Battle for metal

15.04.2010 — Analysis

Just one letter to the Russian Government from Oleg Siyenko, the Director General of OAO NPK Uralvagonzavod (Ural Railway Car Plant), succeeded in causing the Federal Antimonopoly Service to conduct an inspection of a whole sector of industry. The RusBusinessNews observer established the potential outcome of a machine builder's complaint against metal makers whereby he blamed raw material companies for continuous price hiking.

In response to the letter the Government asked FAS to conduct inspection of the price forming process in the Russian market of rolled metal and parts. On 19 April the report from FAS should come to the Ministry for Industry and Trade and on 25 April the joint committee of FAS and the Ministry will report to the Government the results of the inspection and suggest ways to resolve the problem.

In his letter to Igor Sechin, the Deputy Prime Minister of the RF, that has caused this reaction Mr Siyenko said that just in 3 months of 2010 prices for metal and raw materials have grown by tens of percents - from 10% for rolled metal to 60% for railway castings. Moreover, Mr Siyenko predicts that in April the price growth may continue all the way from 10% to 30%. The machine builder points out all this will result in growth of cost of products made by his enterprise. On some product lines any change of sale price is impossible (for instance those made under the State defence contracts) and the enterprise will, at least, lose some profits or, possibly, face losses.

It is worth pointing out that Mr Siyenko suggested most radical measures to fight against the suppliers - from the compulsory long term contracts with fixed prices to the suggestion of resorting to the method tried and tested by the automotive sector, i.e. the introduction of prohibitive duties, to abolish the import duties on metals and at the same time introduce prohibitive export duties.

Metal makers are in no hurry to agree with Mr Siyenko's accusations. They say that they are just as dependent on prices of raw materials which are also growing. A Severstal representative, according to Vedomosti, reminded that his enterprise in 2009 had reduced prices for Uralvagonzavod by 30% in comparison to the pre-crisis period.

Business analysts are also sceptical about the possibility of the introduction of duties. According to Dmitry Baranov, the Leading Expert of the MC Finam Management, introduction of any protectionist measures is not very likely. In the interview to RusBusinessNews he pointed out that metal making still remains one of export-oriented sectors and profits from exports constitutes a significant part of the State budget. Moreover if metal makers are nevertheless forced to leave the active participation in international trade then we will have to concern ourselves with saving them as the domestic demand is significantly lower than the production capacities in the sector. All this may lead to the collapse of the sector and then machine builders will be left without metal altogether.

Nor have the ideas of the Nizhniy Tagil machine builder been supported at the regional level. According to Aleksandr Petrov, the Minister for Industry of the Sverdlovsk Oblast, all problems have to be resolved using free market tools, without resorting to administrative leverage. Moreover, Mr Petrov advised machine builders to pay attention to the fact that metal price growth is not just Russian but a global trend and they will have to just get used to it.

In the meantime, even before the FAS inspections have been announced it was clear that the State is unlikely to leave machine builders to fend for themselves. Mr Baranov pointed out that machine building has been and remains one of the priority sectors of economy for the leaders of the country. Uralvagonzavod for instance received in 2009 as means of support from the State 6 billion roubles, 4.5 billion out of this - into the company's registered capital. In 2010 the enterprise will be given further 10 billion roubles.

However, whilst Mr Baranov sees direct negotiations between metal makers and machine builders as the best way out of the situation, others remember the situation in 2008 when it was steelmakers who started complaining against Mechel. At that time everything ended with the Prime Minister Vladimir Putin promising to send a doctor to see Igor Zyuzin, Mechel's CEO, as the company was exporting coal at lower prices than selling it to Russian consumers. At that time, by the way, the final resolution involved signing long term contracts the need for which Mr Siyenko asserts today. However, counting on precise repetition of the events of 2008 would not be wise; in contrast to Mechel metal makers already sell rolled metal on average at 10-20% cheaper to domestic consumers than abroad.

As a result all hopes of machine builders are "tied" to FAS. Experience demonstrates, however, that even if FAS finds some transgressions it will not necessarily result in instantaneous price drops. Car owners remember very well that despite FAS penalising fuel companies for the excessive prices of petrol fuel prices almost never reduced.

Aleksey Ostapov