Andrei Karunos

O

ver the recent years Russian steel manufacturers have tried to set up their own trading houses and sales networks in an effort to tighten control over sale of their products. Their desire to sell their products without intermediaries is quiet explainable. In most cases such a sales scheme proves very attractive for major buyers as well. As a result small independent trading companies are gradually ousted from the market.
Some of them either became a part of steelmakers’ sales networks or integrated into big and competitive trading structures to form their own sales networks with affiliated companies and subsidiaries. In experts’ opinion there are only several dozens of such independent trading structures currently operating in Russia. However, the great bulk of intermediary traders have got no luck: most of them have already had to leave the niches they happened to occupy in the course of spontaneous emergence of the fabricated metal product market.
One of the reasons for these changes on the Russian market is quite obvious: in general the process of consolidation in the steel industry is over. Rolled iron production is concentrated in five holdings, with the main metallurgical complex being affiliated with raw material enterprises (coal and iron-ore mining), small semi-integrated steelworks, hardware plants and sometimes pipe production or even machine building companies. Naturally, raw material and commodity flows inside a corporation are streamlined according to its technology, with the service of intermediary companies, which not so long ago got good profits from these supplies, becoming absolutely unnecessary.
As a good example one can draw a supply system organized in Mechel Steel Group. This holding was set up not so long ago to occupy a unique niche on the market of steel iron and fabricated metal products. The core of the holding is Chelyabinsk Integrated Iron&Steel Works, a high quality steel manufacture having Mechel as its trademark. Based on this enterprise the whole holding’s system is formed to incorporate a coal mining company, an iron ore concentrate company and a number of metallurgical iron and steel works and processing plants, including two steel works in Romania and a pipe production in Croatia. In August the group’s structure was supplemented with yet another trading house called "Mechel Trading House" (previously known as "Uglemet-Trading"). Its subsidiaries and service centers are mainly located in the Ural region.
In an interview to "Eurasian Metals" Vladimir Titsky, the senior vice president of the Steel Group and deputy general director of the trading house, said that the change of the name did not mean a change in the strategy of the trading house, which kept on selling products manufactured by the enterprises incorporated in the group while coordinating all the incoming supplies of raw materials. Moreover, now the group keeps yet another type of activity that is sale of products from stock.

Rounds

According to managers of Mechel Steel Group the range of the goods offered by their group is the widest in Russia both with regard to fabricated metal products and rolled iron. This peculiarity of Mechel Steel Group conditions its sales policy. "Our operation as a part of the group allows us to meet the demand of our customers in a very timely and well balanced fashion, – says Mr. Parkhomtchuk, – In this particular case it deals both with supplies within the holding structure and our work with the "external" consumers".
Thus, cooperation with Chelyabinsk Integrated Iron&Steel Works allowed Beloretsk Iron & Steel Works to reach a record high volumes of production of roll iron and fabricated metal products. A similar situation is at the Vyartsilya Metal Products Plant, which demonstrates now a very high production rate. The trading house handles about 80% of all the raw material supplies, including coal concentrate, for the group’s companies and sells the marketable part of raw materials and semi-finished products. Today the buyer has an opportunity to get the required product at any process stage as the trading house tracks down and controls the whole processing chain from incoming raw materials up to finished products.
"We have been operating on the market for quite a period of time. We would sell our products both directly to the consumers, who are mainly industrial enterprises, and through different trading companies, – says Mr. V. Titsky, the senior vice president of the Steel Group, – In the course of this work we streamlined our relationship with traders. We are still cooperating with some of them, with our business relationship getting stronger and wider. There are some traders we had to stop working with." In Mr. Titsky’s opinion this practical experience saved his group the trouble of selecting traders for the newly established holding.
Even though Mechel Steel Group keeps trying to apply new organizational forms for its trading business, on the whole the group is pretty skeptical about them. Andrew Parkhomtchuk has strong doubts that auctions or electronic trading can attract new customers. "This is a peculiarity of our core business, – Mr. Parkhomtchuk elucidates, – I mean high quality and stainless steel production".
Compared to Mechel Steel Group, EvrazHolding managing company, which holds assets of West-Siberian Steel Corporation, Nizhny Tagil Iron & Steel Woks and Novokuznetsk Iron & Steel Woks, resolutely changes the sales approaches traditionally practiced by these enterprises. Established less than two years ago, today EvrazHolding is a good example of a modern trading structure effectively introduced into a corporation.
EvrazHolding’s companies operate mainly on the market of metals for construction industry and railroad transport. In Russia railroads are state owned and run by the RF Ministry of Railroads, which acts as a monopolistic consumer of rails and railroad wheels. Therefore, there has never been a place for an intermediary business here. On the contrary, the market of construction engineering grade metals actually has no major final consumers.
Restructuring of EvrazHolding’s sales network started with sales auctions and certification of independent traders. According to Andrew Kruglov, the chief of the trading house’s marketing department, "under close examination it turned out that most of them were just regular intermediaries". However, the first auctions showed that a number of traders, who had never promoted EvrazHolding’s products, were ready to make with the holding contracts on terms and conditions which proved much more favorable compared to that offered by other metal traders, who had worked with the holding’s companies. Thus, it deals rather with setting more streamlined rules than with pressing independent traders.
Spokespersons for EvrazHolding believe it possible that while developing its trading business this company will set up its own steel product sales centers in regions. This is conditioned by the revival of the Russian economy, which calls for changes in the territorial structure of demand. It is difficult to imagine now that just a few years ago all the trade in metals was concentrated in Moscow as the Russian capital was the only place in the country where more or less significant funds were circulating. Nowadays regional markets start emerging that makes both steelmakers and steel traders be closer to the consumer and expand the scope of their services.
Magnitogorsk Iron & Steel Works (MMK) and Severstal group have taken the same way. Thus, Magma, a company affiliated with Magnitogorsk Iron & Steel Works (MMK), acts as its official distributor and represents interests of MMK in the North- Western and the Central regions. Similar trading companies are operating in Siberia, in the Ural area and regions located along the Volga. All of them have networks of official dealers, stocks of steel products and service centers.

