The Association NSRO RUSLOM.COM is the only official industry association of metal scrap processors in Russia with a national self-regulatory organisation (SRO) status. The Association possesses more than 340 active members, including procurement divisions of major metal plants, leading independent scrap processors, exporters and traders. Members of the Association own 100% of shredding capacities in Russia and occupy 75% of the market in terms of steel scrap consumption.

On its own behalf and on behalf of its members, the Association NSRO RUSLOM.COM declares the following.

On Wednesday (May 19, 2021) it was announced that the Ministry of Industry and Trade of the Russian Federation is considering the possibility of doubling the export duties on ferrous scrap up to 90 euros per tonne. The main goal of the initiative is to decelerate the growth of metal prices on the domestic market. On January 30, 2021 the Government of the Russian Federation has already established an export customs duty on scrap in the amount of 5% but not less than 45 euros per tonne, for a period of 180 days. The measure was positioned as an attempt to hold the prices for metal products and consequently for construction and housing in the domestic market. It reduced scrap exports to a record level of the last four years. However, it did not have the expected impact on metal prices.

To demonstrate the positive effect of this initiative, the Ministry of Industry and Trade provided data on 697.9 million roubles additionally received by the budget due to the collection of duties in less than four months of this year.

According to the position of the Association RUSLOM.COM, the initiators did not take into consideration the consequences for the market while developing their plan for a new increase of duties.

According to the Association’s data, the actual financial damage and negative economic effect for the country caused from February to April 2021 while the duties were in effect amounted to more than 1.4 billion roubles. First of all, this is the loss of budget revenue, including from customs payment in the amount of 799 million roubles and taxes in the amount of 602 million roubles. It is also necessary to take into account the loss of revenue of Russian seaports in the amount of 570‑670 million roubles as a result of a decrease in the volume of scrap transhipment by 602 thousand tonnes. The duties also led to a decrease in the inflow of foreign currency earnings to the country by 16.5 billion roubles (USD 59.9 million in February, USD 122.1 million in March and USD 37.4 million in April). This is a substantial decline in the GDP of Russia, given the absence of a commensurable increase in reinforcing steel production. The level of reinforcing steel consumption is lower than of 2020. Moreover, the measures eliminated 2,300 jobs in the country’s scrap and waste metal processing industry in three months. This trend increases social and economic tension in the regions, as well as negatively affects the amount of tax deduction from wages.

Justifying the increase of the duties the Ministry of Industry and Trade notes that against the background of increased purchasing priced for ferrous scrap in Turkey in April 2021, there is a threefold increase in the export of scrap from Russia to Turkey compared to March of this year, from 24.8 to 75.4 thousand tonnes. However, in our opinion, it is more correct to compare with the same period of the last year. In this case, the scrap export in the first three months of the 45 euros duties being in effect decreases 5 times.

When comparing prices in Turkey and Russia, it is necessary to take into account that there are additional costs along the supply chain. These are freight, duty, transhipment in ports, operating expenses, including agency, surveyor expenses (insurance), the cost of credit and taxes of participants in foreign economic activity. Considering all these costs the February collapse of export becomes understandable. According to Rating Agency Rusmet, which deals with price and market analysis, in February 2021 scrap exports decreased to a historically low level in the last 20 years, as the 45 euro duty made it unprofitable. At current prices and costs of exporters an increase of the duty to 70 euros would make exports unprofitable. The table below shows that the Russian scrap export now remains at the level which is much lower than of 2020.

Table. Export of ferrous scrap from Russia, thousand tonnes

An increase of the duty to 70 euro in the situation of unstable demand for scrap and high price volatility will lead to a complete closure of exports. The growth of world prices has exhausted its possibilities for continuation; there is a very high probability of a price rollback, which is shown by futures transactions on the London Metal Exchange. Export enterprises provide 20 thousand jobs. Export grants scrap processors stability, required to successfully operate on the domestic market. Taking into account the terms and conditions of payment, export provides current assets for working with the Russian plants. The unstable demand from various sectors of the Russian metallurgy shall also be taken into account. For example, the production of welded pipes in the first quarter of 2021 fell by 14% compared to 2020.

