"Russia ranks fifth in the world in terms of steel production and third in terms of production of steel pipes and steel exports."
Transcript:
Dmitry Medvedev: First of all, I would like to wish you a happy upcoming professional holiday. I have just wished the work collective a happy holiday, and now I would like to extend the same wishes to you as owners and managers working in the steel industry.
We are aware of the recent developments in the steel industry. It is clearly developing, and that says it all. It’s even growing, even though the market conditions are far from perfect. Output is up, but the balanced profit is down by more than three times over the past few years. This is probably the biggest challenge; we must not only talk about this, but also think of ways of dealing with it. The investment amounts remain fairly stable. This is a good opportunity to talk about investments. We attended the launch of the universal structural mill. It’s good that such investments are made, and they are made in more than one place, which is a result of successful cooperation between our companies, including foreign ones.
The implementation of such major investment programmes has allowed the industry to break through to a new level, introduce advanced production processes and increase the output of high-tech products.
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Russia ranks fifth in the world in terms of steel production and third in terms of production of steel pipes and steel exports, with most of this output coming from modern metallurgical holding companies that operate as a production chain, and have their own services for metal processing and trading in finished products. To a degree, this helps mitigate risks on the domestic and international markets and ensure the independence of our metallurgists (relative independence, of course) from the suppliers of raw materials.
We are fully aware that the Russian steel industry is affected by the unstable situation in the world. The key problem is the reduced demand for products and, consequently, lower prices. According to forecasts, the output of steel products will grow insignificantly until 2015. Let's wait and see, perhaps different forecasts will emerge. The annual average growth will not exceed 1.5%. This year, the output may remain unchanged or decline by 1%-3% as compared to 2012.
I suggest that today we discuss specific measures that will allow our metallurgists to continue their investment programmes, improve (or, at least, try to improve) the competitiveness of their products, and stimulate a number of economic approaches. I have a few points I would like to make.
Dmitry Medvedev: "We have to stimulate demand for metals, especially in metal intensive sectors such as engineering, the fuel and energy sector and the construction industry."
First, I would like to say that we have to stimulate demand for metals, especially in metal intensive sectors such as engineering, the fuel and energy sector and the construction industry. There are a number of proposals. For instance, let’s discuss ways of prohibiting the use of restored steel pipes and other re-used metals during construction of buildings and structures. Perhaps, as with any decision, there are both pros and cons, and I would also like you to report your proposals to me on this issue. This is particularly true of unique and complex facilities. Increased demand for metal products on the part of natural monopolies and companies with state capital could also support the metallurgy sector. Some of our colleagues from major infrastructure companies are present here.
Second, we must make full use of the advantages of the Customs Union to protect ourselves from the unfair competition from foreign producers and devise measures to protect the domestic market in strict accordance with the international obligations that Russia has assumed.
By the way, I would like to tell you that I have decided not to renew the quotas for the delivery of Ukrainian pipes for this six month period, despite numerous requests about this issue.
Third, we need to update and approve the strategy for the development of the metallurgical industry up to 2030 and draft a step-by-step action plan that we can implement over the next three years, that is, in 2014-2016.
And now my final point. I know that the reduction of tariffs on energy intensive enterprises is a crucial issue. Our colleagues are present here so let’s discuss this issue. That's a rather narrow but important range of issues that I propose discussing at this meeting on the development of the iron and steel sector. I hope we will be able to discuss everything in detail.
Dmitry Medvedev: "We must make full use of the advantages of the Customs Union to protect ourselves from the unfair competition from foreign producers and devise measures to protect the domestic market in strict accordance with the international obligations that Russia has assumed."
After my introductory remarks, I will give the floor to Deputy Minister of Industry and Trade Alexei Rakhmanov. Mr Rakhmanov, over to you.
Alexei Rakhmanov: Thank you very much. Mr Medvedev, colleagues. I will only try and touch upon the key issues which need to be clarified or commented upon. Until 1991, Russia was in fact firmly established as one of the three biggest metal producers. Over the past 20 years, our colleagues from China and India have overtaken us. Today, Russia is in fifth place with a 4% market share. If we talk about global factors, our main problem today is overproduction. We are unable to sell about 10% of our metal, this despite the fact that Russia’s pipeline industry and ferrous metallurgy, in the traditional sense of the word, are still actively developing. We can see we are unlikely to exceed the 2012 production figures in 2013. There are perhaps several factors for this. First of all, there has been a decline in exports due to the fact that China is increasing production. China is entering markets and setting low prices.
Dmitry Medvedev: How much does China produce today?
Alexei Rakhmanov: 335 million tonnes annually …
Dmitry Medvedev: It's more than that. My colleagues told me it was 700.
Alexei Rakhmanov: 335 million tonnes in six months.
Dmitry Medvedev: So 770. The Soviet Union produced 180. Just a small detail…
Alexei Rakhmanov: But the steelworkers have retained a sufficiently high average wage level amounting to 35,000 roubles. This is a very good indicator.
