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. Last Updated: 07/27/2016

Murky Deals Cloud Metals Market




Russia's steel market is likely to remain inefficient as long as its distorted and murky nature provides conditions in which low-key businesses and plant directors can devise and preserve self-enrichment schemes.


"We would own a steel factory ourselves and assume the risks of ownership if the market were more efficient," said Alexei Labovsky, director general of Vostokstal. He founded his business using Western money half a year ago, sending faxes from an empty office in downtown Moscow.


Vostokstal makes steel items for the building industry, using bulk steel ordered from steel factories.


In its first six months the company cornered about 4 percent of waste steel left over after production of steel bars from factories throughout Russia.


However, even when Vostokstal offered steel factories an above-market price, nobody jumped at the opportunity to earn extra money.


"Company managers are used to getting kickbacks from traders, so they are reluctant to change their sales strategies," Labovsky said.


Steel companies' behavior invokes the problem of agency costs, a term that describes managers' preference toward enriching themselves at the expense of their firms.


"Managers in charge of steel distribution have vested interests," said Leonid Soltanov, a commercial director with Metizy Ltd. The company, which makes small metal fittings, has been operating on the local market for eight years.


Soltanov said earlier this year that Kemerovo-based Western-Siberian Steel Mill, or ZapSib, had chosen not to deal with his company, saying the plant's preferred partner is Moscow-based trader Leros.


Leros officials confirmed that their company was ZapSib's largest partner, but disagreed with competitors' view of the nature of the relationship.


"It is convenient for steel companies to stick to old partners," said Oleg Matveyev, head of sales with Leros. "People who allege there are other reasons should remember their [legal] obligations."


Fast growth suggested that the steel industry's problems were exaggerated, Matveyev said.


Production of iron and steel surged 14.5 percent in the first 11 months of 1999, according to government statistics. Total industrial output was up 7.8 percent over the same period.


However, domestic plants consume several times more input for steel production than their Western peers.


Severstal, located in Cherepovets about 400 kilometers north of Moscow, has 45,000 people on its payroll and produces about 8 million tons of steel a year.


"A Western European plant of similar size would employ 15,000 people," said Ivan Chenzhikovsky, Moscow representative with Austrian-based Voest-Alpine Intertrading, a large importer of Russian steel. "Had they outsourced noncore suppliers, the figure would be down to 25,000 employees at Severstal, but they cannot do it."


Some of the grounds for entry barriers and the maintenance of unequal relationships is that they serve social purposes, consulting firm McKinsey & Co. stated in its recent report on Russia's economic performance.


McKinsey estimates show that labor productivity in the Russian steel industry is about 28 percent of the U.S. level.


Clashes between financial groups at steel factories have produced several scandals, including the flaring at the NOSTA steel plant near Orenburg this year.


Its former boss, Pavel Gurkalov, sold the company to Yury Grinin, the head of Nosta Metallhandels, but later disputed Grinin's nomination as director general.


The feud has spawned a series of court cases.