Andrei Karunos

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rices in the Russian steel market are getting close to the world ones. In less than half a year the increase in domestic prices for steel rolled products averaged 25 %. The first significant jump took place in March. That month the major steel companies MMK, Severstal, NOSTA and Mechel raised their sale prices by 15 % to 30 %. NLMK partially did the same already in February by increasing the price for steel sheet 5 % to 9 %. The price growth continued both in April and May. Thus, despite experts’ expectations, the price rise that started in 2002 is still on.
Officials of metallurgical integrated mills are citing two reasons for their actions: first, a similar tendency is existent in the world market as well and, second, expenses on services of natural monopolies and raw materials (scrap, iron-ore concentrate) in Russia are on the rise: by estimates of steelmakers themselves, they annually go up by 15 % to 20 % on average.

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According to the data provided by Marketing Alliance, in May steelmakers’ prices for rolled products have risen by more than 4% against April. It is noteworthy that among those products prices have grown for rods by about 7% and for channels by about 6%. Traders’ dynamics of the price growth is somewhat lagging behind. Judging by average indicators, traders’ prices have ramped up in May by over 3% as compared with April.

Prices for steel started to ramp up in 2002 after the White House introduced import duties. As a follow-up, they began rising in Europe and Asia, including CIS countries (Ukraine, Kazakhstan). In the first quarter of 2003 the world average price for coiled hot-rolled steel increased up to $312.5 a ton, the price for cold-rolled steel climbed up to $410 a ton and a ton of section steel began to cost $295. Prices were also rising for such products as ferrosilicon (by 26 %), ferrochromium (by 21 %) as well as iron-and-steel scrap (by 41 %).
On average, in March 2003 world market prices for most steel products considerably exceeded the price level of March 2002. For example, just in one year prices for coiled hot-rolled steel increased by 43 %, for coiled cold-rolled steel by 60 %, for section steel by 27 %, for ferrosilicon by 71 %, for ferrochromium by 43 %. Prices for iron-and-steel scrap shot up by 82 %.
As for the cost of services of natural monopolies, this category in Russia includes two corporations Gazprom and RAO UES as well as state-owned railroads. In the opinion of some experts, the economically justified growth of prices for metal products dependent on this factor should not have exceeded 8 %. Although prices for electric power and gas in Russia are still lower than the world ones, between 2000 and 2002 they were growing at accelerated rates and a year ago many enterprises by failing to adapt to the so quickly changing situation reached the upper limit of their profitability. In 2003 the Russian government introduced limits on price increases with respect to gas (20 %), rail transportation (12 %) and electric power (14 %).
Steelmakers explain that they raise their prices by exactly the amount of tariff growth But if the tariff is up by, say, $1 while the price for rolled stock increases $2, then, there is a reason for that as well. It should be kept in mind that the cost of products is also influenced by market conditions. That is why, in their opinion, those calculations, which seemingly prove that raising prices for rolled products is groundless, are not exactly correct.
Although steelmakers describe their actions as a quite natural reaction to external conditions, both traders and consumers of rolled stock (metalworking, pipe-producing and automotive industries) are angry with them. Many analysts started talking about some cartel conspiracy. Victor Sherstyuk, the head of the Security Council, even made a proposal to Prime Minister Mikhail Kasyanov to discuss this problem at the government’s session since another rise in prices for metal "contradicts interests of the country’s economic security".
In goes without saying that leaders of steel companies are rejecting all accusations of any cartel conspiracy. And at the same time they are predicting the further growth of prices for rolled stock.
In the words of Vadim Makhov, the deputy general director of Severstal, in the mid-2003 a ton of steel rolled products will cost in the domestic market by between $30 and $50 more (the increase of 15 % to 20 %) at the least. Just recently metal products cost Russian consumers only by 10 % to 20 % less than in Europe, where their price reached from $350 to $450. Following the March price increase costs of sheet in foreign and domestic markets have become practically equal.
According to the information provided by managers at the company NOSTA, the March price increase was planned in advance and it was coordinated with consumers.
When requested by Eurasian Metals to comment on the situation, Andrei Kruglov, the head of marketing department at EvrazHolding Trading House, reminded that the three EvrazHolding-incorporated mills ZSMK, NTMK and KMK are making mainly section steel while the price growth affected sheet products to a larger extent. Prices are increasing in Russia following price rises in foreign markets. In Kruglov’s opinion, when China was consuming sheet in enormous quantities, steelmakers were trying to ship their products precisely to that country, since China’s prices were significantly higher than in other markets. It was more profitable for them to sell their rolled products for $300 or $400 to China than for $200 in Russia. However, the situation changed. The reason was that Chinese traders were expecting an introduction of duties. A lot of steel sheet were accumulating on borders. The price for sheet to be shipped under contracts for April and May fell down.
"This year the situation in the section steel market will be more stable than last year. We do not expect such jumps as was the case in 2002", predicts Kruglov. "Today, we are aware of market conditions, of the import/export situation and we are in a close contact with construction companies, which are major consumers of our products. So, having all needed information on volumes of construction and proceeding from it we adjust our price policy appropriately. If you check the price dynamics, then, you will see that their growth in our segment does not exceed $7 to $10 a month", he points out. Kruglov mentions a seasonal increase in demand, which, by his estimates, will amount to between 7 % and 10 %. After that the market will get stabilized and by the year-end there, probably, will be a small price decrease. "Prices should remain steady in winter and later they will be possibly going down smoothly. But we do not expect any collapse", insists the marketing expert.
As far as billets are concerned, this product has always been and will always be in demand. It is more profitable, of course, to sell products of the second or third process stage but due to the same Chinese factor many unexpected things happened in the market. For example, in some places square billets were being sold at prices higher than reinforcement. Ukrainian mills, which earlier shipped reinforcement to Asia, switched over to supplying billets there.
In Kruglov’s opinion, despite the fact that Russian prices are approaching the world ones, they should not exceed this limit. Otherwise, there will be a real danger of European metals flooding Russia.
Representatives of the steel business are connecting numerous accusations of the cartel conspiracy, among other things, with the market stabilization. As Andrei Kruglov says, those traders, who used to fish in troubled waters, went out of business and lost their income.
The price increase always leads to the somewhat narrower market putting in danger the implementation of metal-consuming projects. But, as the experience proves, the reduction of metal consumption due to the price growth is usually of a temporary nature. An adjustment of domestic and foreign prices for metal products is one more testimony to Russia’s integration into the world economy. And, in opinion of steelmakers, this is a guarantee of signing long-term contracts with consumers both inside and outside the country. The influence of the spot market is going down, mills are loaded with fulfilling orders, sales are guaranteed, they stress.
So far though the production prime cost in the metallurgy is steadily increasing. And the situation in the world steel market does not give grounds to make optimistic predictions. Despite high prices for almost all kinds of metal products, which still have been getting more expensive this year as well, many experts doubt that the world steel market will become stable. On the one hand, the growth of prices for rolled products have a positive impact on the world market, since Russian steelmakers did not completely exhaust quotas on supplies for 2002 and now they will probably start increasing export shipments. On the other hand, Russian products with high added value are being actively forced out of the world market. By results of 2002 export shipments of sheet and section rolled products went down by approximately 54 % and 48 % accordingly. And, on the contrary, the export of slabs grew up by 40 %. It is quite possible that this year again steelmakers will have to get an upper hand by the amount, not the quality of their products.