The introduction of the increased duty this year has no effect on the stabilisation of prices for the metal products. First of all, prices for rolled metal products in the domestic market are practically independent of scrap prices, but determined by external prices. Secondly, there is a risk of rush exports amid an increase of the duty to 70 euros per tonne and a corresponding destabilisation of prices under pressure on the market as it was already in January 2021.

The price of reinforcing steel also did not follow the dynamics of prices for ferrous scrap. In January 2021 it was 62 thousand roubles per tonne, in early and mid-February it decreased (due to close attention and inspections by the authorities) to 48 thousand roubles and at the end of February it increased to 67 thousand roubles per tonne. The decrease of available reinforcing steel in stock created increased demand and price growth after a short-term decline.

After the initiation of an increased duty on scrap this year the consumption by metallurgical enterprises in Russia increased by 25%, while the consumption of reinforced steel remained at the same level compared to the same period in 2020. This shows that scrap was not used for producing construction metal rolling for the domestic market but for the production of steel semi-finished products, hot rolled coils, steel wire rod and wire, which were exported. The export of these products has grown in line with world prices. Therefore, the internal shortage of reinforcing steel and other metal structures and the increase in their prices at the domestic construction market is not related to the increase in scrap prices.

Furthermore, the increase of the duty will inevitably negatively affect the volume of the scrap collection in export oriented, but metal intensive regions of Russia such as North-western Federal District and the Far Eastern Federal District. The scrap, not collected for export, will add to the accumulated environmental damage and will not be recycled. In addition to environmental and economic damage this situation will negatively affect the competitiveness of domestic metallurgy, given the global trend towards reducing CO2 emissions. Plants will have to involve more primary raw materials in production instead of scrap and this implies an increase in greenhouse gas emissions into the atmosphere.

Another important negative effect is a significant risk of retaliatory sanctions and compensatory measures from the global community, considering the negative experience of quotas for scrap exports from Russia. The introduction of the duty is already looking like an attempt to restrict trade and a measure to subsidize metallurgical exports. Its increase amid the current collapse in exports will only strengthen these suspicions. Countermeasure from importing countries may be anti-dumping duties against Russian steel products, that can be applied to the entire industry or can be calculated individually for each plant. Furthermore, tariff and non-tariff restrictive measures are usually introduced by the country for 6‑12 months, but the countermeasures applied to businesses stay in effect for up to 5 years. In 2000, when Russia was not a WTO member, quotas were introduced for Russian suppliers on metal rolling in response to our duties. In 2020 new mechanisms for responding to violation of obligations were put into effect by the WTO; they can be applied to Russia.

It is also worth noting that since the new duty was introduced in 2021, only 2.6% of the total volume of scrap metal is exported; at the same time, 35‑50% of rolled metal and reinforcing steel (depending on the product type) goes for export. Meanwhile, export duties for some reason are introduced for scrap. It may lead to a reorientation of scrap collectors from export of scrap metal to its processing, production and export of steel billets and reinforcing steel. The appearance of such a large number of new processing facilities on the market will lead to even a greater destabilisation.

The same path was followed by the Russian non-ferrous metallurgy; the protective duties on the export on non-ferrous scrap were in effect for many years. This led to the creation of hundreds of small production facilities; nowadays the production capacity on the aluminium, copper and lead markets is several times higher than the non-ferrous scrap collection capacity.

All these arguments suggest that an increase of the duty will not lead to the results for which it was initiated. Conversely, it will have an extremely negative impact on the domestic market.

The Association NSRO RUSLOM.COM calls for complete abolition of the duties from June 1, 2021 instead of introducing the new ones, in order to avoid further damage to the state and business. At the same time the Association is ready for a constructive dialogue with the supporters of market restrictions and comes up with an initiative aimed to improve its transparency and regulatory quality. We suggest using market mechanisms rather than protective barriers. The presence of personal income tax for individuals who deliver scrap significantly reduces the efficiency of the industry at the moment. There is also a significant shadow sector, which receives unjustified profits unlike the trustworthy players. In our opinion it is necessary to:

• cancel personal income tax for individuals who deliver scrap;
• adopt the law which implies transition to non-cash payments of scrap collectors with individuals;
• increase the fines for violations by individuals in the field of scrap turnover.

