The Russian government has proposed that the country's ferrous scrap exporters only be permitted to ship material purchased through exchange tenders that are subject to official oversight.
Plans for the introduction of a tender system by 1 January 2020 were announced in June, and a draft decree that outlines further details for the proposal was published on a Russian government web portal on 26 July.
The initiative entails exporters being permitted to ship abroad only the tonnage that they purchase at exchange auctions. Moscow wants this help it establish a firm price indication for the country's tax authorities and other regulators. These authorities would then use the prices set in these auctions as the official price relevant to the Russian tax code and consequently restrict speculation in scrap pricing.
"Exports of around 4mn t/yr, excluding shipments to Belarus [which is a member of the Eurasian Economic Union], intensify a shortage of scrap in the domestic market and lead to speculative price increases," the new draft document said. "The new export procedure will secure domestic customers non-discriminatory access to ferrous scrap, which is currently exported on non-transparent conditions."
The draft decree claims that ferrous scrap collection in Russia averaged 25mn-27mn t/yr over the past 10 years, while average purchasing prices rose by 25pc on the year in 2017 and by 22pc in 2018. These figures roughly follow estimates by Russian steel pipemakers, whose lobbying was a major driver behind the introduction of a system of regional quotas for Russian ferrous scrap exports from 1 July.
But market participants doubt that the new exchange tender system will work in the way that the government intends. "Authorities seem to seek for a solution to help them eliminate disparity between domestic scrap prices and exporters' dockside prices," one market participant said. "But eventually, it may likely have a totally opposite effect."
One potential negative consequence of the new system is that it could reduce transparency in the market rather than boost it. This is partially because exporters would not be able to directly sell scrap collected themselves to overseas customers. Instead, they would buy and sell through affiliated or friendly scrap collectors, with the latter trading necessary tonnage in the exchange back to the exporter or any other seller at intentionally inflated prices that may be agreed by the two original parties before the exchange process.
"In such cases, for exporters, it's just a question of some — not very large — additional expenses, mostly for higher exchange transaction fees because of higher transaction prices," one trader said. "But it has to be understood that this will move the market back into the shadows, from which it began to emerge not so long ago."
In addition, steelmakers have lobbied for greater protection as they claim they have had to hike their buying prices because of high exporter prices. But there may be negative consequences for steelmakers if tax authorities acknowledge exchange prices as official indications of overall Russian scrap price levels.
If exchange prices are higher than steel mills' own separate scrap purchase prices, the tax authorities may receive a legislative mandate to investigate steelmakers for purchasing scrap at below-market prices.
"The whole initiative was ill-conceived and may turn into a backlash against those who are in favour," a market participant said.
Russia's ferrous scrap exports continued to fall in the first five months of this year on weaker buying interest from export outlets and lower prices globally. Shipments totalled 1.85mn t in January–May, down by 19.7pc on the year, customs data show. Around 450,700t was shipped in May alone, 27.5pc less than in May 2018 and 3.7pc down from April.
Turkey was the largest recipient of Russian scrap, with its share of January-May exports reaching around 44pc at 814,000t, down by 25pc from January-May 2018. Belarus bought 23pc of the total, with tonnage falling by 15.4pc on the year, and South Korea took 16.7pc, with purchased volumes dropping by 11.6pc.
Falling global prices amid slowing demand were a key factor weighing on Russian exports. The Argus A3 fob Black Sea price for Russian and Ukrainian scrap averaged $297.56/t in January–May, down by 13.9pc on the year. The average Argus HMS 1/2 80:20 cfr Turkey price for the period fell by 14.1pc on the year to $307.49/t.
Rail shipments of ferrous scrap to Russian steelmakers totalled 5.09mn t in January–May, 13.2pc higher on the year, indicating that Russian scrap suppliers can easily re-allocate tonnage to the domestic market when demand is present and that scrap export volumes exert little influence on domestic supply, market participants said.
The trend continued in June, with domestic shipments for the first half of the year rising by 8pc on the year to 6.4mn t, including 1.31mn t delivered in June, up by around 1pc on the month and an 8.5pc rise from a year earlier.