Alexei Rakhmanov: Whatever happens on the Chinese market has immediate repercussions on our export amounts. We also have considerable metal imports amounting to about 10% of domestic consumption, given that our domestic demand amounts to 40 million tonnes out of the approximately 70 million that we produce a year.
The pattern of sales is reflected in the financial and economic situation. As you said, EBITDA efficiency has declined from 31% in 2007 to 13% in 2013: we expect this to be the yearend figure. But the steelworkers have retained a sufficiently high average wage level amounting to 35,000 roubles. This is a very good indicator, one which is approximately 30-35% higher than the average pay in comparable industries. Iron-and-steel companies took advantage of their fat years to invest heavily into new production capacities and the modernisation of existing ones. These investments totalled 900 billion roubles over the last five years.
Boosting competitiveness is a crucial task facing the industry. I want to make a special emphasis on this…Please have a look at the third slide, Mr Medvedev. We can see that in a number of cases, tariffs grew by 400, 500 and 600% since 2001, while the rolled steel price growth averaged a mere 290% in 2012 by comparison with 2011. And we have to live with this. Meanwhile, in terms of energy prices in some areas, such as electric power or gas, we are edging closer to the United States of America, and it is clear that our global competitiveness is coming under pressure.
But the main priority for the iron-and-steel industry, one that determines its development vectors, is to meet the domestic demand. As you said, this is the main goal, and it will remain this way in the future. But our expectations concerning growth in the main consuming industries vary within the range of single-digit figures. For example, the construction industry, if its consumption level remains at 36% of the market, will grow by approximately 2-3%; the engineering industry, if we take the automotive industry, by about 5%; heavy engineering, 6%; and manufacture of household appliances, a new segment of the engineering industry and a major consumer of metal products, will alone reach a double-digit growth of about 13%.
As we see it, major infrastructure projects, including government-assisted ones, are what can be the real driver of growth.
The main investment projects in the iron-and-steel industry were, as a rule, a response to major infrastructure projects, such as those planned by Russian Railways, Gazprom’s pipeline construction programmes, or the recently approved project to build high-speed rail networks. Properly speaking, this is what we are celebrating, in addition to the rail-and-structural steel mill that has been put into operation somewhat earlier and will make 100-metre rails for this ambitious project. And, of course, the automotive industry will contribute to growth as well.
Dmitry Medvedev: It’s too early to celebrate. We do have a rail-and-structural mill here and another such facility there (my colleagues inaugurated it not so long ago), but we have yet to make use of their potential in terms of its application to the high-speed railways. So far, a very difficult decision has been made; we also have some money to invest into this. Go on, please.
Alexei Rakhmanov: It is clear that supporting industries capable of creating prospective demand is going to have a positive effect on the entire supply and value-added chain.
You have mentioned this subject and now we really have to draw your attention to the need to revise a number of urban development standards in order, first, to authorise the use of modern metals and metal structures in the construction industry, and, second, to do away with outrages such as reusing old pipes in the housing and utilities sector, as was the case in several cities.
We have and actively use industrial policy tools, which are aimed at promoting production and have acquitted themselves well in practice. We are engaged in dialogue with business on long-term contracts. As you may remember, there were problems in relations between steel-makers and car manufacturers not so long ago. But we have transitioned to long-term contracts with clear price formulas and now these problems are a thing of the past. Given the scale and importance of current investment projects, the Government has aided their implementation. In effect, it’s a set of measures.
First, the Government provides guarantees. Let me mention the fact that the guarantees amounted to 114 billion roubles between 2009 and 2012. The Government helped businesses to obtain bank credits. Jointly with Vnesheconombank, we…
Dmitry Medvedev: 114 billion roubles… Was this within the industry itself?
Alexei Rakhmanov: Yes. It’s all about the businesses. Some part of these state guarantees has been repaid and another part is working, as for example, in the case of the Chelyabinsk plant. Accordingly, those who implement these projects are ready to make more detailed reports, if necessary.
Alexei Rahmanov: "To stimulate development and special steel production, we have had a mechanism for compensating credit interest rates in case of retooling projects. This is also one of the elements that can impel our steelmakers to better meet the demand in the engineering industry".
We regularly use the format of intergovernmental commissions to discuss steelmakers’ projects. The project that has been given an impetus for its development earlier today was discussed by Russian-Italian intergovernmental commissions, when we had to have SACE provide export funding. Our Chinese colleagues, too, had to be prodded into making good on their promises to the implementation of work and the number of employees on the construction site. But together, we are making good headway. In addition, we arranged for zero duties and VAT on equipment imports, which has helped to save investment resources. We think that all these factors have combined to propel us towards the result we have today.
To stimulate development and special steel production, we have had a mechanism for compensating credit interest rates in case of retooling projects. This is also one of the elements that can impel our steelmakers to better meet the demand in the engineering industry.
