Steel is no longer exported – Newspaper Kommersant No. 193 (7394) dated 10/18/2022

Russian Steel criticized the planned increase in railway tariffs for 2023 by 9.8%: according to metallurgists, the increase in the tariff burden on the industry will be 22%, which is higher than all inflation forecasts. It cancels out any effect of the discounts they are currently negotiating with Russian Railways. The monopoly notes that the increase in tariffs is necessary to finance the investment program. According to experts, the position of metallurgists is worse than that of coal miners, and either significant state support or a weakening of the ruble can save them.

Kommersant got acquainted with the letter of the Russian Steel Association (which unites the largest metallurgical enterprises of the Russian Federation) to First Deputy Prime Minister Andrei Belousov dated October 17. In it, metallurgists criticize the indexation of tariffs for 2023 proposed by Russian Railways. In case of approval of proposals involving a cumulative increase in the tariff burden by 9.8% (see “Kommersant” of September 14), “the resulting increase in the tariff burden year-on-year for the transportation of metals will be 22%,” the letter says. The planned inflation is much lower: according to the forecasts of the Central Bank – 12-15%, the Ministry of Economy – 13.4%, the Ministry of Finance – 12.4%.

“As a result of the two-time indexation of railway tariffs in 2022, the strengthening of the ruble exchange rate (from 70 rubles / $ at the beginning of the year to 55 rubles / $ in September), lower prices for steel products (the cost of supplying a slab on a FOB basis decreased from $ 775 per ton in January to $467 per ton in September) and restrictions on the part of unfriendly countries, the export of metals is at zero or negative profitability,” the letter says. It notes that the key limitation in exports to new markets is the transport component, which in September “when shipped to the Far East is up to 30% of the final cost of products, when delivered through the Azov-Black Sea basin it reaches 20% with a norm for metals of 5–7 %”.

Russian Steel proposes to index tariffs in 2023 to the forecast inflation rate of 5.7%.

JSC Russian Railways told Kommersant that the indexation of tariffs was due to an increase in the cost of organizing transportation, as well as the need to finance an investment program, in particular, to solve the problems of developing the Eastern range, based on the needs of the country’s economy in an accelerated reorientation of goods from the western direction.

Russian Steel also notes that, in accordance with the August order of the President of the Russian Federation, the government needs to take additional measures to support the transportation of metal products. But discounts to the tariff, which are being worked out, will actually be leveled as a result of indexation.

A source in the industry says that the president’s instructions “have not actually been fulfilled: only certain metallurgical companies have agreed discounts with Russian Railways, and even for these companies, the proposed discount option gives zero economic effect and is valid only until the end of the year.” In this regard, according to him, the companies refused discounts and continue to work with Russian Railways on new options.

Russian Railways says they are monitoring the situation on the transportation market and the company has “the necessary tools for tariff regulation, including for metallurgical enterprises, in order to respond flexibly to market changes and prevent the outflow of goods.”

“To date, the company’s board has already considered the appeals of PJSC NLMK and PJSC Severstal and agreed on the advisability of reducing tariffs in certain areas,” the company says.

Now, they add to Russian Railways, work is underway on the appeals of UK IMH LLC, MMK PJSC, Evraz TK LLC, Novostal-M LLC. Earlier, Alexei Shilo, Deputy General Director of JSC Russian Railways, noted that the main constraint in providing discounts is the unwillingness of metallurgists to guarantee the volumes (see “Kommersant” dated October 3).

If the coal miners, except for the more difficult companies from Khakassia, still have a positive profitability of export deliveries, says Mikhail Burmistrov, head of Infoline-Analytics, the situation for metallurgists is much worse. They entered this year with a large financial cushion against the backdrop of high profitability in 2021, but there are no reserves left for 2023. At the same time, the lost export markets were high-margin and scarce, while Asian markets are in surplus, and the profitability of export shipments from metallurgists for most products is either negative or close to zero.

The increase in tariffs for metallurgy is “deadly” and is fraught with a decrease in production and the decommissioning of part of the capacity, the expert believes. In his opinion, the weakening of the ruble to at least 70–75 rubles per dollar, or a reduction in the tax burden, or subsidies or discounts that can partially compensate for logistics costs, can support metallurgists.

Natalya Skorlygina, Evgeny Zainullin