By John Helmer, Moscow
Russia’s price watchdog, the Federal Antimonopoly Service (FAS), has announced that on its own initiative, it has opened a case against Novolipetsk Metallurgical Combine (NLMK) and its subsidiary, VIZ-Stal, charging that electric steel produced by the two mills has been priced in violation of Article 10 of the Competition Law of 2006. This article covers “prohibition of abuse of dominant position by an economic entity”. The provision charged in this case is Art 10, sect 1: “the establishment and maintaining of monopolistically high or monopolistically low price for a commodity.”
The timing comes just days after NLMK has released a financial report indicating that prices for its electric steels have been falling for at least the past six months. In the first quarter of this year, the price decline has been so steep at the VIZ-Stal mill that a 5% reduction in sales tonnage (compared to the December quarter of last year) has turned into a 14% fall in sales revenues; an 80% fall in operating profit; and an 84% fall in net profit.
Prices were also falling in the last quarter of 2010, according to NLMK’s report for the period. In that quarter, sales revenues climbed 9% on a 19% increase in the volumes of electric steel sold, while operating profit and net profit fell 24% and 33%, respectively.
Should the watch-dog be barking when the sheep have been getting thinner?
NLMK, owned by Vladimir Lisin, is the monopoly producer of electric steels in Russia, turning out two types, dynamo and transformer steel, at NLMK’s main Lipetsk complex, and also at VIZ-Stal at Yekaterinburg. With unique alloys and coatings, these steels are manufactured with the magnetic properties required to conserve energy and reduce corrosion inside electric machinery.
Lisin bought out VIZ-Stal for $550 million in mid-2006. Allowing the elimination of domestic competition at the time, FAS announced its approval of the deal, claiming it was doing the opposite. According to the FAS report in 2005, the Russian monopolization was the trend in the global markets:
“Consent to acquisition with regard to terms of global competition. In 2005-2006, pursuant to item 1, art. 18 of Competition and Restriction of Monopoly Activities in Commodity Markets RSFSR Law, FAS Russia reviewed an application of Novolipetsky Metallurgical Integrated Works, plc (NLMK, plc) for the purchase of a 100% share of authorized capital stock of VIZ-Stal, Ltd. This transaction constituted a horizontal integration for subject to acquisition was a business turning out, in terms of product range, similar products, and led to restriction of competition in transformer and dynamo rolled metal markets characterized by a high degree of concentration. In considering this transaction, FAS Russia took into account the opinions of the key transformer rolled metal consumers in the Russian Federation relative to the deal impact on consumers’ business activities. Also, account was taken of the fact that the acquisition of the a 100% share of authorized capital stock of VIZ-Stal, Ltd is consistent with the world-wide trend in concentration on ferrous metallurgy markets; the emergence of groups such as Arcelor, Corus, Mittal Steel, Posco, US Steel is an example of the trend. FAS Russia held protracted and complicated talks with NLMK, plc management, which helped resolve numerous legal and competition-related issues, and make a decision on potential approval of the above deal by FAS Russia, provided NLMK, plc meets, in line with FAS Russia order, several behavioral requirements aimed at securing competition.”
Six months later, on June 9, 2006, these are the pricing conditions the FAS imposed:
“for 20 years not to increase prices by more than 3% per month on electrical steel (using as the base price weighted average sales price for the Russian market similar products under ExWorks production plant for the month preceding the month of notification), without prior notice not less than 45 calendar days before the date of the planned change in prices of the antimonopoly authority on the proposed price increases with explaining the reasons for their change. If the federal antimonopoly authority on the basis of submitted or received an additional request for information about the planned price increases would come to a conclusion about abuse of OAO NLMK and OOO VIZ-Stal (as well as their successors), its dominant position on the Russian commodity market of electrical steel in the form of setting monopolistically high prices, the federal antimonopoly authority shall send a written reasoned notification to this effect addressed to NLMK and VIZ-Stal.”
And this reporting requirement: “OAO Novolipetsk Steel LLC and VIZ-Stal shall, within 5 years after the issuance of the prescription to inform each quarter (within two weeks after the end of the quarter) the federal antimonopoly authority about the current prices on electrical steel, and on production volumes , supplies for the Russian market and exports of electrical steel, in bulk and in value terms, specifying the geographic region of delivery and the buyer.”
So if NLMK isn’t applying for a domestic price increase, why is the FAS launching its investigation now?
Maxim Ovchinnikov, head of the industry department at FAS, confirms there has been no price objection from domestic consumers of the product, Russian manufacturers of high voltage electrical turbines and other equipment. “There was no application. The case was opened in relation to a market analysis by the FAS.” Details of this have not been released, Ovchinnikov explained, because “only participants in the case can get access to the materials.” In its public statement, the FAS announces that it “sees signs of violation of antitrust laws in the market of electrotechnical (transformer) steel.” Asked how that can be if prices are declining, he added: “we cannot state anything for sure yet. The commission to be held around July 4-5 will investigate the matter and make the ruling.”
NLMK refuses to comment on the FAS charges while the investigation is pending. But the company’s trading and financial reports for the fourth quarter of 2010 and the first quarter of this year document declining prices for electric steels.
In its most recent operating report for the first quarter ending March 31, NLMK said that sales volumes of electric steels at its main Lipetsk site and at VIZ-Stal came to 121,000t, well ahead of the same period of 2010, but down 13% on the December quarter of 2010.
At VIZ-Stal, sales volume reported of transformer steel in the first quarter came to 42,000t, down 5% on the previous quarter, up 61% on the year. In a company comment on these results, NLMK said it was seeing “stable demand for the product in the beginning of 2011. A 5% reduction in sales was explained by the delay in recognition of export sales. In the second half of the quarter there was an increase in export sales that will be largely reflected in Q2 results. Prices for transformer steel remained stable with tentative signs of improvement both in demand and prices in Q2.”
VIZ-Stal exports roughly 80% of its transformer steel to markets abroad. In its end of year report, NLMK said the plant saw a surge in demand, compared to 2009, with sales volumes up 52% year on year to 153,000t. “Despite the decline in prices during the reviewed period, increased transformer steel sales pushed Q4 revenue up 9%, while year-on-year growth totaled 3%. Gross profit decreased by 10% quarter-on-quarter and by 35% year-on-year as a result of lower steel market prices as well as higher prices for HRC used as a substrate in electrical steel production.”
Company reports do not release prices. However, the first-quarter 2011 financial report confirms that export prices continued to fall, resulting in revenue and profit figures below those of the December quarter. “Lower average sales prices, impacted among other factors by the strengthening [rouble], served as an additional factor for reduced revenue,” NLMK says.
According to a steel industry insider, the FAS investigation is fabricated, and the agency is allowing itself to be manipulated into applying pressure on NLMK’s owner, Vladimir Lisin. “I believe the FAS investigation into NLMK and VIZ-Stal trade is not connected with the [electrotechnical steel] price growth, but rather it’s a way to press on Lisin for some different reason.”