Director of the Association NSRO RUSLOM.COM                               Victor V. Kovshevny

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Deputy Prime Minister Yuri Borisov did not support the introduction of quotas for the export of ferrous scrap. Kommersant was informed of this by two sources in the industry, familiar with the text of the Deputy Prime Minister’s order, given in September. By means of this order, Yuri Borisov instructs the Ministry of Industry and Trade and other relevant ministries to work out possible mechanisms for regulating the scrap market ‘in order to supply consumers with strategic raw materials unconditionally’ and report to the Government by October 1, 2020. The representative of Mr. Borisov left Kommersant’s inquires without response.

The introduction of quotas was initiated by the Foundation for Development of Tube Industry (FRTP), which represents the interests of the largest pipe companies. The Foundation proposed to limit exports to countries outside the EAEU with a quota of 1 million tons for six months. Otherwise, the Foundation forecasts a decrease in steel production in Russia by 2.5–4 million tons. Among the market participants, quotas are supported by Severstal, the Abinsk Electric Steel Works and Magnitogorsk Iron&Steel Works (MMK). A representative of MMK confirmed to Kommersant that the company supports the introduction of quotas for the export of scrap metal due to the current shortage in the domestic market.

A Kommersant’s source in the market estimated the shortage of scrap in September at 400 thousand tonnes.

Igor Malyshev, the director of the FRTP, told Kommersant that scrap prices on the domestic market have been growing for the last five months and have already reached their maximum historical level, which was two years ago. ‘For example, in the Ural region, now, at the beginning of September, a historic record of scrap prices has already been reached. The reason is the limited supply of scrap after the pandemic and the ban on its import from Kazakhstan. The overwhelming majority of metallurgical plants confirmed the deterioration in the provision of scrap and the need for export restrictions at summer meetings in the Ministry of Industry and Trade’ he says. Mr. Malyshev recalls that only Russia out of the five EAEU countries has no significant restrictions on the export of scrap. Igor Malyshev also stressed that, based on the wording of Yuri Borisov’s instructions, an additional analysis of the situation will be carried out.

The quotas were opposed not only by scrap collectors themselves, but also by the Ministry of Economic Development and the Federal Customs Service. The Ministry of Economic Development saw the introduction of quotas as a violation of Russia’s obligations to the WTO.

The Customs Service believed that quotas would not achieve their goals, since raw materials would be exported through the EAEU countries. In addition, Russian ports opposed the quotas, fearing a reduction in export trans-shipment.

Commenting on Yuri Borisov’s order on the need for stable scrap supplies, Viktor Kovshevny, the director of the Association of Metal Scrap Processors RUSLOM.COM, notes the need to stimulate scrap collection, for example, through equipment recycling programmes. He also added that the abolition of individuals’ personal income tax on sale of recyclable materials would also help the situation, making people unafraid to deliver scrap.

According to Maxim Khudalov from ACRA, the situation with scrap collection is improving. Thus, shipments to plants in August 2020 were actually equal to amounts of August 2019. According to the expert, the plants possess approximately a two-month supply of scrap in their warehouses, which is not unusual on the eve of winter. ‘Domestic scrap prices are growing, but they reflect the dynamics of export prices and the depreciation of rouble’, says Maxim Khudalov. In his opinion, it is premature to talk about a deficit of scrap, since the demand for its processed products, in particular rolled metal, remains rather weak.

By Kommersant Newspaper

https://www.kommersant.ru/doc/4483859

09.09.2020

Evgeniy Zaynullin, Kommersant Newspaper

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https://www.kommersant.ru/doc/4457574

17.08.2020

As Kommersant found out, the Government failed to come to an agreement on the introduction of quotas for the export of scrap metal, which are promoted by the Foundation for Development of Tube Industry (FRTP) and some metallurgists. Thus, the Ministry of the Economy sees the introduction of quotas as a violation of Russia’s obligations to the WTO. The Customs Service believes that quotas will not meet their goals, since raw materials will be exported through the EAEU (Eurasian Economic Union) countries, although the FRTP believes that such re-export will be unprofitable. Meanwhile, the need for quotas looks more and more questionable against the forecasted decrease in metal consumption.

