By John Helmer in Moscow
Chinese checkers may be the closest Russia’s metal oligarchs, Igor Zyuzin (right) and Vladimir Lisin (left), 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. It 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 more sophisticated.
Wei Chi, on the other hand — also known as Go, in Japan — is said to have been created by the Emperor Shun around 2200 BC, to train the brains of his son and heir. The game has 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 Russia’s 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 $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 utilisation plans of the 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 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 longs entering China from Evraz and Mechel.
Could the timing of the Russian government’s an-dumping report against Chinese pipes have been worse for Putin’s negotiations? In a 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 480,000t to 2.4 mt. In a price comparison for these two periods, the report says the average price for imports for all sources was $1420/t in H1 2007, and $1546/t in H1 2008 (9% rate of growth). By contrast, the average price of the Chinese pipes was $1156/t in H1 2007, 19% below the all-world average; and $1331/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, gropwing 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 5-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 favour, 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 today the immediate risk “that current steel prices outside of China, in the range of $560/t (HRC Black Seat) 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.