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ergei Mitin, department head, Ministry of Industry and Energy, Russian Federation:

- Russia’s steel industry is developing quite steadily. In 2003 the production volume amounted to 51 million tons of finished steel, including 27.7 million tons of bar, 22.7 million tons of sheet and about 0.7 million tons of other kinds of rolled stock. The volumes of rolling such progressive types of metal products as cold-rolled sheet and coated plate have considerably increased (by 12.5% and 22.5% respectively). The loading of rolling production capacities went up from 81% to 82.5%. The production profitability reached about 35%. Export shipments accounted for over 50% of profit.
In our opinion, the major problems include, above all, the high degree of wear, which equals 70% for the active part of basic production assets, and the high resource intensity. It results in accumulating inefficient excess capacities that deform the market. The constant growth of tariffs on energy resources and railroad transportation services contributes to the increased prime cost of metal products and undermines their competitiveness.
Today’s market reacts sharply to the fast growth of prices for coke, agglomerate, blanks, rolled ferrous metals, etc. The growth of prices for commodity iron ore by 24% has naturally caused a significant rise in prices for finished metal products. One can often hear that it will make sense to let the market solve problems of the metallurgy, that the market’s invisible hand itself will cope with all the complexities, obstacles and will balance the situation in any industry. In our opinion, this approach is inapplicable to the metallurgical complex. Problems of the metallurgy are the ones of not only owners and CEOs of enterprises. They are the State’s problems as well. We are not seeking a confrontation with it. We are seeking a dialogue and cooperation. The state industrial policy that is aimed at improving conditions for development could guarantee the continued growth of both steel and non-ferrous industries and could contribute to consolidating this most important sector of Russia’s economy.


Vladimir Lisin, chairman of the board of directors, NLMK:
- The resumption of economic growth in Russia provided a strong incentive for improving the steel industry’s production activity. By 2003 the industry restored the production volume bringing it up to the pre-crisis level of 1992. This year there is a practically full use of all the production cycle of the steel industry. The loading of its capacities exceeds 90% and that is higher than in 1991. Some minor reserves are still available for the rolling and subsequent process stages.
We can state that on the whole the period of extensive development has been completed and that further advances in production are impossible without considerable investments, construction of new steel-making facilities.
To increase production volumes is not a simple task and we have to be sure that additional products are needed. In foreign markets sales of our products with high added value are being limited in every way possible while Russia’s reprocessing industries just have not reached the pre-crisis level.
Why is it that the important moment to choose a strategy of further development has come precisely today? Many enterprises have accumulated a considerable financial potential but, in fact, there are not that many ways to use it. The first option: stock owners buy airplanes, soccer teams, newspapers, ships. The second option: in the last year and a half Russian metallurgists made investments abroad of about $4 billion; most of them went to metallurgical or allied assets, which owners of funds professionally know about, The third option: owners keep their profits in Russia and make investments in developing the industry. It is clear that the first two options has little to do with the growth of GDP and only the third one fits in the logic of the country’s economic development.
During periods of industrial upsurge the direct dependence between growth of GDP and steel consumption is obvious in all countries. This goes on till they do not get annual gross income of $8,000 to $10,000 by volumes of production per capita. After that steel consumption growth slows down and the development of nonproductive sectors comes to the forefront of the economy’s growth. The developed economy becomes stabilized with the annual steel consumption amounting to between 350 and 700 kg per capita depending on the economy’s structure. An annual consumption between 400 and 500 kg per capita can be considered average. Russia with its GDP of about $1,500 a year per capita – that is 10 times less than in the U.S. and Japan – and steel consumption of about 150 kg per capita has set a task of achieving intensive growth. The main emphasis is to be made on increasing the share of manufacturing sectors. Following the world development logic, by 2010 an annual steel consumption in Russia should amount to about 400 kg per capita.
Thus, Russia needs to ensure already in the nearest year an annual steel procession volumes of no less than 20 million tons. This will be achieved with the help of products of either the domestic steel industry or enterprises of other countries – Ukraine, Turkey, Kazakhstan, EU, China, Japan – depending on the chosen policy of providing the steel industry with investments.
Taking into account the specific as well as the extent of Russia’s territory its important sectors of final consumption have been and still are the oil and gas industries, pipes and hardware, railroad transport along with railroad engineering, electric power engineering. Later on, the consumption growth is probable in the fast-developing construction sector, which in today’s Russia is far behind than in the world as a whole. Reprocessing of rolled steel into pipes, sundries, roll-formed sections and so on should also get a boost. An impetus can be provided by the State’s large-scale programs, development of oil refining and oil production, mechanical engineering as well as by the increase in consumption of durables.
However, the way that Russia’s consumption sectors are developing is not always predictable. For example, the program to develop the automotive industry failed. At the same time, by our estimates, major producers of automobile-body sheet and rolled stock with coating invested about $400 million in automobile-related programs. The rise of the automotive industry could be helped by a totally different program, which, besides protective measures against imported products, would offer incentives for foreign investments, encourage the use of domestically-produced components at assembly enterprises, guarantee repayment of investments, etc.
The program to modernize Russia’s transportation system is being under discussion now. This program provides for putting in operation over 72,000 km of motor roads and 1,100 km of railroads, 20,000 passenger and freight railroad cars, 8,000 locomotives. And all these should be done before 2010. By the most modest estimates, its complete implementation will require no less than 15 million tons of steel, not counting machinery, equipment, buildings and installations, bridges and so on, which will be needed for production, construction and operation. But where is the guarantee that the program will not turn out again to be just a piece of paper? This guarantee can be provided only by the complete liberalization of the investment policy in such projects as securing transparency of both budgetary and commercial components of the program.
Let us consider the question of pipes. In contrast to its Western counterparts Russia’s steel mills make only a small portion of pipes, about 10%. "Independent" pipe companies account for the rest of them. So, strip is the main product for allied industries. However, consumers failed to meet expectations of pipe-making enterprises. Just Gazprom alone bought pipes 2.5 to 3 times less than its declared needs provided for. But the matter is that on the basis of its requests not only call-off contracts were signed to supply pipes but real investments were also made in the pipe-production program.
If we take the forecast of the Russian economic growth till 2007 published recently by the Ministry of Economic Development, we will find it difficult to feel optimistic with respect to further investments in the country’s metallurgy. The growth of import shipments will considerably exceed the increase of export shipments, the growth of industrial production will be gradually reduced from between 6% and 7% to between 4% and 5%. It is quite possible to conclude that, to a large extent, needs for metal-consuming products will also be satisfied by import shipments. By results of the given period their growth will amount to about 75% (from $75B to $120B). Naturally, automobiles, lathes and equipment, household hardware and so on will account for a considerable share of imports. So, we still do not feel confident that our products will be in demand.
Following this logic, it is necessary either to make investments in developing production facilities of Russia’s neighbors or to continue developing our enterprises in spite of the government’s general direction and its economic policy.


