By John Helmer, Moscow
A decision this week by the Kremlin to raise duties on imported pipes from the Ukraine will hit Interpipe, the heavily indebted pipemaker owned by Victor Pinchuk (left), particularly hard as it faces debt default negotiations with the Ukrainian government, headed by Victor Yanukovich (right), and with a syndicate of European banks. The Fitch ratings agency has warned that if Interpipe’s export revenues fail to meet Pinchuk’s projections as a result of the curtailment of the Russian trade, the company faces a downgrade, and the cost of its debt service will rise sharply.
Following a meeting with Russian steelmakers on Tuesday, Prime Minister Dmitri Medvedev revealed that as a stimulus measure for local producers of steel strip and pipes, the government has decided to raise import duties and restrict the inflow of imported Ukrainian pipes. “I have decided not to extend the quotas for the supply of Ukrainian pipe products in the last six months”, Medvedev said, endorsing the view of the domestic pipemakers that Ukrainian pipemakers are unfairly undercutting the price of pipes on the Russian market.
In the first quarter to March 31, despite global and Russian cutbacks in steel production, Russian pipe output defied the negative trend with a growth rate of 1.8%, compared to the same period of 2012. By contrast, Russian crude steel output was cut 4.4% and finished steel products by 3.4%. Growth in pipe production has been reported at the five largest pipe plants – Vyksa, which is owned by United Metallurgical Company; Volzhsky, Seversky and Taganrog of the TMK group; and Pervouralsk of Chelpipe. The exception was Severstal’s Izhora pipemill, which is reporting a production cut in the first quarter by 10.6%, compared to last year.
Demand for pipes from Russia’s oil and gas industry drives about 18% of Russia’s yearly steel consumption; this trails the construction sector, which consumes 68% of the steel supply; but it’s ahead of the auto and white goods sectors; they absorb about 13% of the steel produced. In the second quarter and for the remainder of this year, according to a recent report from TMK, demand for pipes for the oil and gas industry will support the production plans and profitability of the domestic pipemills, so long as Ukrainian imports don’t undercut their price.
The domestic steelmills and the pipemakers have been lobbying the Kremlin to prevent this from happening, and they have succeeded. The government’s move this week against Ukrainian pipe imports eliminates the mechanism agreed within the customs union of Russia, Ukraine, Belarus, and Kazakhstan – known as the Eurasian Customs Union — which allows duty-free trade between the member states. Kiev and Moscow have also negotiated agreement that duty-free pipe imports from Ukraine would be restricted to an annual quota of 300,000 tonnes. In 2012 the quota was cut to 120,000 tonnes. For this year the quota was issued for six months; it expired on June 30.
From now on, the Russian Pipemaking Foundation, the industry lobby group, told CRU Steel News, Ukrainian pipe exporters must pay anti-dumping duties on the full volume of their shipments to Russia. According to the foundation, pipe imports from Ukraine reached 467,000 tonnes in 2012. In the first half of this year, they totalled 167,000 tonnes, of which 114,000 tonnes were covered by the duty-free quota. The new duty level will run from 18.9% to 37.8%, depending on the product and the producer.
According to the acting director of the pipemaking foundation, Alexander Chumakov, the main types of pipes to be penalized are oil and gas pipes of up to 820-mm in diameter. According to documents issued by the Eurasian Customs Union’s commission to investigate dumping complaints, Interpipe’s exports will now be subject to a penalty duty of 19.4%, while shipments from the Dnepropetrovsk Tube Works will be taxed 37.8%.
Three of Interpipe’s plants are named in the Eurasian Customs Union anti-dumping decision. Russian industry reports claim that about one-third of Interpipe’s current production and sales are accounted for by Russian purchases. Interpipe’s financial report for calendar year 2011 – the latest available — reports that sales to Russia comprised 25% of Interpipe’s revenues. About 90% of Interpipe’s exports to Russia have been covered by the duty-free quota until now.
Interpipe remains a private company wholly owned by Pinchuk through a Cyprus entity . It is delaying public release of last year’s financial results, and of the audit undertaken by Ernst & Young. The 2011 financial report was issued on July 4, 2012, and Interpipe sources have promised to release the new financial report before now. Moscow industry sources estimate that Interpipe’s quota shipments to Russia 2012 were worth $380 million. In 2011 Interpipe says  its sales to Russia came to $413.3 million. In the six months to June 30 of this year, the Interpipe shipments were worth $185 million, according to Moscow estimates.
Interpipe has proposed that the Eurasian Customs Union investigate import pricing and in exchange for the elimination of quotas, reduce the level of the anti-dumping penalty duties now in force. Since the investigation could take up to year, Interpipe has requested a prolongation of the quota for another six months, or until the investigation is completed.
Russian steel and pipemakers have submitted to the Union the claim that Ukraine has adopted protective measures for raw material supplies to smelters, such as coal, coke, and scrap, the effect of which is to hold down costs of steel and pipe production, and allow exports to Russia at dumping prices.
Interpipe is “under-perfoming” in volume and value of sales and exports, a report  from the Fitch ratings agency revealed on June 17, in part because of delays in ramping up output at its new 1.3 million-tonne capacity electric arc furnace, and in part because of “ a lower than expected quota for pipe sales into the Russian market”. As a result, Fitch says that “Interpipe has recently approached its lenders regarding an increase in permitted working capital limits (the existing USD150m limit having been fully utilised), and the waiver of expected leverage covenant breaches over the remainder of 2013. Interpipe’s large 2014 scheduled debt repayments remain a key risk factor.”
According to a Pinchuk-financed organization called Yalta European Strategy (YES), Pinchuk has been lobbying President Yanukovich , as well as politicians in Washington, Paris, and Brussels, to sign a deal with the European Union to combat what the European Parliament is calling Moscow’s “excessive pressure on Ukraine” through the Eurasian Customs Union; and to offset that with “financial benefits, the tangibility of which will increase with time.” In November 2011 the European Parliament issued this report  explicitly condemning Ukraine’s participation in the Eurasian Customs Union. There was no mention of support from Brussels for the Ukrainian steel and pipe sector.
Interpipe’s press office at Dnepropetrovsk was asked how the company assesses the impact of the new Russian import duties. A spokesman who refused to give her name said she couldn’t answer and that if her colleagues do not reply to the emailed questions, that meant there would be no reply. Asked by telephone to confirm she had received the email, she said: “I told you everything – can’t help anymore. Thank you and good bye.”