By John Helmer in Moscow
Russia tries cooling steel prices.
The Russian government has postponed a decision on whether to impose export duties of up to 20% on steel products, despite a flurry of press and brokerage reports claiming the government’s senior industry minister has already promised not to levy new taxes.
A meeting between steelmakers and Deputy Prime Minister Igor Sechin on Saturday last, June 21, did not reach a policy conclusion, both government and industry sources report.
The duty scale proposed by the government may parallel the regime recently adopted by the Indian government — 5% for zinc-galvanized products; 10% for cold-rolled and hot-rolled products; and 15% for semi-fabricated slabs.
Russian ferrous scrap exports have been taxed at 15%, with a minimum of 15 Euro/per tonne, for more than a decade already; this was a measure originally sought by the domestic steelmills as a way of holding down the price at which the Russian scrap processors and exporters would sell the scrap to the mills. The scrap export tax rate is also being reviewed at the Ministry of Industry.
The problem is that the average sale price for a tonne of domestically produced flat steel hit Rb32,031 ($1,358 — includes VAT and delivery) last week; the rate of growth is 45% since January, or almost 10% per month.
In May, Industry Minister Victor Khristenko kicked off the lobbying contest, telling a gathering of steelmill and pipemaking representatives that they should present their justification for current pricing, and their case for and against export duties and other measures to regulate the price growth.
Khristenko’s intervention followed the opening by the trade division of his ministry — formerly at the Ministry of Economic Development and Trade, which was reorganized last month — of an anti-dumping and domestic injury investigation of pipe imports, principally from China. A parallel investigation is also underway at the Federal Antimonopoly Service (FAS) of the price Severstal, Novolipetsk and Magnitogorsk are charging for strip supplied to the pipemills.
Steel isn’t the only manufacture targeted for price control. High-level government officials, led by former Prime Minister Victor Zubkov — now first deputy prime minister — have backed export quotas and duties, as well as price controls on domestic fertilizers, in order to assist farmers, and limit food price growth. A windfall profit tax — previously imposed on oil producers and exporters — is also being considered for the steelmakers.
Opposition to the proposal for the government to levy an export duty on steel has been voiced by the steelmakers. Their bargaining position is undercut, however, by their traditional position in favour of the protective export duty on scrap.
The steelmakers argue that the increase in domestic prices follows the international trend. Their critics claim that the vertical integration of the Russian steel groups, and internal transfer pricing of coal and iron-ore, allows higher profitability than is warranted.
Russia currently imports from 25% to 30% of the domestic requirement for steel reinforcement bar and other long products that are much in demand in the booming construction and infrastructure sectors of the market. The domestic rebar price moved recently ahead of the export price by about 5%, after trading at a discount for the first months of the year. Flat product imports currently account for about 9% of domestic Russian consumption.
FAS has also tried jawboning to curtail price growth for coking coal; as vital to feed steelmaking furnaces as scrap. Last month, the agency publicly warned that coking coal producers may be penalized for unjustified price hikes. It remains unclear what the FAS intends to set as the threshold limit for price increases that it will accept; and what scope for penalizing the coalmining companies, and compelling price cuts or controls the agency will test.
At present, the average coking coal price in Russia is $160 per tonne, which represents a significant discount to prices in Ukraine and Asia – key export markets for the Russian product – where prevailing prices are around $300/tonne. However, since domestic steel prices are rising sharply, it is expected that coking coal will follow, picking up another 25% to more than 50% growth to the $200-$250/tonne level.
Pressure for imposing the new export tax is also coming from the Ministry of Finance, in order to offset revenue losses from the award of tax cuts in the oil and gas sector. The politics of the steel export duty is thus a test of clout between the steel lobby versus the oil men. Most Russian steel traders are betting the oil lobby will prove the stronger.
According to Igor Konovalov, head of leading steel service center group Inprom, “Export duties are not simple topic. There is an intention to introduce them as they can be used as additional funding for the budget, first of all, and then to try to cool domestic prices.”
He added: “There is a very strong lobby from both sides. Oil companies and construction companies are lobbying very hard for introduction, and they may succeed.”
The postponement of the government’s decision has been confirmed to Mineweb by a source in the Industry and Trade Ministry, which is responsible for the analytical work on the duty proposal. The postponement has also been confirmed by one of the country’s leading steelmills. A source there said: “As I understand, no decision was made. There was absolutely nothing decided. [The government] will continue to study arguments of the both sides.”
By contrast, Mechel group spokesman, Ilya Zhitomirsky, claims in a comment to Mineweb: “The decision or agreement was made on Saturday. There will be no duties, but there will be long- term contracts. Everything is still in oral form, and yet to be finalized in writing. Then we will understand how the long- term contracts process will work.”
This is the position of the steel lobby, but for the time being it remains on the defensive. Despite press leaks, and a Reuters report, claiming that the government has accepted the undertaking from the steelmakers to fix long-contract prices for steel in domestic trade, there is no finality. The press reports are wishful thinking from the steel lobby, an industry source acknowledges.
A government official was categorical, telling Mineweb that the only decision that has been made is to “to keep working on this question.”
The long-term contract scheme, reports James Lewis, an analyst with MDM Bank, would set pricing formulas between the coal, steel, and pipe producers. “It would seem to protect steelmakers against continued rising raw material costs (most often blamed as the main reason for rising steel costs). Still, it seems that such long term contracts could put producers with less self-sufficiency in coal, such as NLMK [Novolipetsk] and MMK [Magnitogorsk], at greater risk, especially given that they do not receive all of their coal supply on long term contracts.”
For vertically integrated steelmakers, like Evraz, Severstal, and Mechel, which are self-sufficient in coal and either sell the surplus domestically, or export it, the contract measure won’t have much impact.