Where the WTO is concerned, we have been running a number of WTO-authorised support mechanisms. First, there is a mechanism in relation to high-tech products, which we maintain in cooperation with Vnesheconombank. Jointly with the Ministry of Economic Development and the Foreign Ministry we are working to have restrictions revised.
I am ashamed to say that we are on the receiving end of 22 measures of which 18 are anti-dumping duties (the European Union, the US, Indonesia, China, Mexico, Turkey, Thailand and Brazil) and four are quota restrictions in the US and Ukraine. Of course we should work on this, because it is impossible to develop exports unless these barriers are lifted.
Dmitry Medvedev: How is that work structured at present?
Alexei Rakhmanov: We have the Trade Negotiations Department which takes part in formulating the Russian position. We put these issues up for discussion at every meeting and secure the support of the industries before forming common positions. But the background to this is as follows: when we were already joining the WTO, additional protective measures were being introduced against us, either immediately before we joined the WTO or several weeks after our accession. So, our European colleagues are acting to protect their interests and they are doing so very cynically.
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Dmitry Medvedev: I think we should be tough and present the relevant demands. Incidentally, we discussed this recently at the Russian Union of Industrialists and Entrepreneurs and I would like to reiterate it. We should do our homework and bring in business people, who are present here, in order for them to make a case to uphold their position and help move this process along. The main agency responsible for this is the Ministry of Economic Development. I hope it will come to grips with this issue as soon as possible. Meanwhile, you prepare your materials. One has to fight for one’s interests.
Alexei Rakhmanov: It is important, Mr Medvedev, that we had been heard, because now that we have joined the WTO we and the industry need strong legal support. We need such financing, including additional financing, and perhaps our colleagues at the Ministry of Economic Development, Andrei Klepach (Deputy Minister of Economic Development) would speak about it, because this is a topic… For example, the much publicised affair of the scrappage fee will cost car makers about $1 million if we become engaged in some pre-trial legal procedures – it is pretty costly.
If we look at protective measures on our part within the framework of the Eurasian Economic Commission, we too are trying to negotiate the best possible terms for us, and we have measures against stainless steel, stainless piping, polymer-coated rolled metal, roller-bearing pipes, fittings and table-ware. All these measures were introduced as a result of protective investigations and were approved by the Eurasian Economic Commission with the active participation of the business communities in all the three countries.
We think it makes sense to continue helping the Commission to expedite the protective investigations, and especially to have recourse to preliminary duties, although that is an instrument that works both ways. If the investigation fails to provide proof, we will have to compensate for these duties and possibly to impose some measures retroactively, that is, from the time the investigation starts, or 90 days before it starts, like they do in the United States. In general, speaking about the WTO situation, the “bonuses” our metallurgists had expected from Russia’s accession to the WTO are not very much in evidence. What I have said bears this out. And there are still some problems to be addressed, including here at home.
We are witnessing a boom in the construction of mini-factories that use only scrap metal and the shortage that is already felt, if these enterprises continue growing at the current rate, may become substantial, and Russia could turn from a net exporter into a net importer of scrap. The problem has already hit some enterprises in Central Russia. It is particularly manifest in the Far East, where a failed attempt to limit metal exports has led to the lamentable situation at Amurmetall. They are clearly short of metal scrap, that’s on top of the managerial problems that the enterprise is facing.
As regards the Strategy, we have met practically all the Strategy targets that were updated in 2009. This was partly because 2009 was a crisis year and we set the bar a bit too low. But we think it is our duty to fulfill your instructions and introduce amendments to the Strategy, and to develop a new document until the year 2030 setting very clear benchmarks for the industry. We will do this, of course, together with the business community, because there can be no Strategy for the industry without the strategies of specific enterprises.
Alexei Rakhmanov: "We should make the Strategy of the development of the metallurgical industry real, we must continue supporting investment projects and we have to look at the complex of measures to stimulate the development of machine building".
Now for the results, or rather, the summary of the measures we propose to consider today and discuss with our colleagues in more detail.
First, we should make the Strategy of the development of the metallurgical industry real, we must continue supporting investment projects and we have to look at the complex of measures to stimulate the development of machine building. Some measures, of course, are being taken in the auto industry pursuant to your instructions. We will consider similar measures when approving the Strategy for heavy, transport and energy machine building. And we would appreciate it if today we could discuss in detail the problem of rising tariffs, because it is becoming more acute in ferrous and non-ferrous metallurgy.
Other issues include everything having to do with making trade protection measures more effective. You have spoken about this in some detail and all we have to do is act according to these plans.
Dmitry Medvedev: Thank you. I'll now open it up for discussion. Alexei Mordashov, please.
Alexei Mordashov (Director General of Severstal): Thank you, Mr Medvedev. Dear participants, I am wearing my hat of the President of the Russian Steel Association, which brings together 90% of rolled metal and steel production in the country… In accordance with the rotation principle, it is my turn to serve as its president, and I am glad to present our consolidated report on the problems facing the industry.
Dmitry Medvedev: Very well.
