Email This Post - Print This Post Print This Post

By John Helmer in Moscow

The proverb that good things come to those who wait has recently been used to sell a brand of ale that takes a long time to pull into the glass.

An older version makes the waiting less optimistical. “Wait, thou child of hope,” coined the 19th century aphorist, Martin Tupper, “for Time shall teach thee all things.” But then Tupper was that special type, the London lawyer, for whom time is money. Tupper’s best known aphorism is the one legal opinion he didn’t manage to charge for. On his gravestone, it is claimed – “Although he is dead, he will speak.”

The time the Russian government is taking over policy towards the domestic cost of steel and its raw materials, coking coal and iron-ore, is instructive, as the policy debate runs now into its third month. There have already been several misleading announcements of decisions that have yet to be finalized. As a tussle between the Russian oil and gas industry, which consumes the steel in pipe form; the steel industry, which supplies the steel for pipes; and the mining industry, which fills and fuels the blast furnaces, the length of time the contenders and decision-makers require to resolve their differences indicates how unprepared the new government is to make the difficult choices.

A July 2 meeting in Moscow between steelmakers and the Federal Antimonopoly Service (FAS) agreed on a formula for regulating domestic steel prices through long-term contracts tied to a price and cost index. But there has been no official decision by the government on whether to impose a tax on steel exports, or control how coalminers can sell their product between the domestic and export markets.

Alexei Ulyanov, head of the industry department at FAS, told Mineweb: “Currently, we have worked out the general line regarding long-term contracts. That doesn’t terminate the discussion of [export and import] duties; they are pending in FAS and Minpromtorg [Ministry of Industry and Trade], although my personal opinion is that the question of export duties was more or less decided in favor of long-term contracts, while we could play a bit with import duties. Some of them may be canceled, some reviewed.”

According to Ulyanov, a working group has now been set up with FAS and Trade Ministry officials to work out a price index formula for steel; a standard steel sales contract form; and a scheme to regulate how the price movement should be monitored and enforced. Ulyanov said this preliminary work should be completed in September. But implementation cannot occur before November, he added, intimating that he would not be surprised if the time slipped by, and no price control scheme was adopted before the end of the year.

According to FAS, the long-term contract scheme is the government’s response to the price-rigging charges which FAS has been studying fopr several months. A press release issued by FAS on July 7 noted that it had completed its assessment of steel pricing for strip supplied to the pipe mills by Magnitogorsk Metallurgical Combine, Severstal and Novolipetsk Steel. FAS said it had not found evidence of price rigging in violation of the Russian anti-trust laws. The FAS inquiry into alleged price rigging had been requested by the pipemakers and the oil industry.

The July 7 statement also disclosed that FAS is studying the impact of the much broader steel price control measure that has been proposed — a tax of up to 20% on steel exports. This means that, for the time being, the government has postponed making up its mind on whether to impose the export duties.

That issue was the subject of a meeting on June 21 between steelmakers and Deputy Prime Minister Igor Sechin, who supervises all Russian industry under Prime Minister Vladimir Putin. Some participants told Mineweb they thought they heard Sechin tilting against the export tax option; others swear he did nothing of the sort. 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 steel 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 and in the FAS study.

In May, Industry Minister Victor Khristenko kicked off the lobbying contest between some of Russia’s largest companies, 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 of an anti-dumping and domestic injury investigation of pipe imports, principally from China. Direct talks between the Russian and Chinese pipemakers, and the industry associations on both sides, have gone through four rounds over the past twelve months, but have produced no agreement on limiting Chinese pipe exports to Russia, or the price at which they are landed. The Russian pipemakers this month charged the Chinese with protracting the negotiations, while increasing the volume of cut-price sales into the Russian market.

Russian industry sources say that Sechin has also been asked to decide the issue of regulating domestic coking coal supplies by quota, thereby cutting the volume available for export. This too is a hard choice Sechin hasn’t made yet.

According to lobbying by the steelmakers, they are agreeable to the government fixing a minimum annual quantity of coking coal that suppliers would be required to sell to the domestic market, with the remainder to be sold as exports, should they choose. The minimum amount to be sold on the domestic market discussed in the meeting was 50 million tonnes per year. A total of 74.9 million tonnes of coking coal was produced domestically in 2007, of which 54 million tonnes were processed into coke concentrate. Of the latter amount, 42.4 million tonnes were sold in Russia, and 10 million tonnes (24%) went for export

Alexander Pirozhenko, head of the fuel-energy complex department at FAS, told Mineweb: “I can’t comment on the information that appeared after Sechin’s meeting on coking coal. FAS is currently studying the market of coking coal. Whether there will be export duties, long-term contracts or other measures – this will be visible only after the study.”