The ministries are not ready to unequivocally support quotas for the export of scrap, as follows from the correspondence with which Kommersant got acquainted. The initiator of the quotas is the FRTP, which represents the interests of the largest pipe-producing companies. The foundation proposes to introduce quotas on exports to non-EAEU countries for six months with a quota volume of 1 million tons. Otherwise, the foundation predicts a decrease in steel production in Russia by 2.5–4 million tons.

From the letter of the Ministry of Finance to the Ministry of Industry and Trade in June, it follows that the Ministry ‘considers it possible’ to support the foundation’s proposal, but expects additional information from it, including the information on administrative mechanisms that would eliminate the risks of exporting scrap to third countries through the territory of the Eurasian Economic Union. The Federal Customs Service (FCS), in turn, referring to the law enforcement practice of the customs, notes that such unilateral measures lead to the ‘relocating of flows’ of goods through the EAEU countries, which ‘prevents achieving the stated goals’.

The Ministry of Finance informed Kommersant that its position on the issue of quotas is being worked out; the FCS did not provide any comments.

The head of the FRTP, Igor Malyshev, noted that scrap of ferrous metals is an inexpensive commodity, so its export through other EAEU countries is unprofitable due to high cost of logistics.

Moreover, all the EAEU member states have various restrictions on the export of scrap, including not only in relation to third countries, but also the countries of the Union.

According to Kommersant’s information, among the market participants, quotas are supported by Severstal, the Abinsk Electric Steel Works and Magnitogorsk Iron&Steel Works (MMK), which note an acute shortage of unalloyed ferrous scrap on regional markets. A representative of MMK confirmed this information to Kommersant, the others did not provide any comments.

The data prepared for the meeting of the working group of the Government Subcommittee on Customs, Tariff and Non-Tariff Regulation (which will consider the issue of export quotas) says that according to the analysis of the Russian market in 2020, a shortage of at least 1 million tons of unalloyed ferrous scrap is predicted. In addition, according to the agreed estimates of metallurgical and scrap collecting associations, the level of scrap collection of ferrous metals by the end of 2020 will decrease by 15%, from 26.8 million to 22.8 million tons, that is, by 4 million tons, which is comparable to the total amount of Russian export of scrap ferrous metals in 2019.

According to Kommersant’s information, the Ministry of the Economy is strongly opposed to quotas.

The Ministry insists that there is a lack of data on the critical shortage of scrap in the domestic market. In addition, FRTP’s proposal has the signs of violation of Russia’s obligations to the WTO.

The Ministry of the Economy’s letter to the Ministry of Industry and Trade dated June, 23rd stresses that the issue of quotas for the export of scrap was repeatedly discussed at the government level, but the final decision was to abandon quotas and introduce the exchange mechanisms for the sales of scrap. The corresponding decision was made in October 2019 by Deputy Prime Minister Dmitry Kozak, but after he had left the government, exchange trading failed to start. The Ministry of the Economy left Kommersant’s inquiry without response.

The Association of metal scrap processors RUSLOM.COM informed Kommersant, that although the FRTP justifies the need for restrictions on a possible shortage of raw materials during the period of quarantine measures in the country, there have been no real cases of stoppages or failures of metallurgical production due to a lack of scrap.

According to the Association, in fact, metal production is decreasing and ‘at present, scrap collectors in many regions are already experiencing problems with sales’.

Maxim Khudalov from ACRA agreed that the demand for scrap this year will decrease, as the demand for rolled steel and pipes in Russia is obviously going to decrease. This is confirmed by the forecasts of metallurgical companies: MMK expects a decrease in metal consumption in the Russian Federation by 7-10% by the end of the year, Severstal – by 6-9%.

Evgeniy Zaynullin, Kommersant

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