Alexei Mordashov: As a follow-up to what you said in your speech, I would like to start with an overview of the situation in the metallurgical industry in the world and in Russia.
The growth of steel production in China, which was particularly rapid over the course of several years, went a long way in determining the situation in our industry. Then there was an economic downturn in the world and accordingly a drop in the consumption and production of steel. We see on page 2 that the dynamics differ from country to country. Russia was hit by the 2008 crisis, but on the whole steel production in Russia is recovering and growing. Last year we reported a 2% growth of demand in our market.
Dmitry Medvedev: Pardon me, Russia experienced this, of course, but in America there was a 40% drop. Was that really the case?
Alexei Mordashov: ...it was 40% in America, yes.
Dmitry Medvedev: Minus 40%?
Alexei Mordashov: Steel output dropped sharply. But America traditionally imports a lot of rolled metal, so output did not fall by 40%, but consumption contracted dramatically.
Dmitry Medvedev: I see. So this was due to reduced import?
Alexei Mordashov: "Russian metallurgy is in better shape than in many other countries. The load on our industry is a bit higher, it operates at 78-80% of capacity (compared with 75-76% for our competition)".
Alexei Mordashov: To a large extent it was due to reduced import, but it was also due to the fall in domestic production. As we see, Russia was not alone. Europe and the European Union recorded a 35% drop in steel consumption. Consumption is growing now. On the whole growth is not very fast, but anyway it was 2% last year and we expect 3% growth in output this year. I have to say that Russian metallurgy is in better shape than in many other countries. The load on our industry is a bit higher, it operates at 78-80% of capacity (compared with 75-76% for our competition). Even so, we have very serious problems. But I would like to make it clear from the start that there is a steel market in Russia, it is growing at a pace that allows us to develop. If you look at the next slide you will see that not only steel output, but also steel consumption in Russia is growing. It increased to 71 million tonnes last year and to 73 million tonnes this year. We expect that consumption and production of rolled metal and steel will grow at an annual rate of 3% to register a 16% growth by 2017. Of course, we are pinning our hopes above all on the growth of domestic consumption which we expect to increase at a still higher rate, by 18% by 2017. Slide 4 shows our main projections for the key rolled metal consumers in our country, above all the building sector. Though it is not growing very quickly, it is a major consumer of our products. We expect massive growth of household appliances production, by about 9% a year. On the whole we see some growth potential for our market. Of course that would greatly depend on how the Russian economy develops on the whole and how Russia’s GDP will grow.
If we look at slide 5 we see that the situation for metallurgical plants, as you have said, Mr Medvedev, has become more difficult in the last several years. Our profit margin dropped from 31% in 2007-2012 to an average of 13-14%. We are aware of a number of adverse factors. On the one hand, steel consumption is growing, but the rate of growth has slowed down dramatically and besides, it is coming after the downturn of 2008.
If you look at the top right-hand part of slide 5 you can see a chart describing the situation Alexei Rakhmanov has just been speaking about. Prices for metallurgical goods are not rising so quickly, we can see fluctuations of the prices for our goods. But the tariffs of the natural monopolies have been growing steadily all these years resulting in a significant gap between the dynamic of the prices of our goods and the dynamic of prices and tariffs of the natural monopolies, which is a major component of our production cost and on which our competitiveness hinges.
Alexei Mordashov: "Steel consumption in Russia is growing. It increased to 71 million tonnes last year and to 73 million tonnes this year. We expect that consumption and production of rolled metal and steel will grow at an annual rate of 3% to register a 16% growth by 2017".
If we look at the next slide (№ 6)… It shows what the dynamic described in the previous slide has led to.
The spot market gas prices in the US are practically at the same level as in Russia. Yes, the European countries have higher gas prices, but our American rivals are no more competitive as far as prices are concerned.
Electricity price trends are still worse. Russian prices are higher than in the United States and are edging up to some European countries, Belgium, for example. Thank God, they are still lower than in Italy, but then Italian prices, as we know, are among the highest. So, when it comes to electricity prices, the Russian steel industry and, obviously, other sectors of the national economy are in a very difficult situation in terms of competitiveness.
There have been serious difficulties with getting rid of cross-subsidising. Our legislation sets the goal of eliminating cross-subsidies, but unfortunately, they are still widespread. The next slide shows the Skolkovo business school assessment of the amount of cross-subsidising in the Russian economy, which has reached 324 billion, resulting in losses of about 3.6% of the total industrial output. This is commensurate with the growth of the Russian economy, in fact it is 50% more than the growth of the Russian economy. Eliminating cross-subsidising alone could boost economic growth by 0.8%. That is, of course, a very serious issue, and what worries us in particular is that the State Duma has prepared for the second reading a draft federal law that would introduce amendments to the federal law on electrical energy which is rather controversial…
Dmitry Medvedev: What is your take on this draft?
Alexei Mordashov: Very negative.
Dmitry Medvedev: I have just been meeting with the deputies and they too criticised it vigorously.
