ these plants still has not begun and construc-
tion times are long, the plants probably will not be
fully operational until the late 1980s at the earliest.
We believe that because of stringencies in scrap metal
supply, the Soviets will be able to commission no more
than 3 million tons of new electric furnace capacity by
the mid-1980s. This new capacity would increase
annual scrap metal demand by more than 2 million
tons-about 50 percent of the increment in scrap
metal supply the Soviets are likely to achieve by 1985.
We project that the supply of scrap metal will in-
crease from about 78 million tons in 1980 to 82
million tons in 1985, or an annual growth of about 1
percent. the sup-
ply of scrap metal increased by about 1 percent during
1976-80. A Soviet estimate indicates that the supply
of scrap metal will have to increase to about 90
million tons by 1985, roughly 3 percent per annum, to
meet fully the needs of the steel industry in that year.
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Pig Iron and Scrap Metal Requirements, by Type of Steelmaking Furnace
Type of Furnace Kilograms/
Metric Ton
Pig Iron
Scrap Metal
Pig Iron Charge as a
Percent of Total
Metal Charge
Estimated
Soviet Use
(percent)
Kilograms/
Metric Ton
Scrap Metal Charge as a
Percent of Total Metal Charge
Estimated
Soviet Use
(percent)
Open-hearth
600
0 to 100
55
500
0 to 100
45
Basic oxygen
925
70 to 80
80
215
20 to 30
20
Electric
150
0 to 15
13
990
85 to 100
87
Source: Battelle Columbus Laboratories, Energy FJfciency in
Soviet Ferrous Metallurgy, 15 October 1980.
We believe this target is unrealistic unless Moscow
takes unusually tough measures to marshal additional
resources behind astepped-up scrap metal recovery
campaigns' In particular, increased scrap metal re-
covery will entail a sharp jump in rail haulage and
possibly the diversion of additional highly trained
labor. If scrap metal supplies became tight enough,
the Soviets could trim exports, presently some 1-2
million tons per year.s~ Like reductions in exports of
iron ore and coking coal, such a cutback would most
seriously affect Eastern Europe
The share of steel produced in BOFs and EFs was to
rise to 32 percent and 12 percent, respectively, by
1980, while the OHF share was scheduled to drop to
about 56 percents' But these goals were not achieved
(see table 11). In 1980 the OHF still accounted for
over 60 percent of Soviet steel production, much more
than other major steel-producing countries. In the
1981-85 Plan, the shares of steel produced in BOFs
and EFs are to increase to 33 percent and 16 percent,
respectively; by 1985 the OHF share is supposed to
drop to about 50 percent. The plan implies about a 15-
million-ton increase in BOF-based steel, a 10-million-
ton jump in EF-based steel, and a 5-million-ton drop
in OHF steel, presumably by retiring some of the
oldest OHF capacity
Although the Soviets must modernize their steelmak-
ing capacity, we doubt that much progress is possible
during the current plan. More likely the share of steel
produced in BOFs probably will not change much
during 1981-85 because of raw material constraints.
The Soviets should be able to raise the share of EF
steel from about 10 percent in 1980 to 13 percent in
1985-manly about half of the planned increase. The
share of OHF steel probably will fall from about 61
percent in 1980 to 58 percent in 1985, still far higher
than in other steel-producing countries.
In effect, by neglecting modernization, the Soviets
seem to have painted themselves into a corner. They
must modernize the steel industry to break the cur-
rent logjam in production. At the same time, the
Soviets will have to defer any major program to
modernize steelmaking capacity as long as uncertain-
ties exist in the supply of iron ore, coking coal, and
scrap metal.
The Military Factor
If our production estimates are accurate, steel will
become an even greater bottleneck in the economy
during the 1980s. Because of the importance of steel
to economic growth, shortfalls in production will force
cutbacks in key sectors of the civilian economy-
transport, electric power, and nonferrous metals.
Moreover, shortages of steel in the civilian economy
are likely to be exacerbated by the steady increase in
military requirements for steel products. The military
preempted about 10 percent of Soviet production of
___ Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Soviet, US, and Japanese Steelmaking Capacity, by Type of Furnace
Source: Data for the USSR are based primarily on Kommunist
vooruzhennikh sil, No. 15, 1981, pp. 21-23. Data for the United
States and Japan taken from the Annual Statistical Report,
American Iron and Steel Institute, 1980.
rolled steel products in 1981-roughly 10 million
tons. We believe that Soviet production of rolled steel
products will increase at most by 5 million tons during
1981-85 over the level of 1980. If allocations for the
military grow in line with overall projected growth in
defense spending during 1981-85-about 4 percent
per year-military requirements for rolled steel pro-
ducts could increase to about 12 million tons by 1985.