Alexei Ivanushkin, executive director, Mechel steel group:

- I expected to receive today a lot of information, to watch disputes about serious grievances against steelmakers that recently became the subject of hearings in the government, in the State Duma and Chamber of Commerce and Industry.
The whole matter progressed not because the government independently examined developments in the metallurgical complex and made its own conclusions but because it received several letters from our ‘poorest’ industries, i.e. our oilmen and pipe-makers. So, hearings were started: we should have submitted an enormous amount of information in the shortest possible time. Two months have already passed since this process has started but it is not clear yet how it will end up. There were different proposals, even the most radical ones. Well, the introduction of export duties is, probably, not the most terrible thing in principle. But regulating prices of the country’s rolled products for domestic consumers has nothing to do with market economy. I would like to mention two facts. First, there should be a presumption of innocence in business as well: not a single clear proof that steelmakers are violating market rules has been presented. Second, it seems to me that the question of the destiny of the Russian mechanical engineering has been drowned in screams of those, who initiated these hearings. Not a single recipe of how to save the mechanical engineering has been offered. Needless to say that we are interested in its development more than, probably, anybody else.
I can tell you that there are a lot of mechanical engineering enterprises in the Chelyabinsk region and many of them are operating poorly. In the last two years we conducted an expensive experiment: we were totally financing the Chelyabinsk press-forging plant, which is a supplier of products for the automobile complex. Nothing came out of this cooperation. We were financing the plant for up to 12 months, prices of its products were stable for 6 to 12 months. As a result, our losses were enormous but the plant failed anyway. The conclusion is obvious: there is no chance to save the mechanical engineering through regulating prices in the metallurgy. If the government is interested in getting results from this experiment, then, we will provide it with the detailed information.
The second question, which was discussed in detail last year and which is now being raised anew, concerns policies of other countries, particularly Ukraine, toward the Russian market and how Russia should react.
In April 2004 we provided the Ministry of Economic Development with an analytical report on subsidizing of Ukraine’s metallurgical enterprises. This report cost us money and time, about 6 months of work. It completely exposed mechanisms of providing Ukrainian metallurgical enterprises with privileges and preferences with respect to tax, customs, foreign currency and general economic regulations within free economic zones and territories of priority development. For example, free economic zones ‘Donetsk’, ‘Azov’ and ‘Porto-Franko’ were set up in the commercial seaport of Odessa for the next 60 years. Many metallurgical enterprises are getting these privileges not directly but through affiliated companies. As a result, the Russian market is getting products that receive sizeable State support.
The extent of programs to subsidize enterprises of Ukraine’s mining-and-metallurgical complex makes it clear that this is a thought-out, long-term and purposeful policy of the country’s leadership. Subsidies, which were and still are provided to Ukraine’s metallurgical enterprises, are forbidden by norms of the international law. I would like to particularly stress this point because in this case we are talking about unfair competitive advantages. This has a negative impact on normal market conditions, especially on export shipments. This way damage is done to our national industry.
This spring parliaments of Russia, Ukraine, Byelorussia and Kazakhstan ratified the agreement on creating a common economic space. At the same time Ukraine, which for a very long time was refusing to join this agreement, now insists on creating a free trade zone while keeping restrictions, including the non-use of special protective measures, antidumping and compensatory duties. It is obvious that with an integration such odds are absolutely unacceptable to Russian steel companies. We are today in a far less favorable position than Ukrainian producers and we have to compete in the very market of ours with those products that are government-subsidized. It goes without saying that there should be a sectorial agreement, which would either force Ukraine to give up providing Ukrainian metallurgists with an opportunity to work in free economic zones or forbid them to operate in the common economic space.
