When The Government Is A Cat – Steel Price-Rigging In Private, Complaining In Private, Deciding Price And Profit Margin In Private

By John Helmer, Moscow

The Russian government’s price watchdog, the Federal Antimonopoly Service (FAS), confirmed today that a new complaint charging unlawful price-fixing for steel sheet has been received. The complaint has been filed, according to FAS spokesman Victoria Livanova, by Chelyabinsk Pipe (Chelpipe, ChTPZ) against Severstal and Magnitogorsk Metallurgical Company (MMK). Industry sources claim that TMK, Russia’s largest pipemaker, has also filed a complaint against the two steel sheet suppliers.

The pipemakers are charging that what is called strip, the steel they require for rolling into pipes, has been increased in price by an overall 15% since the start of the year. They also claim, according to a leak reported by the RBK newspaper today, that the prices for some types of specialty steel for pipemaking have been hiked by up to 43%.

Depending on pipe type, the price of the steel represents about three-quarters of the cost of pipe production, so the pipemakers understandably fear a massive squeeze on their profitability. According to the RBK leaked version of the story, the pipemakers believe they are being forced to pay a domestic Russian price for steel which is swiftly approaching parity with world prices, thus hurting both their export competitiveness and the profits to be earned from their domestic supply contracts. The main Russian buyers of pipes – state-controlled companies like Transneft, Rosneft, and Gazprom – prefer to minimize the profitability of pipemaking, and earn larger profits for themselves, so they regulate the increase in prices which the pipemakers can pass on by locking in their costs in long-term procurement contracts.

Steel sheet suitable in Russia for pipemaking is produced by three major domestic steelmakers, and also in smaller amounts by the three main pipemakers in their own mills. The plants are fully privatized; they are owned by open shareholding companies which are publicly listed on the Moscow and international stock exchanges; and their controlling shareholders are oligarch-sized in terms of their attributable wealth and industrial sway. Notwithstanding, because the state plays the dominant role in price-setting along the chain of steel manufacture, from raw material mining to fabrication of steel consumables such as pipes, cars, railroad lines and bridges, this ostensibly competitive sector of the Russian economy is, for all intents and purposes, controlled by a single decision-maker. He’s the cat who’s caught everyone’s tongue.

The complainant pipemakers are members of a local lobby group called the Russian Fund for Pipe Industry Development. Its director is Alexander Deineko. He’s a highly expert conversationalist on the subject of pipe imports flooding into Russia from China or the Ukraine, undercutting domestic prices and taking market share from the Russian producers. But when it comes to proceedings and investigations requested by members of the foundation like Chelyabinsk Pipe or TMK against Russian steelmakers, Deineko isn’t saying anything. At least not this morning, and not until he’s had time to digest his lunch.

Spokesmen for Chelpipe and TMK said they refuse to comment on their filings with the FAS; the price hikes they report for their steel supplies; or the grounds in Russian law which they claim are being violated by the steelmakers. TMK is not denying that it has filed a complaint with FAS, though for the time being, Livanova says she cannot find a record of its receipt at her agency. The steelmakers charged, Severstal and MMK, refuse to respond to the price claims or the new FAS complaints.

The new price investigation required of FAS comes on the heels of a still unsettled pricing dispute for automobile manufacturing steel between the Russian automaker AvtoVAZ and truckmaker KAMZ, and steel supplier Severstal. This dispute will be considered at a meeting of government officials under Deputy Prime Minister Igor Sechin at the end of this week. This is a continuation of the price bargaining which he chaired last Friday. On that occasion, a the FAS was told to go back to its calculator after ruling a few days earlier that Severstal’s price increases were in line with the law.

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