By John Helmer in Moscow
A senior Russian industry ministry official has come to the defence of domestic steelmakers, warning that an attempt to roll back or penalize their recent price increases could lead to the ultimate bogeyman — a flood of cheap Chinese-made steel into the Russian market. Andrey Dementiev, a Deputy Minister of Industry and Trade, made a public statement, reported Thursday by Reuters, that if a price-rigging investigation now under way by the Federal Antimonopoly Service (FAS) leads to sanctions against the steelmakers for lifting their prices, “it is possible that we would choke the metallurgists to death, but in such a case, we will have to use Chinese steel. Today, internal prices are in any case lower, but it is not possible to support them artificially.”
Dementiev’s ministry is usually protective of domestic industry interests. In this case, the steel industry challenge, which Dementiev has issued, comes from Evraz, Mechel, Severstal, and Magnitogorsk; these are, owned respectively, by Roman Abramovich and Alexander Abramov; Igor Zyuzin; Alexey Mordashov; and Victor Rashnikov.
Dementiev’s warning suggests that the steelmakers are not convinced that Prime Minister Vladimir Putin, who ordered the FAS into action last week, has made up his mind to control the steelmakers’ freedom of action and preserve their profit margins, as raw materials for steelmaking, such as coking coal, iron-ore, and scrap, move up in the domestic market, in line with global benchmark prices; these in turn are fixed primarily between Chinese steelmakers and a handful of international companies — BHP Billiton of Australia, Rio Tinto of the UK, and Vale of Brazil.
Putin said he had requested the FAS investigation after receiving a complaint about rising steel prices from Uralvagonzavod (“Ural Wagon Works”, UVZ), the state-owned manufacturer of railway cars and tanks, road-building vehicles, metallurgical products, tools, and the Russian Army’s main battle tank. In the complaint lodged by UVZ’s chief executive Oleg Sienko, it was reported that four steel suppliers — Evraz, Mechel, Magnitogorsk, and Severstal — had demanded price increases, starting this month, of 10% to 30% above the previous contract delivery level for UVZ. Sienko’s submission to FAS argues that the rise in costs of raw materials to the steelmakers should not be passed on to consumers, and that domestic prices should be frozen for a year. If the steelmakers refuse, UVZ is calling on the government to cancel import duties on steel, and impose a 15% export duty on steel shipped abroad.
In Russia, deputy ministers rarely challenge prime ministers; mid-level officials never publicly undermine the position of Prime Minister Putin. Dementiev’s frankness is therefore likely to have been calculated after the major steelmakers have sounded out Putin in advance. The last time Putin took sides against one of the steelmakers on a pricing conflict , it was against Zyuzin for hiking the price of coking-coal; in that case, Putin was acting on behalf of other steel oligarchs, rivals of Zyuzin, who proved to be more persuasive of Putin than he was. This time, Zyuzin appears to be calculating his alliance with the others may be strong enough to persuade Putin to drop his claim altogether.
The FAS was asked to clarify whether there was an investigation at all, and if so, why no notice had been posted on the FAS website. FAS spokeswoman Maria Chernova told CRU Steel News her agency has not backed off investigating, but the decision of what is to be done will be taken elsewhere. “We received a request of the federal government on April 1, and we started the check. We have to prepare a market analysis before April 19, to indicate whether there are signs of a violation of the antimonopoly legislation, and to provide a report to the Ministry of Industry and Trade. On April 25, the joint commission [FAS and the Industry Ministry] will make a report before the Government [Prime Ministry]; it will report on the situation, and will offer options for solving the problem.” She confirmed that the reason for the investigation was the complaint about steel price hikes from Sienko of Uralvagonzavod.
A report by Renaissance Capital, issued to clients today, interprets Dementiev’s statement “as “confirm[ing] that the current situation has nothing in common with FAS’s 2008 investigation of coal producers [when coal prices were rolled back, and Mechel, as well as other coalminers fined for abuse of market power]. In our view, steel consumers, including Uralvagonzavod, may have to adjust their procurement policies to the new market reality in which raw materials prices are settled on quarterly basis…. We doubt that export duties for finished steel products or special railway tariffs for the sector in general – which were proposed by Uralvagonzavod – will be introduced.”