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By John Helmer in Moscow

Prime Minister Vladimir Putin, with several government ministers, met on Monday [May 31] with representatives of Russian steel mills, carmakers, and state companies to discuss steel-pricing mechanisms. Putin started off wagging the stick, but it isn’t obvious that anyone in the audience thought he was serious.
Putin began the session by attacking the 25% to 30% price hikes which the domestic steelmakers have been seeking from consumers, starting on June 1. Resistance to these new prices led first to the halt of steel deliveries to car production lines ten days ago; and then to public lobbying by the steel consumers advocating a Kremlin-ordered price rise cap of 17%, an export tax on steel sold abroad, and other sanctions to pull the steelmakers into line.

According to the official transcript, Putin said: “international prices have increased over the last six months or year. Nevertheless, a 25% to 30% one-time price hike for domestic consumers is beyond normal economic logic. Nor are we in a situation where we can afford such price hikes based exclusively on the situation in international markets.”

But the prime minister also defended the big Russian steel groups and their oligarch-sized proprietors, implying that their price hikes have been intended to benefit their workforces, as much as themselves. Putin also skirted the oligarchs’ sensitivity to publicly aired criticism of their offshore losses and debts, particularly in the US; and of profit maximization schemes which have been charged as a factor in the safety violations causing last month’s Raspadskaya’s coalmine disaster.

The new price demands, said Putin, “can be attributed to a subjective desire of the said companies to make up for the losses sustained during the downturn. And I can understand your position as business leaders responsible for their workers. But the government bears an even greater responsibility, responsibility for the entire economy… Trying to compensate for all losses all at once, without considering the effects this will have on other players in the national economy, such as the car makers, railways, the housing and utilities sector and other industries, is unjustified and very dangerous.”

Putin spelled out a four-point set of priorities. The first, he said, is to protect “domestic supplies of metal, iron ore and coke” to conserve production levels in the steel-consuming plants. The second is the adoption of “long-term contracts based on fixed prices, which would prevent any abrupt increases”. As he said this, the prime minister and the steelmakers and steel users at the table were all aware that as domestic spot market prices for steel are now falling in Russia, as well as internationally, long-term contract pricing is not particularly advantageous to consumers.

The third point in Putin’s formula is the prevention of asset-raiding through disruption of supplies or bankruptcy in the oligarch-dominated steel and mining sectors. “Price disagreements should not lead to unilateral discontinuation of supply or disruption of payment. Commercial contract disputes should be resolved through negotiation, or, in extreme cases, in arbitration courts. Any attempts to drive one’s partner into a corner are impermissible. I’d like to bring up Gazprom as an example here: this state-owned company never cuts off gas supplies to its customers, even during price disputes.”

Putin omitted to set the price rise cap that had been sought by the carmakers. Instead, he endorsed the 22% price hike, which was signed between Severstal and state controlled carmaker AvtoVAZ last week. “As I understand, they have reached a mutual understanding and settled their differences,” Putin noted. “I ask you to put these agreements in writing, in long-term contracts, as soon as possible.” As a sweetener for having to accept higher raw material and steel prices, Putin told the steel consumers at the meeting that the government is holding down the tariff hikes for state-supplied electricity, gas, and rail freight. “Severstal,” according to Putin, “paid 1.78 roubles per kWh in January 2009, compared to 1.73 roubles in January of this year. This decrease would seem small, but given the lower inflation, the situation is not that critical. On the contrary, things are even getting better.”

Putin’s fourth point in the pricing formula is a vague undertaking to a new form of state supervision of input costs and state planned price benchmarks, enabling the Federal Antimonopoly Service (FAS) and the Ministry of Industry to deter or control sharp price deviations. “The relevant federal agencies will be instructed,” said Putin, “to calculate economic benchmarks for metals prices and prices for other basic goods and services. Needless to say, these benchmarks will take into account prices for natural monopolies. Then we are planning to set up a system to monitor the market so that we can have up-to-date information about potential threats and problems. This would enable us to respond quickly to any deviations from the price benchmarks.”

There was a closed part of the meeting, which has been disclosed by steelmakers who were there, but is not revealed in the official transcript made public by the prime ministry. But Putin was reportedly no tougher there than he appeared to be in his published remarks, leaving the steelmakers to walk away believing they have the green light to run their price and supply negotiations with customers as they choose.

Sergei Chemezov, who heads the state conglomerate Rosteknologii, which includes AvtoVAZ and Kamaz, the truckmaker, said after the session with Putin that there had been agreement on a 20% to 22% price increase for steel deliveries this month. In another concession to the steel group and mine owners, the long-term contract formula that has been accepted by the government ties domestic prices to an international steel price index, that of Steel Business Briefing (SBB), rather than to a domestic pricing index, or to a profit margin target.

Current SBB global price index for hot-rolled coil (HRC)

Although in the official record Putin claimed he has ordered the steelmakers into “long-term contracts based on fixed prices”, there is nothing to indicate that this fix is anything more than a commercial arrangement, with the government agreeing not to interfere if the price goes up when the SBB international benchmark rises by 10%. Putin’s endorsement of international benchmarking means abandonment of any effort to bring the oligarch steelmakers’ margins in line with domestic investment policy. It is also a tacit endorsement of the profit optimisation schemes of oligarchs famous for them, such as Roman Abramovich, co-owner of Evraz.

For the time being, the steel mills are not officially confirming the adoption of a specific price formula. But the stock markets cheered on their behalf, running up the share prices of Evraz, Severstal and Magnitogorsk at the end of Monday trading by 3.1%, 4.6%, and 2.9%, respectively. Pipemaker TMK, which depends on the steel groups for its semi-fabricated sheet, and is under pressure of an FAS investigation of its pipe prices instigated by the oil companies, grew by 0.2%. Even Raspadskaya, whose share price had lost 31% of its value since the May 8-9 explosion, gained 2.7% on the day.

Moscow industry analysts reported today to their clients that the spectre of genuine price control and investment market fears of profit margin capping have been dispelled by Putin. Boris Krasnojenov of Renaissance Capital reports the outcome of Putin’s directions is “neutral-positive” for steel group share prices. “The meeting’s outcome and state officials’ comments will, we think, help to dispel rumours about much more stringent steel-price regulation in Russia. We believe long-term contracts with price formulae linked to international benchmarks would be fair in the current environment.”

Unicredit steel analyst Marat Gabitov implies in today’s client report that the market had known all along that Putin’s plot was kids’ stuff. “We did not expect any sanctions to arise from the meeting, as previous similar meetings have also ended with long-term contracts, and therefore we see the news as neutral for Russian steelmakers. At the same time, we note that such long-term contracts were ineffective in 2008, when contracted coking coal prices proved higher than spot prices (which had fallen due to the global financial crisis), resulting in halted purchases under those contracts.”

Other industry sources say that Putin has defeated the auto industry for the benefit of the steelmakers. But he has only papered over the dispute between the state railways company, RZD, Evraz and Magnitogorsk over price increases demanded by the steelmakers of 10% to 20% for rails, sheet and plate. RZD says it is willing to accept no more than 7.2%. Nothing was decided on this issue by Putin at Monday’s meeting.

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