One percent dream for the metal exchange
07.02.2011 — Analysis
In March, in Chelyabinsk, the branch of the St. Petersburg Exchange will start its first trading session. Officials believe that open trade in metals will help to stabilize market prices. In the meantime, experts told the "RusBusinessNews" about their fear that the electronic trading may turn into a fictitious affair, taking into account insignificant volumes of sales. The exchange will not be able to fulfill its intended purpose without meaningful and hefty support of the government.
The decision about launching Russian exchange metal trading was made by Vladimir Putin in summer 2010. The South Urals that account for almost half of domestic ferrous metals and substantial part of non-ferrous metals was selected as a trading venue. Mikhail Bendyak, Counselor-Minister of Industry and Natural Resources of the Chelyabinsk Region, informed that a steering body (the Committee) of the branch exchange is being formed at the moment, and conditions, terms and procedures for accreditation of businesses for participation in exchange trading are being specified. The RF Federal Anti-Monopoly Service is developing an incentive plan to encourage the metal manufacturers who are going to sell their products on the exchange.
The authorities recommend that steel-making companies should sell not less than 1% of the monthly metal output through electronic trading. Nikolay Vinnichenko, Plenipotentiary Envoy of the President of the RF to the Ural Federal District, expects that in future all trade transactions in ferrous and non-ferrous metals that are produced in the Urals will be performed through the Chelyabinsk office of the St. Petersburg Exchange.
Market participants have diverse opinions about the government's undertaking. Consumers and metals traders welcome the establishment of the electronic trading platform. Alexander Pritchin, Marketing Director of Steel and Industry Company, CJSC, thinks that the exchange can make sense, though he admits that it will be interesting only to large companies. The market for rolled metal products has numerous groups of consumers featuring a wide diversity of interests and requirements. Large consumers can be organized to some extent, thus facilitating the entry of their main suppliers into the single trading venue. We can assume that construction or machine-building companies can make forecasts for their metal requirements for months ahead; therefore, it makes sense for them to purchase rolled products on the exchange.
Small processing companies are unlikely to do without direct negotiations with suppliers. Today, the competition is very high on the market; that is why, a smart consumer can negotiate attractive prices and conditions, just by phone. In some cases, the direct contact with a supplier is the only method of buying metals: small businesses often receive pressing orders for manufacturing of small quantities of products that do not allow any extra time required to supply rolled products through the exchange. Accordingly, A. Pritchin anticipates that small consumers will use the electronic venue only as a source of information.
Meanwhile, machine-building companies are also not going to give up direct contracts with suppliers. Stepan Sergeyev, Purchasing and Procurement Director of CHTZ-Uraltrak, told "RusBusinessNews" that the company will buy most of the metal directly from metal manufacturers. The exchange cannot provide guaranteed quantities of metal at the right price, thus compelling the Chelyabinsk Tractor Plant (CHTZ) to hedge its production through contracts: CHTZ must have 2-3 month metal stock, and manufacturing of rolled section steel takes from 45 to 90 days.
The manager thinks that e-trading will help sellers to protect themselves from unscrupulous buyers and intermediaries, while making it easier for consumers to conduct negotiations with metal manufacturers. Today, the latter use arm-twisting, trying to overprice their products. Sometimes, it turns out that traders sell rolled products at lower prices than a steel-making company. S.Sergeyev is sure that the exchange will tame steel-makers' appetite; however, it will take time and effort to organize its operations.
Producers of metal products are quite tight-lipped about the idea of Vladimir Putin. Dmitry Smolin, an analyst of Uralsib Capital, LLC, notes that manufacturers are not enthusiastic about their participating in trading; therefore, sales performed through the exchange are going to be very low, thus having no effect on market prices and their regulation. In his opinion, at its outset, the idea was not viable, and it is being implemented only for the sake of appearance, though it will help to monitor changes in market prices.
Konstantin Selyanin, Director of YAVA-Finance Management, an investment company, agrees that the exchange has no appeal to metal manufacturers who thanks to the existing oligopoly can sell the same products at prices exceeding by dozens percent those set by their competitors. The exchange constitutes a certain threat to them; however, provided that a number of conditions are met, it will be able to accomplish its mission. The rules governing electronic trading are important. The exchange will turn into a sham, if sellers know who their buyers are; therefore, the trading venue should be located where metals are consumed rather where they are produced.
However, the Russian authorities cherish the illusion that commodity exchanges can change the economic situation in the region. The experience gained from the petroleum exchange opened in the Ural Federal District proves that this sector of business has a lot of pitfalls.
Electronic trading platforms makes sense, but the market price for rolled products will be formed only if at least 10-15% of the sellable metal products go through the exchange. It cannot be achieved unless major producers are persistent. AvtoVAZ and other companies if its caliber must state clearly and confidently that they will buy metal only on the exchange. The authorities must help them.
Konstantin Selyanin thinks that the government can provide assistance in two areas. First of all, it is necessary to make all public enterprises buy metal only on the exchange. Secondly, acting through the Federal Anti-Monopoly Service, the authorities should step up pressure on steel-making companies that dominate the market and make them sell their products through the exchange. When at least 30 large and medium-size sellers start trading through the exchange, the prices quoted by them will have credibility. Without the sellers' pool there will be no market prices, and the whole idea will collapse. On the other hand, the government does not seem to believe in its successful future, being satisfied with only 1% of metal products being sold through the exchange.
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