Decision on case № 1 06/175-03 on violation of the antimonopoly legislation

OAO MMK

93, Kirova street, Magnitogorsk,

455002 Cheliabinsk region



OAO Severstal

30, Mira street, Cherepovets,

162614 Vologda region



OAO AK Transneft

57, Bolshaya Polianka street

119180 Moscow



OAO Gazprom

16 Nametkina street, B-420, ГСП-7,

117997 Moscow







DECISION



on case № 1 06/175-03 on violation of the antimonopoly legislation



January 14, 2004 Moscow



The Commission of the MAP of Russia on examination of cases on violation of the antimonopoly legislation composed of:



Chairperson of the Commission- Deputy Minister A.G. Tsiganov head of the Department of the competition policy in the industry and construction- N.V. Lomanova, deputy head of the Department of the competition policy in the industry and construction, head of the section of metallurgy I.N. Epifanova, deputy head of the section of metallurgy of the Department of competition policy in the industry and construction A.V. Ivanov, head of the section of investigations and administrative procedures of the Legal Department- S.S.Seleznev, having examined case № 1 06/175-03 on violation by the OAO Magnitogorsk Metallurgical Combine and OAO Severstal of items 1, 2 of Article 6 of the Law of the RSFSR of 22.03.91 № 948-1 «On competition and restricting monopolistic activities on commodity markets»,



FOUND:



1. Borders of the Russian Federation serve as the geographic borders of the investigated market of steel strip (hereinafter referred to as strip) used for manufacturing tubes of the oil and gas range.



Analysis of the available materials has shown that capacities for producing strip used for manufacturing tubes of the oil and gas range are concentrated mainly in the Cheliabinsk, Vologda and Orenburg regions.



Transportation of strip used for manufacturing tubes of the oil and gas range is possible by the railway, water and automobile transport. Transportation and storage of strip in general do not require special conditions.



The basic producers of strip used for manufacturing tubes of the oil and gas range in the Russian Federation are: OAO Severstal , OAO Magnitogorsk Metallurgical Combine , OAO NOSTA (Orsko-Khalilovsky Metallurgical Combine).



During the second half of the year 2002 and the 1st quarter of 2003 the OAO Severstal , OAO Magnitogorsk Metallurgical Combine and OAO NOSTA supplied enterprises of the tubes industry with 609379 tons of strip used for manufacturing tubes of the oil and gas range. The biggest supplier of strip out of their group is the OAO Severstal the market share of which in supplying strip used for manufacturing tubes of the oil and gas range to the commodity market of the Russian Federation amounts to 60,3 %.



The second biggest supplier of strip is the OAO NOSTA the share of which at the market of strip used for manufacturing tubes of the oil and gas grade to the commodity market of the Russian Federation amounts to 15,8 %.



A significant supplier of strip to the commodity market of the Russian Federation is also the OAO MMK . Its share of strip supplies used for manufacturing tubes of the oil and gas range amounts to around 10% of the market of the Russian Federation.



The basic consumers of the strip used for manufacturing tubes of the oil and gas range in the Russian Federation are enterprises of the tubes industry the biggest of which is the OAO Volzhsky Pipes Plant , OAO Viksun Metallurgical Plant and OAO Chelabinsk Tube-Rolling Mill .



The aggregate share of the OAO Severstal and OAO Magnitogorsk Metallurgical Combine on the market of the supply of strip used for manufacturing tubes of the oil and gas range amounts to more than 65%.



2. During the period from July 2002 to March 2003 the OAO Severstal and OAO Magnitogorsk Metallurgical Combine sent to the consumers of the strip written notifications (additional agreements to the supply contracts) on prices rise for strip on average by 35%.



Thus, the suppliers determined the following prices on strip grades:



a) OAO Severstal on delivery to the OAO Volzhsky Pipes Plant :



GOST price (rub) price (rub)

August 2002 April 2003

17Г1С-У 6930 8943





b) OAO Severstal on delivery to the OAO Viksun Metallurgical Plant



GOST price (rub) price (rub)

August 2002 April 2003

17Г1С-У 6808 8684





c) OAO MMK on delivery to the OAO Volzhsky Pipes Plant



GOST price (rub) price (rub)

August 2002 April 2003

17Г1С-У 5650 8670





Under these circumstances the strip consumers (OAO Volzhsky Pipes Plant , OAO Viksun Metallurgical Plant , OAO Cheliabinsk Tube-Rolling Mill and others) not having a possibility of concluding supply contracts with other producers were forced to conclude additional contracts on strip supplies at the new higher prices.