In other words, larger military requirements could
account for as much as 40 percent of the total
increase in rolled steel production. For certain types of
the highest quality steel products-high-tensile-
strength alloys and superhard steel-the military's
share of the increase would be even higher.
Imports as a Safety Valve
Imports of steel products and Western technology will
be one of the options open to Moscow in dealing with
problems in the steel industry. The viability of this
option will depend upon how severe the hard currency
shortages will be and the priority accorded the iron
and steel sector.
Imports of large-diameter steel pipe will be critical for
the construction of oil and gas pipelines. The proposed
gas export pipeline alone will require about 3 million
tons of steel pipe. We estimate that the Soviets will
need to import at least 3 million tons of steel pipe per
annum during the 1980s for all of their scheduled
pipelines. At current market prices-$550 per ton-
the cost of imported pipe could amount to about $16
billion during the 1980s.
This projection assumes that the Soviets will not be
able to produce pipe comparable in quality to import-
ed pipe for the foreseeable future and that the Soviets
would not forgo pipe imports in favor of domestically
produced pipe that operates at lower pressures. The
imported 56-inch pipe operating at 75 atmospheres of
pressure can deliver about 35 billion cubic meters of
gas per year. The best the Soviets have available is a
48-inch pipe operating at 75 atmospheres or a 56-inch
pipe operating at 55 atmospheres. These pipes can
deliver about 19 billion and 21 billion cubic meters of
gas per year, respectively.s^ In other words, the Soviets
would have to produce nearly twice as much pipe to
deliver the same amount of gas the imported pipe can
handle. In terms of steel requirements, for every ton
of pipe not imported, the Soviets would have to
produce and install about 1.7 to 1.8 tons.
The Soviets will continue to buy, at least until the
mid-1980s, large amounts of cold-rolled sheet steel for
machine building, automobiles, and consumer dura-
bles, tin plate for canning and packaging, and various
types of high-quality products for use in transformers
and electric motors. Imports of these steel products
25X1
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
amounted to about $2 billion in 1981, and purchases
are expected to remain at least at this level until 1985.
At current market prices, the steel import bill will
accumulate to an estimated $17-20 billion during
1981-85. If the Soviets decided to import iron ore,
coking coal, and scrap metal in the amounts necessary
to meet planned 1985 steel production, the 1981-85
import bill would climb to over $25 billion. We doubt
that the Soviet hard currency situation will be promis-
ing enough to allow them to import all these items,
particularly when coupled with their need for grain
and machinery. We expect that the Soviets will have
less than $20 billion available for steel imports.55 ~
The USSR will also need access to Western process-
ing technology to reduce its dependence on imports of
Western specialty steel and as part of an overall effort
to modernize domestic steelmaking capacity. The
French are helping to build the important Novolipetsk
steel plant, which will produce 7 million tons of
specialty steel per year when full capacity is achieved
(1986 at the earliest). When Novolipetsk is fully
operational, the Soviets may be able to eliminate
purchases of many types of Western steel (other than
large-diameter pipe). The West Germans are building
a large plant near Kursk that reportedly will produce
2 million tons of steel per year when full capacity is
achieved-perhaps by 1985. This plant will use the
direct-reduction iron process, which eliminates the
need for blast furnaces and thus lowers the need for
coking coal. Both Novolipetsk and Kursk are critical
to Soviet steel development plans, especially for spe-
cialty steels.
If hard currency shortages force the Soviets to limit
steel imports, Moscow could cut back production and
cancel or stretch out projects that require large
amounts of steel. Private automobiles, for example,
account for about 2 to 3 percent of annual Soviet steel
consumption, largely in the form of cold-rolled sheet
steel which, in turn, is a major Soviet import.?6
Moscow might therefore cut back on automobile
production, reduce imports of cold-rolled sheet some-
what, and channel a greater portion of domestically
produced sheet into higher priority applications. Simi-
larly, the Soviets could stretch out plans for the
completion of the Baikal-Amur Mainline railroad
(BAM). Every kilometer of track requires about 150
tons of steel rails; completion of the BAM network
will require about 500,000 tons of rails. Additional
amounts of steel will be needed to build the bridges,
tunnels, and ancillary facilities related to this project.
