Russian govt directs metal companies to cut profits, keep domestic prices low

The Russian government has directed steel and other metal producers to reduce their profit margins on domestic sales to a maximum of 20%-25% in order to keep local prices low, according to a meeting between Russia's deputy minister for industry and steel companies' representatives on March 10.

"Today's prices for metallurgical products do not suit us," Russia's Deputy Minister of Industry and Trade, Viktor Evtukhov, said during the meeting. S&P Global was able to access the recording of the meeting through a publicly available link.

In an email response to S&P Global, the trade ministry's press-service acknowledged the meeting between Evtukhov and representatives of the steel companies.

"Metallurgical products must be sold in Russia at low prices," Evtukhov said during the meeting. Regarding foreign markets, they "are no longer relevant or no longer interest anyone [in Russia] today," he added.

He requested the steel companies to submit information on the costs of their production and new price lists by early in the week starting March 13.

"I approximately know the cost of production of hot-rolled coil stands at Rb45,000/mt ($390/mt), and selling it for Rb72,000/mt is no longer possible," he said, adding that the maximal profit margins should be reduced to 20%-25%.

The prices for all steel products, including rebar and cold-rolled coil, must be reset accordingly, including in all contracts with customers and end-users, Evtukhov said.

S&P Global Commodity Insights assessed Moscow HRC price at Rb67,000/mt ($588)/mt CPT March 11, while CIS exportable HRC price was assessed at $1,085/mt.

The gap between Russian domestic and export steel prices, a result of the recent sharp ruble devaluation, is expected to widen if the government implements the 25% profit margin rule.

Evtukhov said the same request was also applicable to all other metals, including nickel and aluminum, as well as scrap. If scrap merchants do not lower prices for domestic consumers, the government will consider banning the raw material exports, he said. The scrap exports are currently restricted through a Eur100/mt export duty.

The government did not plan to regulate exports of metals -- neither volume, nor price -- as long as domestic markets are supplied sufficiently, and at prices that limit profitability on sales to the stipulated threshold, according to Evtukhov.

Russian metal companies' affiliates -- metal service centers and captive trading houses -- that resell metal of their parent companies must also reduce their profit margins to low numbers, Evtukhov added.

The metal companies are expected to work under these terms for a couple of months to half a year, he said. The production at reduced profitability can be sustained through slight cuts to dividends and capital expenditure programs if needed, Evtukhov suggested.

If producers do not implement the instructions on cutting profitability, the government will be prompted to set prices, he said.

Steel companies contacted by S&P Global declined to comment on impact expected from following the deputy minister's directions.

In the meeting, Evtukhov said the request to keep domestic prices down was also addressed to the producers of other construction products, food, fertilizers, machinery and industrial goods.