Russian Metal Makers Asking For Concessions. All This Heat Feeding Pipe Dream

02.03.2010 — Analysis

The governmental support of the sector, according to the metal makers, should be provided along several different lines simultaneously. First of all tax concessions should be established. This would include the reduction of the depreciation term for advanced equipment, to stop levying the profit tax from the sums of money channelled into investment etc. Secondly, the sales of products must be encouraged by the establishment in Russia of joint venture production facilities which are obliged to purchase metal from Russian suppliers. Thirdly, quota system should be introduced for the domestic makers of pipes in joint venture projects of Gazprom. Fourthly, assistance should be given to some enterprises in payments of the interest on their borrowings.

Large metal making companies represented by JSC Pipe Metallurgical Company, Evraz Group S.A., and OAO Mechel declined commenting on their suggestions since it may be construed as pressuring the Government. Experts, however, think differently: the lobbyists' suggestions have been old news for some time and the fact they have been published on the very same day as the Government is considering them speaks of the drive to pressure the authorities. Still, the chances that the metal makers' suggestions will be accepted are very slim.

Konstantin Selyanin, the Director General of the IFC YAVA - Finance Management, doubts that authorities will easily agree to encourage sales of metal through the establishment of joint venture production facilities as this can infringe upon interests of other Russian manufacturers. Opening the internal market to foreign machine builders might aggravate problems in the domestic economy. At the same time we must not forget that our metal makers are not always capable of satisfying the demanding foreign consumers in terms of supplying steel for automotive, transformer, aviation and other complex production processes.

Neither will the State go for tax concessions as this is not permitted for just one sector by the current Russian legislation. The direct targeted help to particular enterprises is possible but counting on it is a waste of time. Valeriy Karaulovskiy, the Financial Director of JSC Ashinskiy Metallurgical Works, says that the company management in 2009 spent nine months negotiating in various Ministerial offices looking for the support of their investment programme and in the end had to call for tenders form banks to finance the lacking sum.

There are several sources of funding for economic mainstays in Russia located in so called monocities. The Ashinskiy metal makers could not get access to any of them, one ministerial office told them that the sum was too small, in another - that it was too large, there are many of those asking for handouts and the State is not cash rich.

The company will be finishing the construction of the electric furnace with the conveyor belt charging using a bank loan. In order to start up the electric furnace they had to build a 220 kV substation and construct an 80 kilometre long electric line to cover the reserve cross-flows between the Chelyabinsk Oblast and Bashkiria.

The State decided not to pay any heed to the metal makers' contribution to the solution of power grid issues. Mr Karaulovskiy reckons, however, that it would have been a great support to the company if the cost of the connection to the grid was waived or reduced. The company is planning to increase sales having reduced costs considerably and improved quality by the end of the investment programme.

Large integrated plants also admit that there are plenty of reserves for the reduction of costs in the sector. For instance, Aleksey Agureyev, the Vice President of the Evraz Group S.A. for Public Relations, has made an announcement recently that the conversion of blast furnaces to pulverized coal fuel gives large savings.

These technologies have been known in the world for quite some time but Russian have only started working on them a few years back. Aleksandr Kolba, the Technical Director of Ferrobank-Engineering Ltd., claims that the production only takes on the new scientific developments when forced by the economic crisis. The deeper the crisis, the bigger leap in technologies is made by Russian metallurgy. The fall in production in 2008-2009 forced metal makers to look for ways of cutting costs while engineering companies are far from being ecstatic about it. The crisis, according to Mr Kolba, has not enabled the technological revolution in Russian metallurgy as the State has covered the reduction in demand by financial injections. The leap would have happened if financial indicators of companies fell another 20% deeper. This has not happened and now it is questionable whether Russians will quickly master many and varied promising technologies.

Anatoly Filippenkov, the President of the Union of Small and Medium Size Business of the Sverdlovsk Oblast, also thinks that survival during crisis is only possible through engineering which enables you without serious investment to cut costs and increase the quality of products. The State, in this connection, should support innovative business not only on paper, but in reality: for instance pass the Law on Innovative Activities. Small innovative companies need loans with low interest and serious information support. So far under the signs of technoparks we see more conmen than serious researchers.

The expert is convinced that the encouragement of demand will give very little on its own. The markets for products with new consumer properties can always be found. For instance a small company in the Sverdlovsk Oblast started up equipment for the production of copper wire rod for the cable making industry while there already is a large company in the region that has both the production of raw copper and copper products with high added value. The small businesses are hoping to find their niche in the market through serious research in the sphere of the quality of metal.

According to experts the attention of the Russian Government is deserved by only one point from the metal makers' suggestion list for the support of the sector, e.g. that a quota system should be introduced for the domestic makers of pipes in joint venture projects of Gazprom. The pipe making sector made serious investments into the modernization of their production facilities and is now capable of competing with many international makers of large diameter pipes. The improvement of quality, reckons Aleksandr Deineko, the Director of the Pipe Industry Development Fund, will enable the domestic plants to hope for some orders from Gazprom in accordance with its share in joint projects with foreign companies.

The Prime Minister Vladimir Putin in September already suggested that the monopoly should increase the share of Russian Pipes in the Nord Stream to 51% but the situation has not changed so far. Metal makers in this connection suggest that this issue should be regulated by a Law, which is a usual international practice. Experts reckon that Russian pipe makers have earned such Law by their focused efforts on the improvement of quality.

Vladimir Terletski