Business à la Russe: Two-faced Zinc of Chelyabinsk

18.06.2010 — Analysis

The Federal Antimonopoly Service of Russia (FAS) has brought an action against the Chelyabinsky Tsinkovy Zavod (Chelyabinsk Zinc Plant) Company. The company is charged with abuse of the dominant position on the market and discrimination of Russian zinc consumers. Experts think that the monopolist is trying to offset the revenues lost during the crisis through inflated prices. In the context of drooping prices, the enterprise preferred to set up-market prices rather than to cut losses that, as the "RusBusinessNews" observer has found it, are systematic.

FAS thinks that Chelyabinsk Zinc Plant has violated simultaneously two clauses of Article 10 of the law "On Protection of Competition". The antimonopoly agency states that the enterprise sold zinc to consumers at different prices, creating obviously discriminating conditions for Russian buyers. According to Maxim Ovchinnikov, Head of the FAS Administration, in 2008-2009, Chelyabinsk Zinc Plant supplied zinc for export at a discount as compared to the price established on the London Metal Exchange (LME). In contrast, on the domestic market it set an additional premium to the LME price: in 2008 it ranged from 8 to 30% and in 2009 - from 9 to 19%. The official says that the enterprise spared itself from any economic substantiation of the prices; therefore, FAS suspected that Chelyabinsk Zinc Plant was twisting consumers' arms, taking advantage of its monopolistic position on the market. The plant is facing a penalty in the amount of 1-15% of the revenue received within the subject period on the Russian market.

Nikolay Sosnovsky, an analyst of Financial Corporation "Uralsib", thinks that the difference in zinc prices set for foreign and Russian consumers is explained by shrinking markets for products of Chelyabinsk Zinc Plant in 2008. The sales problems forced the company to apply special pricing practices on the domestic market. In 2008-2009, metal prices were going down; that's why foreign zinc consumers were able to bargain 10-15% discounts. They had no trouble doing that on the competitive world market, taking into account pegging metal prices to spot prices formed on LME.

Buying cheaper zinc abroad is not profitable for Russian companies due to heavy transportation expenses resulted from the huge territory of the country. Therefore, metallurgic companies, taking advantage of their dominant position on the market, insist on fixed prices for their products - in fact, prices are fixed only if they drop; they can increase without any ceiling. This practice is favored not only by metallurgic companies, but also by oil and gas companies. As a result, prices set for Russian consumers are often higher than those offered to foreign buyers. However, they demonstrate a wide range within the country due to the dispersion of premiums set for different consumers. There comes specific nature of Russian pricing.

Denis Nushtayev, a senior analyst of IFC "Metropol", admits that Chelyabinsk Zinc Plant is manipulating the prices, referring to high quality of the metal (the plant emphasizes in all its press-releases that it produces zinc of SPECIAL HIGH GRADE that guarantees the 99.995% purity of metal). However, the expert suggests that the true reason for growing prices lies in the monopolistic position of Chelyabinsk Zinc Plant on the Russian market and in lack of mechanism that would define the premium for domestic supplies.

Yuri Volov, an analyst of Bank of Moscow, says that it is very difficult to create an economically feasible pricing mechanism in Russia due to economic instability and tremendous differences existing between the country's regions. However, efforts must be made in this field: the expert thinks that the price behavior on the London Metal Exchange must underlie the policy in forming prices for metal. Yu. Volov thinks that the government turned a blind eye to Chelyabinsk Zinc Plant because it bought raw materials abroad, moving up its costs.

In the meantime, Chelyabinsk Zinc Plant did not have any particular reason for setting a 20% markup for Russian consumers: based on the information disclosed by the company, its net profit soared by 289.23% in the fourth quarter of 2009 as compared to the third quarter. The increased LME prices for zinc and improved sales contributed to the impressive performance. Andrei Panshin, General Director of the plant, informed the press that the change-over of the owners helped to solve the problems with supplies and the situation on the world market was favorable.

In this connection, experts note that sales could have been even more impressive, if the plant had upgraded its production facilities on time. Recently, the Board of Directors of the plant announced that they intended to invest 622 million rubles in renovation only in 2010. Through a number of innovative solutions, Chelyabinsk Zinc Plant wants to improve the product quality and reduce production losses that, according to Alexander Tatarkin, Director of the Institute of Economics at the Ural Branch of the Russian Academy of Sciences, are still sizeable.

The supervisory authority of Chelyabinsk Zinc Plant entrusted the management team with the task to propel the plant to the world level of production and quality, thus, giving grounds for the conclusion that the new owner is not satisfied with the plant's performance. Consequently, at the moment it is inappropriate to require high markups to be paid by Russian zinc consumers, with reference to the high quality of products. According to Maxim Ovchinnikov, in 2010, the prices set for Russian industrialists exceeded LME prices by 15-18%. The Federal Antimonopoly Service assumes that after it takes a close look at the current performance of Chelyabinsk Zinc Plant, it will extend its claims to 2010.

The administration of the zinc plant does not make any comments on the antimonopoly investigation: in the company's press-office the "RusBusinessNews" observer was offered to call back late in June - probably, by that time there will be some comments.

Experts think that the reasons for silence reside in the fact that the owners of Chelyabinsk Zinc Plant realized a simple truism that they will not be able to influence the world market with their 200 thousand tons of zinc - or will not be able to increase substantially their sales to foreign consumers. To make it, the plant should be highly efficient and productive. However, no efficiency can be discussed when in 2009 - half year after the new owner came to the plant he had to write off the shortage of raw material (zinc concentrate and zinc-containing cake) in the amount of 180 million rubles, which was found during the inventory check?

Such type of management leaves no other choice but increase prices. Russian consumers will survive. If not, so much the worse for them.

Vladimir Terletsky