On May 26, 2004, in his message to the Federal Assembly the president of the Russian Federation said the following: "The growing competition in world markets prompts developed countries to increase support of their producers and exporters. Russia’s Ministry of Foreign Affairs and the government as a whole should look for more effective ways of increasing Russian exports, of a reliable protection of Russian companies’ interests abroad". The government was given a clear task: what has to be done with respect to foreign markets. Today, there are two things that interest us very much. This is the agreement between Russia and the U.S. that is to expire on July 12 and the agreement between Russia and the European Union, which will expire on December 31. Many people know how the agreement between Russia and the U.S. was signed more than 5 years ago. It reflected interests of the three leading integrated mills. At the same time precisely our three giants, which are the most profitable, defended absolutely non-market rules, which put us away from competitive market processes. It is still not clear what will happen to this agreement. Despite our active, 5-year-long attempts to suspend the agreement, we did not succeed.
While moving to join the WTO, toward liberalizing its foreign economic relations, Russia should not take upon itself unilateral obligations regardless of European practically ultimatum-like threats that if it does not sign an agreement, Europe will introduce one-sided quotas. Today having an opportunity to export a little more than 1 million tons of rolled metal products to countries of the EU, Russia can lose this right. I want to stress: if quotas are introduced, then it will be an absolutely unlawful act. We will get one more evidence of how other countries protect their markets. Everybody knows quite well about the U.S.’ article 201 that was also unlawful. Thus, our opinion: both agreements cannot be extended and they should not be signed.
I would like to wind up by touching upon the question that could be a separate subject. There is a whole number of reasonable grievances of Europe and other countries against us in light of the future accession to the WTO. In particular, these grievances are connected with claims that that we have non-market prices for gas and electric power. This is true. After long negotiations on this question our government was doing everything wrong. It kept discussing the questions of how much gas should cost, how much electric power should cost, what concessions we should make. Instead, it should just create a market of energy resources in Russia. The country is ready for it.

Viktor Makushin, president, MAIR group:
- As a businessman, who is active in metallurgy, I am undoubtedly pleased that there is a production volume growth in the industry and that profits are high. But to what extent does this success contribute to developing the country’s economy? As results of analytical studies show, today, the success of steelmakers is based not so much on their ability to operate skillfully as on their ability to distribute and redistribute resources. Recently I read a report that was brought by our steelmakers to the prime minister and that concerned the growth of prices for the metal. This report was obviously directed at pushing for more subsidies to large steel mills from other industries and the State’s resources. Why prices for hot-rolled sheet, strip today amount to between $450 and $460 EX works but export prices equal $380 to $390? How this may happen? There is an enormous monopolization. For example, three largest integrated steel mills account for almost 40% of rolled products. That is why a considerable part of profitability or something like 15% was taken away from pipe makers and other consumers of hot-rolled sheet.
Steelmakers wring funds out of the State in their favor through lower tariffs on electric power and railroad transportation. They use the natural rent free of charge to consume coal and ore.
Relations between business and state authorities should be based on the following principle: the withdrawal of advantages for all industries should be balanced in accordance with world standards.

Igor Prokopov, president, NCP Aluminum:
- Ten years have passed since the completion of privatization and the start of integration of Russia’s aluminum industry in the world market. Shareholders and managers tried to use advantages of private property to the maximum. And here is the result: the aluminum production level increased 30% against the 1994 level and 19% against the level of 1990 (the best year for the planned economy). All qualitative parameters – indexes of consuming raw materials, electric power and auxiliary materials, quality of products – have a positive dynamics.
Russia possesses objectively cheap energy resources. The country is such a region of the world where it makes economic sense to develop energy-intensive production. At present, over 80% of Russian aluminum is produced with the use of ecologically clean hydroelectric power.
Structures of Russian companies do not have their own energy resources. Today, prerequisites are being formed to move in this most important strategic direction. However, for the sake of their corporate interests well-known structures are resisting it. We think that the government should promote using advantages of the country that possesses cheap energy resources for an effective development of its economy.