Noose around the Neck. "Made in Evraz Group"

22.11.2010 — Analysis

On November 24, 2010, Evraz Group is planning a pompous celebration of the completed reconstruction of the steel-making facilities at the Nizhny Tagil Iron & Steel Works OJSC. Just recently, the Russian Federal Antimonopoly Service (FAS) condemned this enterprise belonging to the empire of the billionaire Roman Abramovich for abusing the dominant position on the market. Evraz Group that is haunted by fatal casualties at the production facilities will have to share part of its revenues with the government. However, as experts said to the "RusBusinessNews" columnist, this payment is too small to compensate the damage caused by metallurgical enterprises through maintaining unreasonably high prices on the Russian market.

The FAS committee acknowledged that the Nizhny Tagil Iron & Steel Works (NTMK) violated the Law "On Protection of Competition". Being Russia's only manufacturer of Z-section products, the factory set monopoly high prices. Besides, one and the same product was sold at different prices that could not be explained by any of the economic, technical or geographic reasons. For example, section products were available to railcar manufacturers in Ukraine at a lower price than to NPK Uralvagonzavod (UVZ), though the latter was located next to NTMK. Even the amount of delivery had no affect on the contract price.

During the examination of the claim, representatives of the Nizhny Tagil factory made an attempt to explain their actions by existence of strategic consumers for whom the exclusive prices were set. However, as Maxim Ovchinnikov, head of the FAS department, states, metallurgists did not submit any documents that would substantiate the system of discounts and establish the pricing rules for strategic partners. In the meantime, the difference in prices sometime could amount to 66%, thus, pushing the return on sales of section products up to 200%. The received revenues can be collected to the state treasury: the metallurgical factory is facing a penalty for discrimination of consumers in the amount of 15% of NTMK's revenue for the period of 2009-beginning of 2010.

The claim against the enterprise of Evraz Group was initiated at the request of Oleg Sienko, General Director of NPK Uralvagonzavod. He claimed that the metallurgists were steadily increasing prices, refusing to fix them at least for three months. The Nizhny Tagil railcar makers complained not only about NTMK, but also about Severstal OJSC, Magnitogorsk Metallurgical Integrated Plant OJSC, and Mechel. For example, in the second quarter of 2010, Severstal increased prices for boiler steel almost by 30%. The Uralvagonzavod managers say that they had to accept the new price, as the Cherepovets factory slashed deliveries of rolled metal and UVZ was on the brink of shut-down. The parties agreed that the price for metal plates would remain unchanged for the third quarter of 2010. However, Severstal did not keep the promise. Oleg Sienko wrote another letter to the Russian government, accusing the Cherepovets factory of overpricing.

Eventually, the investigation affected only the Nizhny Tagil Iron & Steel Works; government officials recommended the other companies to enter into long-term agreements with machine-building factories. However, in practice, the metallurgists keep on twisting the consumers' arms.

Alexander Kotelnikov, Managing Director of NPP Mashprom, says that the actual problem comes down to the steady increase in rolled metal prices rather than to the absence of a clear pricing system governing metallurgists' prices. Today's prices for Russian metal overshoot the world prices; therefore, all machine-building companies prefer to buy rolled products (especially stainless) in other countries.

Andrei Besedin, General Director of Uralpromoborudovanie CJSC, informed "RusBusinessNews" that they buy German rolled products from the Thyssen Company through intermediaries in St. Petersburg, which on balance is cheaper than purchasing of the similar metal from Mechel or the Magnitogorsk plant. Though the difference may not be substantial, it is essential in material-intensive production: just a ruble increase in prices for one kilogram of rolled products can shake the competitiveness of the whole machine-building outfit.

Cooperation with foreign partners is also attractive for Russian machine builders by the terms and conditions offered for rolled product deliveries. It is easier to negotiate with foreign companies; they accept payment for metal in installments. This fact is highly important for machine-building companies, as the advance payments they receive for manufacturing of equipment amount to 20%. Russian metallurgists ignore such "little things" - and are losing customers. According to A. Besedin, the market conditions make him refuse from products made at Pervouralsk and Sinarsky pipe factories. The Uralpromoborudovanie company is satisfied with the quality of Russian pipes, but it loses the market, as the competitors purchase the similar pipes at half prices in China.

The Russian government has to take a thorough thought: monopoly on the metallurgical market resulted in the situation when major domestic companies, having access to cheaper iron ore raw materials and coking coal, produce expensive and low-grade rolled stock at a profit reaching 200%. FAS decisions alone are hardly enough to rectify the situation.

Vladimir Terletsky