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. Last Updated: 07/27/2016

Steel Industry Criticizes State Tender

A government attempt to assist an underdeveloped sector of the domestic steel industry is generating controversy, as a half-dozen companies scramble to win an investment guarantee from the state worth up to $1.2 billion.

The government set up the tender in order to help create a domestic production capacity for high-quality, large-diameter pipe used in construction of oil and natural gas pipelines.

A special Economics Ministry commission has been given the task of recommending the best candidate to the government, and is expected to issue its decision soon.

While the jury is still out as to how successful the government's attempt at economic-engineering will ultimately be, it is raising questions in many quarters.

Vadim Lazutin, the Economics Ministry's chief spokesman, said the commission would base its decision on "social factors" as well as economic considerations.

"Social tensions will be taken into account," he said, adding that financially troubled factories in regions with high unemployment would likely have an advantage in competing for the tender.

This approach has been criticized by financially secure enterprises competing in the tender.

"It's too bad the commission preferred political arguments to economic calculations," Kommersant quoted a Severstal spokeswoman as saying.

Severstal, located in the Vologda region north of Moscow, is one of the largest domestic steel producers, and is one of the companies angling for the loan guarantee, even as it is busy trying to attract investment independently.

Even though the Economics Ministry insists no final decision has been made, it is already being criticized for choosing one of the most financially troubled steel enterprises as the recommended recipient of the loan guarantee.

In the past few weeks, the press has been filled with speculation on which enterprise has the inside track for winning the tender, focusing on the Nizhny Tagil Metallurgical Combine, which is located in the Ural region city of the same name.

The Nizhny Tagil has debts "in the billions," according to a Metals Bulletin analyst in London, and has flirted with bankruptcy on several occasions.

Meanwhile, Gazprom, the natural gas monopoly, will likely not help finance the investment project as some had hoped, Lazutin said.

The size of the domestic market for large-diameter pipe is a potentially lucrative one - estimated by some to be worth up to $1 billion annually - with the promise of steady orders from natural gas giant Gazprom and oil producers.

Russia, one of the world's largest producers of oil and natural gas, imports nearly 800,000 tons of the pipe per year from Germany and Japan, according to the Metals Bulletin, a London-based industry news publication.

Alexander Andreyev, a metals analyst with the Brunswick Warburg brokerage in Moscow, said the ruble's devaluation had made imported pipe proportionally more expensive and created a demand for locally made pipe.

"Devaluation clearly accelerated the progress of the plans [to create a domestic large-diameter pipe industry]," he said.

Given the market demand for the pipe, financially secure mills such as Severstal have little need for the investment guarantee, Andreyev said.