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
' In connection with this paper, the development of the Soviet
ferrous metals industry during 1975-85 was investigated using a
large-scale multiregional, cost-minimizing linear programing mod-
el. The model was used to help identify critical resource constraints
on steelmaking in 1980 and 1985, and to estimate maximum
feasible crude steel production in 1985. The model results were
consistent with production estimates derived independently. A
research paper (to be published) provides a detailed description of
'Crude steel is the product in the first solid state after melting. All
data on steel production refer to crude steel, unless otherwise
' Pig iron is produced in blast furnaces, using coking coal, iron ore,
and limestone. Coking coal is the chemical agent used to reduce the
iron ore. Manganese is an additive used in any type of steel
3 N. P. Barmy, et al, Ekonomika chernoy metallurgic, Moscow,
1978, p. 5; K. I. Zhilyaev, et al, Ekonomiya materialnikh resursov
chernoy metallurgic, Moscow: 1979, p. 5; and Gazovaya promysh-
6 Usable iron ore is raw ore that has been cleaned and is suitable for
concentration or direct shipment to blast furnaces. Raw ore is the
product first extracted from the mine. It includes rock, dirt, and
' The 1981 plan set the following targets: crude steel, 156.8 million
tons; rolled steel products, 109 million tons; and iron ore, 252
million tons. See Kommunist vooruzhennikh sil, No. 15, 1981, pp.
? The Soviets suspended reporting on steel trade in 1976. Thus,
judgments on the volume of steel trade since 1976 must be
considered rough approximations, subject to a range of error of at
least 1 million tons on both the import and export side~~
? N. F. Sklokin, Ekonomicheskiye problemy povysheniya kachestva
i razvitiya sortamenta chernikh metallov, Moscow: 1979, p. 6~
"The yield is the ratio of production of rolled steel to production of
crude steel. The yield is determined in part by the composition of
the steel product mix. Because a large share of Soviet steel output
consists of relatively simple types of products, their yield may never
equal that of the United States or Japan
"Depletion is defined here as the amount of capacity lost because
of mine exhaustion and the lower productivity of older mines that
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
"Ibid.
:: Planovoye khozyaystvo, No. 7, July 1981, pp. 31-33.
25X1
25X1
25X1
25X1
_' Calculated on the basis of a real investment cost of 102 rubles per
ton of usable ore. Many of these projects have long leadtimes;
therefore some of the investment that will result in increased
capacity during the current plan was allocated during 1976-80. By
the same token, some investments Burin 1981-85 will not result in
new capacity until later plan periods
Z' I. I. Novitskiy, Energoticheskoye toplivo SSSR, Moscow: 1979,
pp. 10-14. See also V. A. Shelest, Regionalnyye energoekonomi-
cheskiye problemy SSSR, Moscow: 1978, pp. 113-116.~~
:6 A major use of coking coal is to chemically reduce iron ore in
blast furnaces. The Soviets use about half a ton of coking coal per
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
~? In addition Soviet imports of coke and coke products from Poland '~ This section presents some key findings of earlier research. For
averaged about 9 million tons per annum during 1972-79. Imports details and explanation of the methodology, see The Soviet Coal
The
estimates for mine depletion include both steam and coking coal.
Since 1978, the Soviets have suspended detailed reporting for steam
and coking coal. Our analysis may understate the severity of the
depletion problem with respect to coking coal because the bulk of
Soviet production comes from basins where the depletion problem
"Agitator, No. 13, 1981, pp. 31-33.
15 Sotsialisticheskaya Industriya, 3 January 1982, p. 1.~
'~ See Planovoye khozyaystvo, No. 3, 1977, p. 124, for details.
"Summary ctf World Broadcasts, 27 November 1981, p. A14. A
more recent source states that the Soviets are planning a 50-percent
increase in electric furnace capacity during 1981-85. See, Stal' No.
" Voprosy ekonomiki, No. 10, 1981, p. 122. The primary reason for
lower investment is that electric furnaces are less costly than open- " Stal' No. 8, 1979, p. 572.
hearth furnaces. (v)
" Voprosy ekonomiki, No. 7, 1979, pp. 35-66. See also Sovetskaya
Rossiya, 24 March 1982, p. 1.~~
'Z This estimate is a rough approximation. Hard data on Soviet
scrap exports have not been available since 1976. Exports amounted
'? Goals for crude steel, pig iron, iron ore, and coking coal are based
on statements by the Minister of Ferrous Metals reported in
Agitator, No. 13, 1981, pp. 31-33. See also, Summary q/'World
Broadcasts, SU/W1164/A/10, 11 December 1981, for details. The
plan for rolled steel production is based on Soviet goals for the 11th
'Z This estimate is based on the most recent available data on
investment per ton of coal at selected Soviet basins. In the mid-
1970s, such investment was 55 rubles and 30 rubles at the Donets
and Kuznets basins, respectively. See Planovoye khozyaystvo, No.
25X1
25X1
25X1
25X1
'25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Z~X1
25X1
25X1
25X1
Z~X1
25X1
25X1
25X1
LOJ~ I
25X1
25X1
25X1
25X1
'25X1
-- -- Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4 -
 Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4
Confidential
Confidential
Sanitized Copy Approved for Release 2010/05/24 :CIA-RDP83T00233R000200080001-4