JOHANNESBURG (Mineweb.com) — Russian steelmakers are super-sensitive about this year’s European Union (EU) quota on imports of Russian steel, and for two good reasons. One is that Russian government policy may be about to change, dramatically. The other is that more than four months of negotiations between trade officials on both sides have failed to produce an agreement. The Russians so far refuse to accept that the terms, publicly identified by EU officials, are either acceptable or final. Resolving the difference between the two may be the first test of the mettle of the new prime minister, Mikhail Fradkov, who most recently served as Moscow’s ambassador to the EU, and who previously ran the Trade Ministry for several years.
According to a source at the Russian Association of Metal Exporters in Moscow, “it’s too early to speak about a final quota, because negotiations are currently running with the participation of the Ministry of Trade, the Russian government, and our assistance. Currently, in the working negotiations the aggregate quota proposed by the EU for Russia equals 1,266,000 metric tons. We insist on expanding this quota by 450,000 to 500,000 tons. This amount is approximately equal to the Russian export volume to the 10 countries joining EU in May.”
Russian steelmakers have been worried that EU negotiators will attempt a similar surprise to the one they pulled in March 2002. At that time, Brussels claimed it was agreeing to an increase in Russian imports of steel, and an expanded quota for a range of steel products in the aggregate. But in the small print, the EU enlarged the number of products covered by quotas to include boron-alloy steels, which had not been covered by a quota limitation the year before, in 2001. What one Brussels hand offered, the other promptty took away. The practical effect was that total Russian exports to the EU were cut back for the year, rather than increased.
The provision for 2003 and 2004 that was contemplated at the time was annual growth of Russian steel shipments to the EU of 2.5%. In addition, the Europeans offered to raise the quota for 2004 by 12%, if Moscow agreed in exchange to drop its 15% duty on exports of ferrous scrap. First introduced in May 1999, this duty has curbed the outflow of scrap from Russia, one of the world’s largest producers and exporters. As scrap is a vital raw material used in the production of crude steel for pipes and other products, Brussels has accused Moscow of imposing the export penalty as a way of protecting its domestic steelmaking industry. It has retaliated by cutting the volume of Russian steel imports allowed into the EU market.
Removing the duty has been rejected by Russian officials and steelmakers; the latter prefer the cost advantages of domestic scrap to the trade volumes so far offered by the EU. With support from the domestic oil and gas industry, which has been complaining about the rising cost of steel pipes, the Russian industry is now pressing for a doubling of the export duty to 30%. Because of rising steel production around the world, scrap is in very short supply, and its growing cost threatens to eat into steelmakers’ profits. The European approach has been to insist that Russia should allow unrestricted export in support of foreign steel profit margins.
Roelof Plijter, head of the steel unit in the European Commission’s trade directorate, told a steel industry conference in Rome last week that the only additional Russian steel volumes to be allowed for this year would be those for Severstal and Mechel, two leading steelmakers, which also own plants in Latvia and Lithuania. Plijter referred to 119,000 tons of rolled flat products for Severstal’s Severstallat service centre and pipemaking plant, and 42,000 tons of steel products for Mechel’s Nemuno plant for production of hardware. Severstallat has a capacity to produce about 31,000 tons of pipes annually. It is Severstal’s only production venture in Eastern Europe; the big Russian steelmaker lost a recent bid to acquire Dunaferr in Hungary, and did not compete in the privatization of Krivorozhstal in the Ukraine.
Nemuno has design capacity for output of 100,000 tons, but actual production dwindled to just 23,000 tons in 2003. Mechel, the fifth-ranked steelmaker in Russia, which also has acquired plants in Croatia and Romania, plans to boost Nemuno’s output by 50% or more this year.
According to a Severstal source, “we do not see any changes with our trading volumes after the introduction of the quota to the countries which will enter EU this year. The quota hopefully will be expanded. Severstal plans to receive the same quota as the previous year – it will be approximately 384,000 tons – plus the volume allocated to the Latvian enterprise of 119,000 tons.”
What may be good be Severstal and its oligarch-sized shareholder, Alexei Mordashov, isn’t necessarily the best thing for Russian steel as a whole. At least, that’s now the question which Fradkov must decide. If the EU allows only for the Severstal and Mechel volumes totaling 161,000 tons, then the proposed new EU quota will fall about 300,000 tons short of the Russian position. For Fradkov to agree would oblige the government to accept a cut of 65% on last year’s Russian exports to the ten new accession countries. Industry analysts who have examined projected growth of production and consumption of steel products in the expanded 25-member European Union suggest that this gap will be filled by producers from western Europe, In short, the Russian steelmakers believe they are being further shut out of the European market by lobbying from non-competitive European rivals.
A move to offset rising scrap prices by introducing a similar barrier to exports is also being considered by US steelmakers and the Bush Administration. But when asked what the EU will do if the US follows Russia into taxing scrap exports, Plijter of the EC was reticent. He claimed that it is still premature to comment on US action on scrap exports.
On this and many other issues, growing Russian hostility to the trade and strategic implications of the expanded European Union have led to a public toughening of President Vladimir Putin’s stance towards the EU. With the appointment of Fradkov, the hostility could lead to Russian trade retaliation; although during his time at the trade ministry in the 1990s, Fradkov rarely received Kremlin support for tough trade measures. When he took over the Security Council’s economic security section in 2000, under Putin, Fradkov demonstrated greater ardour in defence of national economic interests. What Fradkov does next should be revealing.
For the time being, a spokesman for the Russian trade ministry is playing down the conflict by claiming there is no final agreement yet. The source told me: “At the moment, we can’t estimate the 2004 quota from the EU. As to the negotiations, the quota will of course be not less than the previous year. We hope it will be expanded to the necessary level to satisfy Russian steel trading needs with the new EU members. I can’t tell you the exact numbers.”
He predicts that an agreement will be signed within a fortnight.