Iron-ore market in the Russian Federation in 2003 - 1st six months of 2005

Iron-ore market analysis was carried out according to the FAS Russia Order № 134 of 30th June 2005 «On the Work Schedule of FAS Russia on Review and Analysis of Goods and Financial Markets».



Survey period: 2003 - 1st six months of 2005.



Survey forms were based on the «Procedures for Analysis and Assessment of Competitive Environment on Goods Market» approved by the Order № 169 of the Russian Ministry of Antimonopoly Policy of 20th December1996 (in the wording of the Order № 71 of the Russian Ministry of Antimonopoly Policy of 11th March 1999). Problems of the mining industry described in the statement made by «Metalloinvest» CJSC (published on 11th March 2005 in the «Kommersant» newspaper) were also accounted for.



Apart from the survey tables, that include information on the basic economic indicators, companies received a special questionnaire where they were asked to give their assessment of competitive environment, the level of market development, producers' problems, companies' price policy, market entry barriers and suggestions on competition advancement.



Analysis is also based on the data collected by Rosstat of Russia [the Federal Statistics Agency], Minpromenergo of Russia [the Russian Ministry of Industry and Power Generation], the Federal Agency on the Use of Mineral Resources, customs statistics on the foreign trade of the Russian Federation, as well as materials from the websites of the «Ural-Press-Inform» Information Agency, MetalTorg.RU, the «Metallosnabzheniye i Sbyt» [Metal Supply and Sales] data measuring system, UGMK - INFO, ukrrudprom.com, uralpolit.ru, URALNEP.RU, and the OLMA investment company.



Analysis of the obtained information allows coming to the following conclusions: Iron-ore market in Russia is competitive, type - moderately concentrated.



Moreover, judging by the number of companies - iron-ore producers, the market is saturated. 3 companies - Lebedinsky, Mikhailovsky and Stoilensky mining-and-processing integrating works - are able to satisfy the principal needs of the Russian metallurgical complex in iron ore, provided they achieve the maximum level of output possible with the existing production basis. Survey findings also showed that primary producers do not plan to increase the output. Raw materials deficit, indicated in a number of publications, is related to the companies' production, sales and price policy rather than to the insufficient number of producers on the market.



The main entry barriers to the newcomers include high initial costs, long period of costs recovery, and the licensing system.



The principal market feature is described as a vertical integration of the main iron-ore producers with the biggest Russian metal companies.



None of the primary producers has a market share over 35 %.



Due to a number of reasons, a position stated by some independent experts that goods resources should only be defined as the products supplied to the «free market», that is, to independent buyers outside any integrated structures, is unacceptable.



The Law of the Russian Federation [RSFSR] № 948-1 of 22 March 1991 «On Competition and Restricting Monopolistic Activity on Goods Markets» (further on referred to as the Law) does not contain the concepts «integrated structures» and « the free market» and does not use them. Therefore the law does not prohibit formation of such type of structures and does not require division of the market into the «free market» and some other type of it.



Proceedings for analysis and assessment of competitive market environment, approved by the Order № 169 of the Russian Ministry of the Antimonopoly Policy of 20th December 1996 (in the wording of the Order № 71 of the Russian Ministry of the Antimonopoly Policy of 11th March 1999) also does not require separating a free market from some other type of the market, or excluding from the overall goods supply to the market the part of goods that constitute internal supplies within an integrated structure.



In the second part of 2004, one of the mining-and-processing integrating works (MPIW) supplied iron-ore concentrate only to a single Russian buyer - a trading house of a metallurgical complex which is based in Moscow. Both, the MPIW and the trading house are parts of a vertically integrated structure of the metallurgical complex. If the proposed scheme of defining the volume of supplies (sales) to a «free market» was applied, it would appear that in the second half of 2004 there were no MPIW products on the market at all, which was not true. It is obvious that the trading house does not extract the concentrate itself; rather it resells it to other companies that not necessarily should be the members of the integrated structure of the metallurgical complex.



Therefore, such method of calculations is unacceptable as it results in an artificial decreasing of the market shares of some supplies and increasing the market shares of the others.



According to the Law, customer price control is out of the FAS Russia's capacity, excluding the situations when under Article 5 of the above Law, the antimonopoly authority exercises state control over the activity of economic entities abusing their dominant position on a particular goods market by violating the established (by statutory acts) order of pricing as well as setting and maintaining the monopoly high (low) prices. It should also be borne in mind that the prices for iron-ore raw materials are not regulated. Analysis of the price movement for individual buyers as well as companies' price policy showed that during the survey period the producers carried out various price policies aimed to sell different sorts of iron-ore raw materials. Therefore, the actions of the producers do not breach Article 6 of the Law «On Competition and Restricting Monopolistic Activity on Goods Markets».



Under current conditions, it is quite difficult to find an efficient way to influence the producers' price policy. Nevertheless, it is necessary to resolve the problem as in the survey period prices increased much faster than the inflation rate or tariffs for transportation or energy carriers.



There are no solid grounds to believe that monitoring could be such efficient means of influencing producers in order to normalize the price situation. For instance, similar measures did not bring the desirable results on the petrol market.



Increasing export duties would rather lead to some export reduction as well as temporary stabilization on a domestic market, but it would not resolve in principle the issue of price growth rates. Companies can reduce the production output by maintaining or increasing the price.



The measures proposed by the Ministry of Industry and Power Generation towards developing the market of iron ore raw materials - that is, encouraging investments to commission the new and increase the existing productive capacities of the mining companies, or developing the seaports infrastructure to accommodate large ore-carriers- are not quick yielding activities. Commissioning new productive capacities is a rather long-term and expensive process and the mining experts do not expect cost recovery to start earlier than in 5-7 years. Besides, launching the new productive capacities or advancing the existing ones should be in line with the development of the processing capacities of the metallurgical complexes. Improving seaports infrastructure would also require considerable financial investment and take a long time.



It is too early to assess how efficient can be a stage-by-stage unification of the export/import railway tariffs with domestic tariffs as a mechanism of price normalization.



In the meantime, a new iron-ore prices instability can occur rather soon.



Taking into consideration the significance of the iron -ore raw materials for the Russian economy, perhaps it's time when the state should make a radical intervention into the pricing on the iron-ore market.