Alexei Mordashov: We have a very negative attitude to it, Mr Medvedev. With your permission we have prepared a letter on this topic and we would like to take this opportunity to give it to you.
Dmitry Medvedev: OK.
Alexei Mordashov: Because essentially the law seals attempts to get rid of cross-subsidising. There was a trend: we were allowed to sign contracts with the Federal Grid Company and to enter the wholesale electricity market. If the law is passed in its present shape we will be forbidden to sign direct contracts and will be forced to sign contracts with the local grids whose tariffs are significantly higher, and this would put a heavy economic burden on our enterprises which are still suffering from the effects of the global economic crisis.
That is a hugely important issue and we would appreciate it, Mr Medvedev, if you could somehow include us – I mean the Russian metallurgical industry and business in general – in the discussions of this topic because it is very sensitive for all of us. If the refusal is enshrined in law…
Dmitry Medvedev: It is such a thorny issue that I have chaired several meetings on it. The President has held meetings, not to mention the deputy prime minister in charge of this sector, and still things are difficult. But anyway, I have heard you, I will issue all the instructions and perhaps we shall meet again.
Alexei Mordashov: If you can. Thank you very much. It is a big headache for us.
Alexei Mordashov: "Russia’s steel industry has grown substantially in recent years. Huge amounts of money have been invested in our assets. We are proud to say that the Russian steel industry is on the cutting edge in terms of technology. Today’s event, the launching of a rolling bed, is further proof of that".
The next topic that merits attention, in our considered opinion, is rail tariffs. Slide 8 shows the dynamics of these tariffs and their impact on our economy in recent years. The average price for carrying exports rose from $18 per tonne of rolled metal in 2002 to $83 now. The picture for our main rivals, even in Asia where there are also long distances, is quite different: their tariff was a little under $16, and ours is $30 on average. Although the figures may be challenged (it depends on how you calculate it) we see the objective picture that we have discussed before. The average FOB Black Sea price of slabs has gone from $509 in 2007 to $485 in 2013 as a result of all these problems with steel over-production.
The tariff for rolled steel shipping has risen 105% during the same period. So, situation remains fairly difficult. And we very much hope that the tariffs of natural monopolies, notably rail tariffs, will not grow faster than inflation (as we hope will soon be enshrined in federal law).
We believe that in order to forecast our investment projects and make our investment activities more predictable it would make sense to introduce long-term planning of tariffs and long-term agreements on the level of tariffs charged by our railway partners. It is an extremely important issue for us.
Having said that, we continue to invest in our assets. Slide 9 contains the information that has already been presented today, and thank you, Mr Medvedev, for acknowledging our efforts to develop this capacity.
Russia’s steel industry has grown substantially in recent years. Huge amounts of money have been invested in our assets. We are proud to say that the Russian steel industry is on the cutting edge in terms of technology. Today’s event, the launching of a rolling bed, is further proof of that. Investments in ferrous metallurgy amounted to 1.34 trillion roubles in 2000-2012. Between 2000 and 2008 average annual investments increased by 8.7 times compared with the previous decade.
We are ready to move ahead, to develop our assets, but of course this depends on the market and on state support, an issue we would like to discuss at this meeting.
Alexei Mordashov: "Today’s event, the launching of a rolling bed, is further proof of that. Investments in ferrous metallurgy amounted to 1.34 trillion roubles in 2000-2012. Between 2000 and 2008 average annual investments increased by 8.7 times compared with the previous decade".
Moving on to specifics, slides 10 and 11 list the projects that companies in our sector have embarked on. They include Evraz, Severstal, Novolipetsk Metallurgical Complex, Mechel, Metalloinvest and many others that are not mentioned in this table. We are talking about multi-million investments in developing ore fields, especially in remote areas. The enterprises that are members of Russian Steel have committed 630 billion roubles to these projects. Of that sum, 240 billion will go to improving infrastructure in the regions.
Obviously, state support is vital if we are to implement these projects, especially considering the shrinking profits of our enterprises. Perhaps it would be fair to enshrine as a principle (of course, every individual project has to be discussed on its merits) the development of public-private partnerships on these projects, with the state investing in better infrastructure, while we invest in the development of the business, because clearly our industry cannot invest 240 billion roubles without such support. We are ready to invest in development, but such support, compensation is very important for us. We are in effect talking about public-private partnerships to develop infrastructure that would enable us to invest in the development of our own enterprises, especially mining ones.
We would also like to ask you to revisit an issue on which Vladimir Putin and you, Mr Medvedev, have already given instructions – exemption from the tax on the extraction of subsoil resources in remote areas that are difficult to access. So far, we regret to say, no action has been taken on this issue… As a side note, it is odd to be discussing this topic because if there is no support… Failure to meet us halfway on this issue is basically dividing a bear’s skin before the bear is killed because these projects do not exist, and offering this tax break will not take money out of the budget because nobody is paying into it. But if this tax break is granted it would provide an extra chance, an additional impetus to these projects which may bring additional revenue to the budget in the future. This instruction has been issued repeatedly, but unfortunately it gets bogged down in the process of approvals.
