Russia’s price watchdog, the Federal Antimonopoly Service (FAS), plans soon to impose a hefty fine on the Evraz group’s lead mill at Nizhne Tagil (NTMK) for rigging the prices of steel profiles or sections in violation of the law on competition and non-discriminatory pricing. Maxim Ovchinnikov, head of the FAS industry department, said the agency had completed its investigation and issued its ruling against Evraz last November, judging the company in violation of Article 10 of the Law on Protection of Competition “in setting and maintaining monopolistically high prices for Z sections of steel , grades 09G2S and 12G2FD.”
FAS then gave the company three months’ time in which to set new prices for buyers of these products, according to a regulation formula. The FAS order to Evraz says the Nizhne Tagil plant “must fix prices for Z sections of steel grades 09G2S [and] 12G2FD in which the profitability of one tonne of Z profiles of steel grades and 09G2S [and]12G2FD shall not exceed by more than 15% of the weighted average return of all products of NTMK, calculated over the last three calendar years based on reports from the [plant’s] Profit and loss account.” The new pricing deadline expired at the start of this month.
The law gives FAS the right to fine offenders from 1% to 15% of the sales revenues of the products found to have benefited from illegal pricing schemes. Evraz’s operating and financial reports consolidate sales of all railway products together, including rails and other steel, and it is impossible to gauge the tonnage or value of the Z profiles now subject to penalties. Total railway steel sales for the year for Evraz amounted to 1.4 million tonnes; total revenues for all railway products came to just over $1 billion.
The original complaint triggering the FAS action came from a central Russian manufacturer of railcars and other rolling stock, Uralvagonzavod, in May of 2010. According to Ovchinnikov, “the case was dismissed for the Evraz[group], because the head company itself wasn’t setting the prices, but not [dismissed] for its subsidiary NTMK [Nizhne Tagil Metallurgical Combine], which was found guilty. The Commission [of FAS] ruled that the plant should lower the prices. As to the fine, there hasn’t been a ruling yet, but it will arrive soon. NTMK will be fined.”
A text of the 12-page ruling, dated November 24, 2010, was signed by a 5-man FAS commission of inquiry, in which Ovchinnikov was a member. The products covered by the investigation were Z steel profiles used in the manufacture of rail freight gondolas and platforms for tanks, hoppers, and other rail cargo wagons. Competing imports, steel products from Azovstal in the Ukraine, were reported by FAS to have been rejected by the Russian car builders for failing the Russian product quality standards. This created a situation, according to FAS, in which the Evraz mill at Nizhne Tagil, in the Urals region of Sverdlovsk, was the dominant, quasi-monopoly supplier to the domestic market.
Reviewing prices of the Z profiles over an 18-month period from January 2009 to June 2010, FAS found there were significant differences in the pricing of the same product for five different Russian customers. The complainant, Uralvagonzavod, was found to be the leading buyer of this steel, but was disadvantaged in relation to its competitors by Nizhne Tagil’s price discrimination policy. The percentage difference and the price value are classified in the report release.
A source close to the investigation has told CRU Steel News the price differential between buyers of the Z profiles ranged from 10% to 60%, while the profit markup differed by between 12% and 200%.
The FAS ruled that” the division of customers into groups of strategic clients and others is conditional and NTMK [is] unreasonable to set different prices for these customers.” The ruling also found that the differentiation between customers was not based on the volume or value of their purchasing. “[Nizhne Tagil]sets different prices for the same product regardless of the volume of purchases of individual customers for the period of time.”
Production costs were found to be the same for goods shipped to the different buyers, but the price differential resulted from the fact that the Evraz pricing policy set different profit mark-ups for different buyers. One buyer, Altayvagonzavod, was found to be enjoying purchasing advantage over Uralvagonzavod, even though the former plant was in Altai region, 1,835 kilometres away from Nizhne Tagil, while Uralvagonzavod was just 10 kms away from the plant in Sverdlovsk.
Steel traders in Moscow were asked to comment on why the mark-ups were so different in the absence of other factors. One source said: “It’s sometimes better not to comment, just to be on the safe side.” Another said: “I believe kickbacks could be involved here…You can’t say for sure, but something is certainly wrong here.”
Evraz has not reported the FAS judgement against it on the company website. The only company report about Nizhne Tagil in the period of the FAS ruling claimed that modernization at the converter shop at the Nizhne Tagil mill had been completed by November 24, and that the output capacity of the production line had been raised by 700,000 tonnes to 4.5 million tonnes per annum. The cost of the equipment replacements was reported at $50 million.
The company also refuses to comment on the FAS ruling of last November or the new pricing scheme deadline, claiming that until the fine is imposed, the case has not been finalised. A company press service spokesman said today: “I haven’t seen any Uralvagonzavod claim or a final FAS decision on measures against Evraz. When there is one, then we will give you a comment.” When referred to the November 24, 2010, ruling, the spokesman said: “Until there is a final decision [on the penalty], we can’t comment.”
Evraz, which is controlled by Roman Abramovich and Alexander Abramov, has been doing poorly in convincing the government regulator that its price schemes are legal. A fortnight ago, the Evraz group’s coal companies were convicted by the FAS of pricing violations for coking coal. In that case, begun in July of 2010 on the complaint of other steelmills, Evraz and Raspadskaya (Evraz owns 40% of the mining company) were judged to have violated the law by selling coking coal to domestic and foreign buyers at price differentials that amount to anticompetitive discrimination. “The difference in prices to various consumers of the same product,” declared an FAS statement issued on March 14, “ranged from 20% to 48%. In this case, the company did not provide the Commission of the FAS Russia convincing arguments that warrant such difference.”
The agency also ruled that these differentials were “economically and technically unjustified…[and] did not depend on the volume of supplies and the transportation costs”. The FAS says it will fine the violators an amount to be calculated shortly of between 1% and 15% of their sales turnover for coking coal in 2010. An analysis by Uralsib Bank analyst Dmitry Smolin, reports that the fine for Raspadskaya in this case would be $17 million, based on estimated domestic sales revenues of $348 million.
Ovchinnikov of the FAS also told CRU Steel News that a ruling on charges of price fixing by Evraz’s Kachkanarsky mining company for vanadium sales will be finalised on April 7. Vanadium is a steel-hardening alloy used by steelmakers for a range of applications for the car and construction industries. Evraz is also a quasi-monopoly miner of vanadium ore and concentrates in the Russian market, while there are just two refiners of the product into ferrovanadium. They were the subject of a US trade investigation for dumping priced sales in 2006.