By John Helmer, Moscow
Russian steel companies have been ordered by Deputy Prime Minister Igor Sechin to clean up their emissions, and pay for it out of their owners’ profit stream and dividends. If they agree, he is promising to provide tax and other offsets for their balance-sheets. Is he kidding?
According to the press reports, Sechin has ordered the government agencies supervising the steel sector, including the Federal Antimonopoly Service (FAS), the Federal Environment Protection Agency (Rosprirodnadzor), and the Federal Agency for Ecological, Technical and Nuclear Supervision (Rostekhnadzor), to devise new regulations to require the steelmakers to commit to a minimum level of capital expenditure for modernization of their production; to fund part of that out of their profits; and to receive in return tax and loan concessions. Among the objectives Sechin’s instruction reportedly cites is “reducing the environmental impact and increase competitiveness of Russian products.”
A meeting of the government officials involved is due to be held with the steelmakers on Wednesday of this week.
For years Russian steelmakers have been compelled by federal and regional governments, and by the local courts, to make substantial expenditures to bring their water and air emissions into compliance with Russian law. In the case of Evraz, owned by Roman Abramovich and Alexander Abamov, almost six years have elapsed since the company agreed to court and government orders for water pollution clean-up in Novokuznetsk city on pain of having its two local steelmills, Zapsib (West Siberian Metallurgical Combine) and Novokuzetsk, shuttered. The outlay required for a new water treatment plant in 2006 was Rb2.4 billion. ($77.4 million). Since then Evraz has built nothing.
Just how sceptical the compliance record encourages analysts to feel towards the latest government announcement is reported by Alfa Bank’s steel analyst, Barry Ehrlich. “We do not know the real intentions of the government behind this Sechin request. The proposal may be driven by political motives leading up to the presidential elections, intended to force steel producers to support Prime Minister Vladimir Putin’s candidacy. In any case, the stimulus measures that may be offered are unlikely to compensate the increased expenses in full, thus at this stage we view the news as negative, especially if the government is targeting safety issues rather than increasing investment downstream. In our view, it is unlikely that the government will implement minimum modernization capex requirements as it will be hard or impossible to regulate which assets to modernize and whether capex is on expansion or modernization projects. For the same reason, we think that locking up profits is also unlikely due to legislative and control issues.”
Ehrlich also believes there’s no telling which steelmakers will be targeted with the most costly requirements. “At this stage, it is difficult to say who would be most harmed: the most downstream-integrated companies such as MMK [Magnitogorsk](because they would not be able to benefit much from additional downstream integration), the least downstream-integrated such as NLMK [Novolipetsk] (because they would be forced to increase downstream investment), or companies with the oldest facilities (because they would be required to invest in modernization and environmental protection measures).”
What then to make of Alexei Mordashov, who apparently beat the gun with this announcement from his steel company Severstal on October 17. “ОАО Severstal,”, the press release says, “announces the launch of a major environmental project aimed at reducing atmospheric emissions at the Cherepovets Steel Mill, part of the Severstal Russian Steel division. Following a tender process, Severstal has signed an agreement with Siemens VAI Metals Technologies to supply and install a sophisticated system for capturing emissions from plant converters. The system will be installed over the next four years.
“The new system will be installed alongside the Cherepovets Steel Mill’s existing converter process and will include, amongst other things, new bag filters, smoke exhausts, a compressor station, a package transformer and distribution substation, an automated process control system, and a dust removal system. The project is an important step in Severstal’s significant efforts to reduce the environmental impact of its operations. Severstal’s will invest up to 3 billion rubles ($US 96 million) over the next four years in the project.”
The company also claimed this wasn’t the beginning of its Samaritan work. It had been spending, it said, for at least twelve prior months to improve the air at Cherepovets. “In 2010, the Cherepovets Steel Mill invested more than 610 million rubles ($US 21 million dollars) in environmental sustainability projects, with double that level of investment targeted in 2011. A total of 14 new environmental projects and initiatives have been introduced so far in 2011, of which half are aimed at reducing harmful atmospheric emissions with the other half aimed at reducing water pollution.”