Igor Konovalov, chief executive of leading steel service centre supplier Inprom, told Mineweb that he favours the contract formula over export taxation for dealing with the volatility of domestic steel prices. “In my view, the optimal decision was taken. Long-term contracts allow final consumers of steel to predict the price for the future, and form their business models accordingly. They can plan their needs based on predictable prices. When the spot prices change sharply, this hurts the final consumers first, and it is very difficult for their businesses.”

Regarding the position of steel service centres, Konalov said that Inprom is also a consumer of steel. “We will discuss the possibilities of steel shipment on the basis of long-term contracts with the steelmills. Currently, Inprom works on spot market with spot prices; we have no long-term planning. The company will adopt the new mechanisms of the market, and will react accordingly. We will start talks with the steelmakers, and we hope to reach some decision by the end of the third quarter of the year.

In the Russian coal market (steam and coking coal), export volumes are growing, but they also moving towards the west, not to traditional Asian markets in the east.

Despite booming coal prices, and growth in both export and domestic demand for steam and coking coal, the port of Vostochny, on the Russian Pacific coast, the key outlet to Asian buyers of Russian coal, has reported that its coal shipments in the first half of this year dropped 7%, compared to the first half of 2007. Coal shipments comprise 87% of Vostochny’s throughput, and amounted to 6.9 million tonnes in the period. Spokesman for the port Yelena Plotnikova is unable to say if cargoes for China, Japan and Korea are being shipped from western ports, or have been reduced in volume. She says the drop is explained by “weak March and April months plus marketing conditions.”

The State Customs Service in Moscow told Mineweb that in the four months to April 30, Russian coal exports reached 31 million tonnes, indicating a year on year growth rate of 23%. The main ports to benefit from this are all in western Russia — Ust-Luga, Vyborg, Kaliningrad, on the Baltic Sea; Murmansk (Barents Sea) and Arkhangelsk (White Sea); the last of these was the biggest gainer in percentage terms. Tuapse, on the Black Sea, also reported a gain, compared to last year.

From the coalface, the news on supply is mixed. On July 4, the Evraz-owned Raspadskaya coalmining company resumed operations at one of the shafts, where a federal inspection had earlier ordered work suspended, in order to correct safety violations. Yuzhkuzbassugol, the second company affected by the stop-work order – Mechel controls 95% of the shares — has not yet disclosed its operational status. A press statement by the mine inspection agency Rosteknadzor, issued on July 1, explained the reasons for the stop-work orders. In one instance, risk of explosion was cited at Raspadskaya. The sensitivity of the inspectors to violations has been raised by a series of fatal accidents this year and last, in the Kemorovo region.

Evraz, the principal steelmaker supplied by the two mines, declined to respond to questions from Mineweb during the suspension period, and it remains unclear what impact the suspension of mining will have on the output of coking coal for the Evraz group. According to a report from UBS in Moscow, “the news supports our belief that the halt of operations is temporary and should not have any effect on Raspadskaya’s production numbers.”

A Raspadskaya release, however, indicates that for the first quarter to March 31, total output of coal and concentrate totaled 2.9 million tonnes, a drop of 11% on the last quarter of 2007, and also 11% down year on year. This was before the Rosteknadzor action.

Raspadskaya’s sales of concentrate in the domestic market were reported at 1.5 million tonnes in the quarter, down 6% quarter on quarter. Exports of concentrate in the same period totaled 703,000 tonnes, up 20% quarter on quarter. Sales of raw coal in the quarter were 219,000 tonnes, down 51% quarter on quarter; there were no exports of raw coal in the period.

Anatoly Skryl, from the coal industry news agency Rosinformugol (“Russian Coal Information”), told Mineweb he was skeptical that the inspection orders would have anything but a brief impact. “What happened is a typical situation for the coal industry. The inspectors come, find violations, stop the mine, and afterwards everything is fixed. So far as I know, Raspadskaya has big stock reserves, and also good management. It will be able to fix everything on time and there will be no problems.”

Leave a Reply