Another method that can help implement infrastructure projects is to make them commercial in character. This is the subject of slide 12. Some members of the partnership of Russian metallurgists say they are ready to invest in infrastructure, but only if these investments are transparent, are paid back, i.e. they are ready to invest on a commercial basis. But that calls for a legal framework that would make it possible to invest in these projects.
Perhaps the first and the second approaches can be combined, that is, the state finances part of the cost of infrastructure as a subsidy while part of the cost is covered by commercial partners in the project.
Protecting the domestic market is an extremely important issue for us. You have spoken about it today, and Alexei Rakhmanov touched on it as well. Slide 13 is devoted to anti-dumping investigations which are common in the ferrous metallurgy industry in the world in general.
We can see how aggressively our foreign competitors are using this instrument and unfortunately we are lagging far behind on that count. Let me give you a simple example. Everywhere in the world active use is being made of an instrument called retroactive duties after the start of an investigation. Our law also has this instrument but we have never used it. Its use in Western countries has the following consequences: as soon as national producers see a threat to the local market and see rising imports they file a corresponding petition. From the moment it has been filed the importer is at risk of being targeted by anti-dumping duties, if they are applied retroactively that dramatically reduces imports into the country. The example shown in slide 13 makes this very clear.
We are not using such an instrument and are not trying to scare anyone, and yet we have extensive experience of being subject to such investigations, we have found out to our own cost how effective this instrument is.
Dmitry Medvedev: Why do you think we are not using it?
Alexei Mordashov: That is a very good question.
Dmitry Medvedev: Is it the case that we are unable or unwilling, or are there some lobbyists on the other side? What is this about?
Alexei Mordashov: I think there is a certain lack of political will at the level of the leadership of our governments and the Eurasian Commission. Somehow it does not add up. We need to be tough and say firmly that we would introduce duties retroactively…
Dmitry Medvedev: Does the introduction of retroactive duties pose any threat to us?
Alexei Mordashov: None at all.
Dmitry Medvedev: If we make a mistake for some reason or something like that?Comment: If we make a mistake we have to return all the paid duties within a few months.
Dmitry Medvedev: That is what I am getting at. Could you please elaborate on this topic?
Alexei Mordashov: Yes, it is a good topic. Look, in February 2011 we launched an investigation into the import of polymer-coated rolled metal from the People’s Republic of China and in July 2012 a decision was passed and duties were imposed. Because we do not practice imposing retroactive duties, that naturally prompts all importers to rush to bring products into the country. During this period 2.5 times more rolled metal was imported into the country than in the preceding 2.5 years, that is, they imported in less than a year the amount that they previously imported in 2.5 years. An obvious incentive which disappears if the mechanisms of retroactive duties are in place. In principle, it is in our law, but there are some fears… It is all in our hands, that is, if we decide… It does not mean that we should start imposing duties, but simply if it becomes the rule that if such a decision is taken, that is, if the Eurasian Commission decides to introduce duties, they will be valid several months retroactively – that would already deter importers from sharply increasing imports, something that did not happen in this case and our market was hit hard.
Dmitry Medvedev: I would like to understand, perhaps the Ministry of Economic development could tell me, have there been any instances at all when we used these duties?
Andrei Klepach (Deputy Minister of Economic Development): Not that I know of. The instrument is correct, it should be used, but we need to judge every case on its own merits…
Dmitry Medvedev: Listen, we hear this every day: “judge every case on its merits,” “look into the matter,” “proceed carefully” and so on. As a result, if we never use any instruments they will bully us every time because they know that we will never act for some mysterious reason: either because of our inefficient bureaucracy or because we now have the Eurasian Commission or for some other reason. We simply aren't using them. That's bad. I am not referring to any specific case or even ferrous metallurgy, although ferrous metallurgy is the first instance that springs to mind. Go on, and later on I will make some final comments on this.
Alexei Mordashov: Thank you. But I would like to take this opportunity to go back to this issue and make it clear at the level of the Russian Government and the Eurasian Commission that we will have recourse to such duties. Even the mere threat, we are sure, could go a long way to stabilising the market.
Slide 14 deals with another sensitive issue. I am referring to certain preferences for national producers when making procurements at state expense. We know that this is to varying degrees practiced in many countries: to this day the United States, in spite of all the criticism, has the “Buy American” programme and in fact we sometimes cannot get our foot in the door. And yet if we look at such important and significant infrastructure projects as building facilities for the Sochi Olympics, only 50% of rolled steel was bought in the Russian Federation.
Rolled metal imports for the Olympic facilities reached a record 190,000 tonnes in 2012. Perhaps it makes sense to take a leaf out of the United States’ book. We believe that something like the “Buy Russian” principle would be justified. And also perhaps some price preferences. Well, at least, given other equal conditions, the ”Buy Russian” principle if the money comes from the Russian taxpayer’s pocket.
