MOSCOW - Chinese checkers may be the closest Russia's metal oligarchs, Mechel
chief executive Igor Zyuzin and Novolipetsk Steel chairman Vladimir Lisin, have
come to understanding Chinese strategy. The problem is that the game is neither
Chinese, nor checkers - it's actually an American invention, dating from the
1880s and is based on the simple tactic of jumping your pieces further and
faster into your opponent's goal before he can do the same to yours. As
developed 15 years ago, Russian asset-raiding tactics in the metal and mining
sector are not much more sophisticated.
Wei Chi, on the other hand - also known as Go in Japan - is said to have been
created by the Emperior Shun around 2200 BC, to train the brain of his son and
heir. The game has since evolved such complex strategy over the board space
that a novice cannot readily understand how his space has been surrounded
without
apparent capture; and in the champion games, who has won and how.
It's therefore a very unprepared lot of Russian steelers and coal-miners who
will be in Beijing this week. The occasion is the visit of Russian Prime
Minister Vladimir Putin, with a delegation representing all of the Russian
businesses who depend for their futures on either Chinese demand or Chinese
cash, or both. The timing is inauspicious for playing games, as falling
domestic steel prices in China and anger at Russian anti-dumping action against
imported Chinese steel products make the prospects for mutual agreement in
Beijing on the steel and coking coal trade difficult to predict.
The recent retreat of Chinese hot-rolled steel prices below the US$500 per
tonne mark is viewed by steelmakers in Russia as likely to force Russian steel
export prices downwards also, cutting revenue projections and the capacity
utilization plans of Russian mills. Because of the laggardly recovery of the
Russian steel consumers - government infrastructure builders, the car sector,
and construction - the Russian mill owners have been refiring their furnaces
and reviving idle steel production in the hope that the extra metal will be
sellable to the Chinese.
Last week's Russian Trade Ministry recommendation for a 29.4% penalty duty on
imported Chinese line pipes, while not yet signed into force by Putin and still
negotiable with the Chinese, also threatens the Mechel steel and coal group, as
well as Raspadskaya, which is part-owned by Evraz. They have justified the
restart of idle capacity on the expectation of a surge in Chinese import orders
on a rising price line. In Beijing, Chinese anti-dumping action against
Russian-made electric steel from Novolipetsk is being considered now, and there
has been a threat of a wider Chinese reaction against Russian long-steel
products, such as reinforcement bars for construction, entering China from
Evraz and Mechel.
Could the timing of a Russian government anti-dumping report against Chinese
pipes have been worse for Putin's negotiations? In the 33-page report, issued
by the Ministry of Economic Development and Trade in Moscow on October 8, the
ministry detailed the results of a 10-month investigation into import prices
for pipes produced and shipped by three Chinese manufacturers, Ningbo Heshen,
Jianli Group, and Ningbo Sanji.
The Russian complaint and request for anti-dumping penalties was initiated late
last year by two mills in the TMK group, and the Pervouralsk pipemill. The
pricing period ran from January 1, 2007, to June 30, 2008, with a comparison
base period of 2005 to 2007.
The report found that while import tonnage of line pipes (for the oil and gas
industry) from all sources grew modestly from 4.4 million tonnes in 2005 to 5
million tonnes in 2007 (14% over the full period, 5% per annum), there was a
surge of the Chinese pipes from zero in 2005 to 3.6 million tonnes in 2007.
Between H1 2007 and H1 2008, the Russian report claims, Chinese shipments of
these pipes to Russia jumped from 480,000 tonnes to 2.4 million tonnes.
In a price comparison for these two periods, the report says the average price
for imports for all sources was US$1,420 per tonne in the first half of 2007,
and $1,546/t in H1 2008 (a 9% rate of growth). By contrast, the average price
of the Chinese pipes was $1,156/t in H1 2007, 19% below the all-world average;
and $1,331/t in H1 2008, 14% below the all-world level. The rate of growth for
the Chinese products was 15%, indicating that the Chinese exporters were
raising their prices faster than other suppliers to the Russian import market.
As a consquence of their pricing advantage, the Russian ministry concluded, the
Chinese share of the Russian line pipe market rose from 8.9% in 2007 to 14% in
H1 2008, growing in volume over the same period by 53%. The pressure of
incoming Chinese products on "the domestic market has forced the Russian
manufacturers to reorient [their pipe sales] to foreign markets".
Bottom-line - the ministry has recommended imposing a five-year anti-dumping
duty of 29.4% on the Chinese pipes so that they cannot compete with locally
manufactured ones. This recommendation now goes to the prime ministry, where it
must be considered with comments from other ministries, before Putin will sign
the decree putting the penalty into effect. The pipe lobby has made clear it is
in favor, naturally. But what of the risk of tit-for-tat for Zyuzin's steel and
coal exports to China, and Lisin's trade in electric steel?
Alfa Bank steel analyst Barry Ehrlich reported to clients this week the
immediate risk "that current steel prices outside of China, in the range of
$560/t (hot-rolled coil, free-on-board at a Black Sea port) and $640/t (Western
Europe domestic), will not rise further and perhaps come under pressure despite
our estimate of 9% higher global steel volumes in 2010. If prices begin to
decline in Europe, this would likely cause a shock to equity prices, which are
factoring in sharply higher price gains through 2011, in our opinion."
Several Russian steel company share prices have drifted downwards over the past
week as the sentiment on steel recovery wanes. But Mechel, Evraz and
Novolipetsk were up by 14% to 16% over the past week.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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