During the period under the review practically synchronous price rising was evolving for strip of 17Г1С-У grade produced by the OAO MMK and OAO Severstal . The variation in prices for strip of the given grade with the OAO Severstal and OAO MMK expressed in quarterly figures did not exceed 7%. This gives us a reason to qualify their actions as concerted.



The OAO «Severstal» and OAO «MMK» substantiated their raising prices on strip by market and cost factors.



In the opinion of the produces, the basic market factors which determined the prices growth for strip in the period from 2002 to 2003 were:



1. Unjustified low level of the prices for the metal products output from 2001 to May 2003 which was caused by the stagnation of the Russian and world markets.



2. Overproduction of steel in the world and the protectionist measures against exporters from the moment of the initiation of investigation in the USA in June 2001 which forced producers to lower the prices.



3. Curtailing the imports volumes of the flat rolled metal at lower prices from Ukraine and Kazakhstan which was setting prices for metal at a significantly lowered level.



4. Growth of the metal consuming industries in connection with the growth of oil and gas extraction.



In the opinion of the producers, the basic cost factors contributing towards the growth of prices on metal in the period from 2002 to 2003 were:



1. Growth of tariffs for the services of the natural monopolies.

2. Growth of purchasing prices for raw materials and accessory materials.

3. Modifications in the structure of deliveries in favor of more complicated alloy materials, and as a result -growth of the production costs.

4. Growth of the non-core business for development of the new grades of steel for the benefit of the tube industry.



The strip suppliers gave also reasons for raising prices as the seasonality of the strip sales and assigning significant sums of money for reconstruction of their production.



Nevertheless such reasons of the strip producers are not accepted by the Commission as economically sound for the following reasons:



a) Stagnation of the Russian and the world markets from 2002 to May 2003 was negatively impacting all the participants of the market relations, and yet this did not cause such dynamics of prices with other strip producers as well as in other industries, including those of the industries allied with the metallurgical production and also belonging to the high cost group.



b) The growth of prices for strip under the impact of the market and cost factors should be approximately the same for all the producers of this commodity. Yet, for example, the OAO « NOSTA» as one of the significant suppliers of strip utilized for manufacturing tubes of the oil and gas range, which is in the comparable market conditions, raised prices insignificantly.



Thus, in spite of the assertions of the strip producers, the significant rise in prices for strip cannot be confirmed by the objective circumstances, and, in the opinion of the Commission, it was caused by the concerted actions of the producers aimed at determining and maintaining the prices.



Taking into consideration the fact that the cost of strip represents 80% in the prime cost of the tube production, the price rise for strip is critical first of all for the tubes producing enterprises.



In view of the above, the Commission qualifies the actions of the OAO MMK and OAO Severstal expressed in raising prices for strip used for production of tubes of the oil and gas range as concerted, restricting competition on the market of strip used for production of tubes of the oil and gas range, and being guided by item 1 Article 27 of the Law of the RSFSR of 22.03.91 № 948-1 «On competition and restricting monopolistic activities on commodity markets» and by item 2.12 of the Rules of investigation of cases on infringement of the antimonopoly legislation, the Commission



DECIDED:



To issue to the OAO Magnitogorsk Metallurgical Combine and OAO Severstal order № АУ/482 of 16.01.2003 on terminating violations of item 1 Article 6 of the Law of the RSFSR of 22.03.91 № 948-1 «On competition and restricting monopolistic activities on commodity markets» expressed in the concerted activities on raising prices for strip used for manufacturing tubes of the oil and gas range.



Chairperson of the Commission A.G. Tsiganov



Members of the Commission N.V. Lomanova, I.N.Epifanova, A.V.Ivanov, S.S.Seleznev







Ivanov

254-6229