Forgings

A wide range of different purpose steel products offered by Severstal group includes production of hot rolled and cold-rolled steel sheets, mill bars, formed sections, commodity slabs and blooms. A significant share of the supplies is exported. "One of the principles of our operation is to meet the customer’s demand both with regard to the range of products and services we offer,"– says Dmitry Gorshkov, the director of the group’s sales department.
Severstal group’s customers number 40 thousand Russian and foreign companies. The group’s products are marketed both through independent traders and networks of steel product stocks run by two trading houses, namely: by Severstal Invest trading house (about 30 dealer centers across Russia) and by Severstal Lat trading house. On the most strategically important markets (like fuel and energy complex, motorcar, ship building and some other machine building industries), which guarantee significant volumes of demand and profits, the group would apply the tactics of direct sales. With regard to wholesale the preference is given to affiliated and independent commercial structures.
Likewise EvrazHolding, Severstal group has introduced several marketing innovations, such as monthly sales auctions, which attract hundreds of buyers. According to Dmitry Gorshkov "these auctions are very important as they allow us to significantly expand the circle our customers and track down more closely appearance of new customers on the market". Severstal’s trading policy is aimed at sales diversification and keeping balance between domestic and external markets.
The direct sales tactics, appearance of affiliated trading companies and firms in the structure of major steelmakers on one hand and set up of big trading companies, including those affiliated with steelmakers, on the other hand, inevitably narrows the field of action for independent steel traders. However, it would be prematurely to expect their total extinction from the market of steel products. Independent steel traders themselves take the process of merging and squeezing them out from the market philosophically saying that a sound competition is indispensable. They believe it well justified to put the goods closer to the customer and to improve profitability through a direct sales system. Yet, an idea of covering the vast territory of Russia with a network of stocks of steel products looks unrealistic and can scarcely be justified in terms of money the steelmaker would have to invest into it. Independent steel traders think that the most optimum distribution of work on the steel markets would be as follows: trading structures of steelmakers should operate in big industrial centers and, if justified, use services of small steel traders, who showed themselves to advantage, in the regions where demand for steel products is low. In the opinion of independent traders an influence produced by steelmakers’ sales structures on development of wholesale and sale from stocks is still insignificant. Now it is independent steel traders who are mainly competing for this section of the market. The steel traders explain it by the fact that the main purpose steemakers pursue in setting up their affiliated trading structures is neither to expand geography of their presence nor to enter into new shares of the market. In most cases their aim is to tighten control over sales systems of iron and steel works themselves and to monopolize sale of certain types of goods. There is another reason why in the near future sales networks owned by iron and steels works will not compete with independent steel traders on the sale-from-stock market: they are limited in their ability to offer the customers the whole range of steel products and not so flexible in promoting their goods and services.
At the same time major steel companies have only two wishes with regard to steel trading firms: firstly, the firms should be solvent and secondly they should duly and timely perform their obligations with regard to volumes of purchases. Besides, tradesmen should understand it clear that in a large-scale metallurgical process it is very difficult to curb the volume of production. It would be very desirable if during seasonal recessions tradesmen took into account interests of steelmakers and did not reduce volumes of their orders following the recession in demand. In their turn the steelmakers would be pleased to meet wishes of steel traders during the periods of a higher demand.