The Metal frequently referred to the traders’ standing and status on the Ukrainian market for iron and steel. The issue remains on the front burner, as commerce is subject to dynamic changes. New trends arise on metal markets of the CIS countries, where,
METAL TRADERS: WHAT WILL THEIR FUTURE BE LIKE?
The Metal frequently referred to the traders’ standing and status on the Ukrainian market for iron and steel. The issue remains on the front burner, as commerce is subject to dynamic changes. New trends arise on metal markets of the CIS countries, where, similar to Ukraine, mining & metal are the base industries and the leading contributors to the national economy. In this issue of the magazine, we feature the first publication of our Moscow reporter Boris PENDYUR, who assumed an office of the Metal’s reporter in Russia in September 2000.
Let’s try to remember the time when the word “trader” entered the business language in the former USSR. Till the beginning of the 1990s, neither Ukrainian, nor Russian metal producers knew this word. The explanation appears rather simple as the State itself was exporting products and commodities, while domestic sales were actually redistributed among consumers. The time came when people cluttered to their national dwellings, and being full of pioneering enthusiasm and sanguine hopes rushed headlong into the market economy. Simultaneously, Ukraine’s integrated mills got a great opportunity to sell their steel overseas. It was the time when the traders entered the market. In fact, these were foreign trade companies crucially important to our local manufacturers.
The traders also came to interior market for metal products, although at that time they were unpretentiously called “intermediary agents”. Yet, that was it about modesty. The traders had to elbow their way to mills’ management, crawl into their favor, and persuade that the floor sale price was the most beneficial for every party involved, as the sales brought in the corresponding margins. The larger the margin is, the more satisfaction one gets from allocation of this money. Though, let us not carp and doubt the intentions of every then-operators of the domestic metal market. Such generalization would hardly be fair. Yet, one would not call those relations among producers, intermediaries, and consumers the civilized ones.
Much time went by. Is it possible to claim today that the trading activity on the metal market turned into a brand different? Perhaps, there are weighty reasons for such a statement. The market is cruel, whether it is domestic or international one. Being free from bias in its nature, the market creates new conditions and new obstacles on the way to the only objective, i.e., the profit. Rushing after market trends, metal traders adjust their business image as well.
Because the world market today gets much more information on both producers and consumers, ineffective intermediaries seem to be falling out of place. Even the most respectable international traders experience instability, although not too long ago export transactions with Russian metal seemed to assure their firm market standing. Two years ago, some of these trade offices already noticed their intermediary services turning dull, thus having to curtail the business.
At the same time, a number of financially strong companies, e.g., Trans World Group, Glencore, and Duferco, acquired stocks in certain metallurgical mills aiming to strengthen market positions in Russia. Quite logically, an interest held in producer’s share capital is not only a reliable anchor, but also a way to influence the producer’s management and adjust policies to the benefit of traders. The latter, though, claim these relations are nothing but partnership, and intermediaries can afford to service producers and consumers at the modern level. Maybe it is so. Nevertheless, tensions between related parties have lately occurred at metallurgical mills time and again. To some extent, the problems may originate from experience of metallurgical mills themselves, for they have got a foothold on the market, and now feel encouraged to act more independently, whereas business transactions with the related traders limit these intentions.
However, the trend of several metallurgical mills to work directly with consumers is becoming more obvious. According to Commersant newspaper, a couple of months ago, Cherepovets-based Severstal Iron and Steel Works set up Severstal Trade Gmbh company in Austria, which will serve as an agent to sell Severstal’s steel directly to clients. The latter include such authoritative industrial giants as Ford and Fiat. In general, Severstal sells about 90% of its export directly.
Novolipetsk Iron & Steel Works is also searching for its own way past traders. This company intends to acquire integrated mills in Southeast Asia to treat and finish its semi-finished steel in compliance with clients’ requirements.
It seems that such a policy of metalmakers is no more an exception to the rule. Nonetheless, it is too early to claim that the policy will become dominant in the nearest future. The data with the Russian Association of Metal Traders reveal that some 75% of the Russian iron and steel exports today are still carried out via international traders, which aim to strengthen their relations with Russia-based integrated mills.
Besides, not every local producer is ready to escape from such partners’ grasp. Establishment of distribution networks abroad suggests substantial costs, while local companies lack money now. So, many Russian metallurgical mills have no other choice but to cooperate with foreign partners.
The situation on Russia’s domestic market is completely different. The key difference is that metallurgical mills sell around 70% of iron and steel directly to their clients, such as oil & gas companies, automotive factories, construction and assembling companies, and the like. Several thousands of domestic metal traders gulp the rest of this metal pie, i.e. about 6 million tonnes. Competition is definitely strong and cruel there. One can guess that vigorous and ambitious competitors have eyes for this huge portion of direct sales. In any case, president of the Russian Association of Metal Traders Alexander Romanov is sure that local traders will be able to get some of metallurgical mills’ direct clients soon enough. Why is that, you might ask? Firstly, metal traders are ready to give adequate response to changes occurring with metal consumers. Large industrial factories used to keep the so-called auxiliary workshops that treated and prepared iron and steel just a short while ago. The situation has changed now, namely, these divisions failed to vindicate themselves and head companies have started eliminating them. As a matter of fact, metal trading companies usually spring from the facilities of such workshops. In other words, we are moving towards the generally accepted global practice, when traders establish their own large metal centers with appropriate facilities to execute almost any orders coming from their clients. This is an expensive way, but it is inevitable, at least in the short run. Companies that still try to make money on price margins or fail to do well because of their poor financial health will have to leave this business. Yet, the winners won’t see a nice and easy life either.
The point is that there are hardly any international traders on the domestic metal market because there is still not enough space for these giants here. How long will it be like this? Domestic consumption of metal is estimated to gain some 2.5 million tonnes this year, which definitely sounds like good news for local metal traders. However, what if the favorable trend stays on the market? Will it pave the way to foreign metal traders or not? If this is so, the market will see competition among completely different companies, since Russian and Ukrainian traders have miserable financial opportunities compared to the foreigners. Besides, local metal traders will face various other problems owing to invasion of well-equipped competitors from abroad.
Notably, Giuseppe Mannina, head of Russia-based rep office of one Swiss company, is confident that most metal will be traded via the Internet sites in the nearest future. This is considered to be a global trend. So, metal traders must know how to work in e-commerce. Immediately, it has become known that several Russian metallurgical mills are getting ready to set up their own sales sites in the Internet. Therefore, it is nothing but one more headache for local traders. In fact, we are just getting familiar with this new problem. Of course, selected individuals are advanced enough, but the majority prefers to wait and doubt. Who guarantees that it is a true seller, not some swindler offering metal via an Internet site? Will the e-contracts be legally registered like the traditional trade contracts? There is an opinion that it will take much time for e-commerce to become popular in the former USSR, though there is still some time left. Naturally, such an alteration from the regular and reliable practices requires a serious and weighed approach. We can only pray not to make the same mistake again: if we wait for too long, the breakaway hitch may turn out to be very costly.
Nevertheless, the present and the future hardships should not make both Russian and Ukrainian metal traders feel pessimistic. Perhaps, they have already undergone the hardest stage of their development and have learned a lot from all these troubles.