A few days before this claim was published, a presentation by the company to international analysts on September 29 claimed that Severstal has lifted output per employee by 21% since 2005; and improved energy efficiency by 12% since 2007. No precise figures were released in the presentation document, but capital expenditure was estimated to total just over $1 billion in 2010. This was supposed to double in 2011. There was no reference in the presentation to emissions control or to capital investment in pollution compliance.
Channel 5 television at St. Petersburg acknowledged immediately after the company promise that it was hard to see the light through “the sky above the city [Cherepovets, which] is gray, black and even orange, but not blue.” Through the murk, however, the reporter thought she could spot the good news. “Of the 79 contaminants environmentalists have managed to overcome and lead to a rate of 75. The concentrations of the remaining ones [Severstal] plans to reduce each year. Severstal plans for many new projects to improve the quality and ecology in the city. But the main promise was able to disperse and make the sky blue is in priorities.” Channel 5 St. Petersburg is owned by Mordashov. In Cherepovets he owns two television channels; one radio station; and four print publications.
A very different version of what has been happening, and not happening at Cherepovets, has been circulating on the internet. If you are obliged to breathe the Cherepovets air, it’s dramatic. Called “Severstal, The Lost Zone”, with English subtitles intended to appeal for support from outside Russia, the film appears to have been produced between 2002 and 2003. It has been posted on You Tube twice recently – in February 2010, and again in May 2011. Although it also points the finger at local politicians for their subservience to Severstal’s owner, it’s not the catchy kind of film which today’s opposition election campaigners want to focus on.
What regional and national data and special city surveys demonstrate, however, is that in the time the film has been circulating the consequences of air, water and soil pollution in Cherepovets have been getting worse, and the efforts to monitor the problems have dwindled. In 2010 the regional Vologda budget allocated Rb1.6 million ($52,000) for all types of pollution measurement. From this effort the local government has reported that two-thirds of the air emissions of the region came from Severstal. Although the government claimed that conditions were not getting worse region-wide, in Cherepovets city it was acknowledged that one reporting agency had found significant increases of measurable high air pollution levels.
Last month, this is what the table of air pollutants looked like at three measurement stations in the city, expressed as a fraction of the concentration level (PDK) for the identified pollutant allowable without damage, according to Russian public health rules, to health:
How to interpret poorly measured air pollution levels is one problem in Cherepovets. Judging what impact the air pollution is having on disease and death rates, or morbidity, in the city is another.
Life expectancy data suggest that between 2005 and 2010 the men of the town were surviving for an average of almost four more years from 57 to 61; women from 69 to 71. Between 1991 and 2001, there were significant increases in morbidity rates for children, with respiratory symptoms leading, and digestive system diseases growing fastest. Among adolescents in Cherepovets, the decade saw significant growth in circulatory, respiratory and disgestive dieases. What this meant, several studies report, is that improving economic conditions and better measurement detected improvement in the health of the older city population, and worsening disease rates among the younger population. In 2009, Denis Zaitsev, the deputy mayor of Cherepovets in charge of health, acknowledged that “every year our children are sick more and more. In the structure of the primary disease in children from 0 to 18 first place is traditionally occupied by respiratory disease; the second, diseases of the digestive system, and in third place, diseases of the nervous system.”
Noone in an official position in Cherepovets has blamed the pollution of the steelmill for the deterioration in health. But the city records that something serious is in the air, as “the structure of children’s disability is dominated by congenital anomalies and malformations (23.9%), followed by nervous system diseases (22.1%), and psychiatric disorders (18.8%).
As for the sanitary protection zone intended by the city and the company to protect Cherepovets residents from the contamination of the mill, this was first ordered by the Russian government, during the Soviet era, on March 16, 1990, and since then reconfirmed by the Cherepovets city government. Virtually nothing has been done yet.