Of course, as you said, Mr Medvedev, assistance to our consumers is a very important issue and it is addressed in slide 15. We associate our well-being with growing consumption inside Russia and with the prosperity of our customers. Any support of engineering enterprises would be a plus and would translate itself into growth. We wish our consumers and our partners in engineering every success in their development. It is really very important for us. And we would like once again to speak up in defence of such measures as support for exports by Russian engineering companies and lending at preferential terms for their technological development.
We would also like to comment on the issue of the use of second-hand piping. My pipe-making colleagues will say something about this, but I would simply like to say that the annual damage from the reuse of old piping is estimated at $500-600 million for the piping industry and $150-200 million for the rest of our industry.
The next topic is stimulating consumption of Russian steel in Russia (slide 17) and encouraging foreign producers, notably car makers, to further localise production. We have discovered that the norms prescribed for our products are relatively low. Not all agreements on localisation can perhaps be changed but we would like to highlight this important issue and, if possible, revisit the issue of an increased requirement for local content. The current agreements set a target of 15%, which in our opinion, is very low. Of course we are working hard, investing in joint ventures and getting homologation certificates. All those present here who supply goods to the automobile industry are involved in this, but confirming in legislation the requirement for a high share of local content would be very important.
The next topic is connected with the shortage of raw materials which is growing because of the shortage of scrap metal (slide 18). This topic has to do with the lifting of VAT on the import of scrap from Kazakhstan, which would further improve our raw materials supplies, given that they have retained VAT, but in the Russian Federation it is not levied on purchases of scrap metal.
Another topic that is causing increasing concern is the growth of various levies connected with environmental protection. Slide 19 draws attention to the fact that the method of assessing the damage caused to bodies of water due to violations of water legislation approved by an order of the Ministry of Natural Resources is at odds with our legislation. It is based not on the actual extent of the damage, the actual amount of harmful emissions and damage to nature, but simply on the amount of emissions, without any analysing.
We believe it would be desirable to take another look at this method and make it more equitable so that the payments are commensurate with the actual damage caused by such violations.
A related topic (slide 20) is regulation of discharges into bodies of water and the terrain. Today we are often forced to discharge water of a higher quality than that we take off from the bodies of water. In effect we have to invest…
Dmitry Medvedev: To engage in purification?
Alexei Mordashov: That’s right. We estimate that about half of the cost we incur to purify water arises from the requirement to bring it to the level of quality that is higher than that of water quality what we take off. That means an additional heavy burden, additional costs.
Besides, the law does not regulate the issue of discharge of pollutants into the terrain, which is where sewage goes. All this mass is reckoned to be over and above the norm because it cannot be avoided, as for example when it rains and so on. We think this issue should be revisited and norms of discharge of pollutants onto the terrain should be developed.
As it is we often become hostages to high requirements set by the lawmakers… In fact the water we take off is below these norms. Somebody has polluted it, we take it and then the full force of the law is applied to us. We can discharge only water that meets the quality standard. This is tough.
There is another matter on which we would like to seek your support. Russia is the only country in the world where overburden when mining for minerals is considered to be waste. We are charged for this additionally, local councils are allowed to raise these charges and they can often be considerable. We would like to flag up this issue and see new legislation that would, firstly, allow the use of mining waste for recultivation. That is, we have removed the top layer, extracted the minerals and dumped the earth. We can put the soil back and do not consider it to be waste. And besides, stripped soil should be excluded from the amount of waste because the soil, as we see it, has been stripped from the top, it has not been polluted in any way, it is not waste but simply earth moved in the process of mining.
My final point has to do with the FAS initiative on registering OTC trading in rolled stock. . It may not be all that important, but we feel that it will not bring about the desired outcome.
Another topic (not reflected in our slides) is about an information that the Government is preparing a draft law… So far we have not seen the fallout from this, but we have heard that a draft law is being prepared that would introduce the calculation of property taxes based on the cadastre value of the property. This could mean, as happened with land, that some local or federal bodies would determine our blast furnaces’ value from which we pay our property tax based on the balance value, would determine the cadastre value based on, I really don’t know, what market value and force us to pay our property tax from it. We would like to express our fears concerning this and would like to be involved in discussing the draft law if it is in fact being drafted.
In conclusion I would like to thank you once again, Mr Medvedev, for the attention you are paying to our industry and for your support. I think that on the whole we are developing dynamically. Our growth has recently slowed down of course, but the market is there and the potential is there and the extent to which it is tapped very much depends on your support.
Dmitry Medvedev: Thank you. Mr Dvorkovich would like to respond. I usually speak at the end.
Arkady Dvorkovich: Several points. First about the “last mile.” It is indeed a tough problem. Let me say right off that I find it odd that the submission claims that the law was drafted without any consultation with the business community. That is not true. There have been consultations. Various members of the business community have different views on this (I am talking not only about metallurgists, but about the business community in general) and the consultations were extensive. No consensus was reached, that is true, but there were consultations.
