Russian steelmakers are being eviscerated by the Chinese

15.02.2012 — Analysis

The Russian Federal Antimonopoly Service (FAS) has accused VIZ-Stal, LLC of inflating the price Russian consumers pay for silicon steel. The department of monitoring is suggesting that the steelmakers have grown rich by taking illegal advantage of their monopoly position in a market that is not transparent. Meanwhile, a spokesman for VIZ-Stal told RusBusinessNews that the company has not inflated the prices it charges domestic consumers, it has merely reduced its prices abroad in order to maintain production. So little electrical steel is being sold in Russia that, without exports, VIZ-Stal would simply grind to a halt. And experts claim the situation is getting worse. If there is no growth on the domestic market, Russia might very soon find itself without its own manufacturer of silicon steel.

Russia's FAS Commission discovered that a plant owned by VIZ-Stal (a subsidiary of Novolipetsk Steel, OJSC - NLMK) was in violation of the law "On the Protection of Competition", from August, 2009 until December, 2010. Russian consumers were paying up to 100% more for electrical steel than customers abroad. The antimonopoly service did not believe that there were valid economic reasons for such a significant difference and is holding the company administratively liable. VIZ-Stal is facing a fine in the amount of 15% of its total sales in the Russian market during this period.

Maksim Ovchinnikov, the head of the Russian FAS department that monitors industry and the military-industrial complex, told RusBusinessNews that global consumption of silicon steel has fallen sharply since the onset of the economic crisis in 2008. Because 80% of its products are intended for export, VIZ-Stal, LLC dramatically dropped its prices for rolled steel, trying to hold onto its market. China, which at that time was producing about 400,000 tons of its own electrical steel, launched an anti-dumping investigation into the Russians' actions. But the subsequent fine that was levied on VIZ-Stal did little to change the situation. The company's export prices were so low that it was cheaper for Russian manufacturing firms to buy Russian rolled steel in China and then bring it back home.

In Russia, the cost of silicon steel remained almost unchanged during the economic crisis, since the market is tight and there is only one supplier - NLMK - which produced 195,000 tons in 2010. The Russian FAS discovered VIZ-Stal's policy while monitoring the price of metals, which is done at the behest of the Russian deputy prime minister, Igor Sechin. Maksim Ovchinnikov believes that consumers never appealed to the FAS because they might not have known that prices were lower abroad. The market for silicon steel is not at all transparent, making it very difficult to compare prices. The situation is made even more complicated by the fact that Russian manufacturing firms go abroad to buy only small quantities of the type of steel that is not produced in Russia, and thus no direct comparisons can be made.

Dmitry Butorin, the purchasing manager for Energomash, CJSC (Ekaterinburg) - Uralelectrotyazhmash, confirmed for RusBusinessNews that consumers do not know what VIZ-Stal is charging for its products in China. Manufacturing firms can only compare Russian steel to the Korean and German varieties they buy while executing export contracts. The price for Korean steel, in particular, was slightly higher than that being charged by VIZ-Stal, but the quality of the Korean product was better. However, the manager claims that recently the Russians have made great strides to close the gap between themselves and the leading producers of silicon steel. Russian prices and terms of delivery are not quite as good, but progress has been noted even in that area in recent years. The price Russians pay for silicon steel has also gone done since the beginning of the economic crisis. Dmitry Butorin views the problem differently - many types of imported silicon steel have appeared on the Russian market, which obviously lowers the demand for electrical steel.

A representative from VIZ-Stal, LLC confirmed for RusBusinessNews that the situation is now even worse than during the 2008 economic crisis. In the last three years China has begun producing many times more silicon steel, and Chinese manufacturers are now ready to meet their own domestic demand. Naturally the market went reeling, and it became difficult to do business in Asia. Today VIZ-Stal is barely turning a profit because it is so hard for the plant to compete against the global leaders in the industry. There has been some slight progress in the production of anisotropic (silicon) steel in Russia in recent years, but the country still does not make premium HI-B rolled steel. Domestic companies have made little headway in the production of amorphous ribbon, which is now commonly used to manufacture transformer cores.

Experts familiar with state of affairs in the steel industry argue that it wouldn't be fair for the Russian FAS to fine VIZ-Stal. The market for silicon steel is currently so bad that any domestic squabbling seems ridiculous. Globally, 2.4 million tons are produced each year, but demand does not exceed two million. The Russian market is so inconsequential that it can safely be discounted. VIZ-Stal only manufactures about 17,000 tons to be sold domestically, which is no more than 10% of its total production. And due to the weakness of the Russian engineering and manufacturing industry, there are no forecasts for a significant increase in demand in the near future. It will be very difficult for VIZ-Stal to survive under these conditions, because the company has a production capacity of about 250,000 tons per year.

China, a country that has quickly managed to build new facilities to manufacture electrical steel, has begun to close its market to imports and has launched a new anti-dumping investigation. And although the results of that inquiry won't be made public until June of 2012, there are already claims that there will be a 65% import duty on Russian rolled steel. That would be a heavy blow to VIZ-Stal - up to one quarter of the company's exports are sent to China.

The owners of NLMK have suggested solving this new problem in a very Russian style - they want to pressure China to back down from levying such prohibitive duties. But the experts feel that Russia should turn its attention toward developing its own domestic market. That's what China has done, and that has helped their economy achieve a level of growth that is unprecedented for this economic crisis.

Vladimir Terletsky