Arcady Dvorkovich: "On the whole, the Russian Railways investment programme may increase by about 1.5 times in the medium term, and that means a substantial increase in demand for metal products".
The small and medium-sized business community is aware that unless some serious actions are taken in the remaining months of this year, the abolition of the institution of “the last mile” would greatly increase the price of electricity for small and medium-sized enterprises in some Russian regions. Not in all regions. You can probably count these regions on the fingers of two hands, but this is about the number of regions where it could send electricity prices up. This is why the Energy Ministry and most other ministries feel that case-by-case decisions should be taken with regard to these regions, for which there is no legal framework at present. As things stand now the institution of “the last mile” is simply going to be abolished as of January 1, and the companies that have direct contracts with the Federal Grid Company (FSK) have a strong position in relation to the Government and the bodies of power. If we do nothing, the institution of “the last mile” would be abolished, and the revenue shortfalls either of the grid or the consumers would automatically have to be compensated. I reckon that half of that amount would have to be provided by the budget. In other words, one half will perhaps be optimised in some way, but the other half will have to be picked up by the budget and all the other tax-payers simply because time is running short.
If the contracting parties are to be in approximately the same position, legal regulations are needed for the signing of such contracts, which is why an attempt was made to work out a law. I do not claim it is perfect, because it provides for major changes of the contractual relations across the board and the risks are great. Perhaps we will be able to come up with a different decision by September 1. But I would like to warn you against the simplistic approach that says: it is better not to pass any law and we leave it to you to optimise the relations with the Russian power grids and then everything will be fine. It won’t be fine, simply because small and medium-sized businesses will suffer and most likely the population, or all the tax payers, will suffer, because the budget will pay all the other consumers. Therefore I suggest that in the next month we hammer out an agreed-upon position on how to provide a framework for moving from the current situation to a normal situation. During this transition period, the costs should be shared by the categories of players I have mentioned, that is, the grid organisations, big business, the budget and the consumers, by which I mean small and medium-sized businesses and individuals, perhaps with the introduction of a social norm in the regions we are talking about. This would prevent losses and extra costs for low-income citizens who cannot pay significantly more at once. We will proceed in consultation with the business community, with all the associations, including major energy consumers, for whom anyway the tariffs will be lower compared to all the others. This plan was declared from the outset, and we propose preparing the draft law together with supporting legislation so that everyone can be absolutely clear, as the President’s instructions say, as to how this will work beginning from January 1 next year.
On infrastructure. Regarding the demand for metal products. The implementation of large-scale projects will of course help – I mean the high-speed railways, the Baikal-Amur Railway and the Trans-Siberian Railway and some other projects. On the whole, the Russian Railways investment programme may increase by about 1.5 times in the medium term, and that means a substantial increase in demand for metal products.
The second theme is support of investment projects that you and other companies will implement. The decision must be in the public-private partnership framework. Mr Shuvalov recently conducted a meeting, and I conducted a meeting earlier. We have agreed on roughly the following scheme: there has to be a long-term tariff policy with understandable tariff dynamics. Companies want to see flexible tariff dynamics depending on the world prices for their products and raw materials. This is not easy to put into law. We will see how it can be done. But at the same time, we need mutual commitments on the part of the state, Russian Railways (in this case) and companies on the volume of deliveries. Russian Railways would not be interested in building all this infrastructure if the supply volume is not guaranteed. Perhaps an additional investment tariff will be required for some routes in five years’ time (that is, after the end of the five-year period when tariffs will not grow quickly) to ensure returns on invested capital for Russian Railways and tap into the National Wealth Fund, but with exemption from the Tax on the Extraction of Subsoil Resources that would correspond to a de facto extra tariff burden.
Exemption from the Tax on the Extraction of Subsoil Resources is definitely needed, I have no doubt. But at the end of the five-year period, there will probably be a need for a 1% investment tariff for Russian Railways for these routes in order to receive returns for the benefit of the National Wealth Fund.
As regards other proposed measures, for example, the ban on the reuse of old metal structures, we will definitely back it. On the face of it this means extra cost for those who build…
Dmitry Medvedev: I have put this question to those present. Do you support it?
Arkady Dvorkovich: Of course they support it because they
manufacture new products. So, if old products become metal scrap,that basically improves the balance books of the industry as a whole.
But we have to make sure that the consumers of new products understand at least the medium-term dynamic of the prices for your products such that the contracts predict costs several years, and not just several months, ahead.
As for the environmental aspects, we will naturally consider the proposals that have been made. In any case, investments that the company makes into environmental protection should be considered payment, in which case it would not mean additional costs for the companies. This may be a solution that would suit everyone.
Dmitry Medvedev: Thank you. As Mr Mordashov has just delivered an overview that sums up the position of the industry, I invite those present to add to this without of course repeating what other speakers have already said. If you feel that there is something that needs to be stressed, please go ahead… And then I will wrap it up, although Mr Dvorkovich has already articulated much of what I wanted to say.
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