AvtoVAZ agrees to a 22% steel cost increase.
The steel industry has scored its first victory in the price war with consumers. AvtoVAZ agreed to a 22% price hike by Severstal on Friday. But the price war is not over. On Friday Russian Railways (RZhD) announced that steelmakers wanted to raise prices but that RZhD disagreed. Prime Minister Vladimir Putin will meet with big steel today.
On Friday, Severstal's Alexei Mordashov said that his company had agreed with AvtoVAZ on the resumption of sheet metal distribution (suspended on May 21). Mordashov declined to disclose the terms of the deal. The companies merely added that as of June 1 steel prices were fixed at a compromise level and would be updated according to an agreed upon schedule.
AvtoVAZ agreed to a 22% increase for sheet metal costs, only slightly less than the steelmaker wanted (25-30%), Kommersant's sources at AvtoVAZ said. Sergey Chemezov, Director-General of Rostekhnologii (which controls AvtoVAZ) believes AvtoVAZ can handle an increase of 17% at the most. Severstal supplies 60% of AvtoVAZ' sheet metal needs.
The agreement between Severstal and AvtoVAZ was the first in the price conflict between steel producers and consumers, a subject which Prime Minister Vladimir Putin looked into last week. Since then GAZ announced an additional agreement with Severstal, but stressed that it was an interim agreement.
Severstal gained the upper hand in the price dispute, our source at AvtoVAZ admits, "The most the company could do was wrest terms that are barely acceptable." As a result, production costs at AvtoVAZ in 2010 will grow by 10%, or about $40-45 million, says Vladimir Bespalov of VTB Capital. This is not a disaster for the company, the analyst believes, but it is unclear whether AvtoVAZ will pass the cost increase on to consumers, and if so, what effect it would have on sales. It is also unclear if steel prices will be increased for AvtoVAZ component suppliers, the analyst adds.
Price increases are a forced measure, Kommersant's source at a steel company says. Since the beginning of the year AvtoVAZ has been buying cold rolled stock from Severstal and Magnitogorsk Metal Company (MMC) at about $600 per ton. In April-May a ton of rolled steel on the open market cost up to $730, notes Dmitry Smolin of Uralsib. But even in the first quarter the price ensured a minimum profit margin, says Kommersant's source, and beginning in the second quarter it barely broke even.
Alexei Morozov of UBS points out that the steel industry is raising prices for the auto industry in line with global price trends, so a new increase is not unlikely before the end of 2010. A Kommersant source close to the negotiations between AvtoVAZ and Severstal explains that the price is based on the Steel Business Briefing (SBB) index which requires an automatic price revision if the index changes by 20%. Russian steelmakers change prices only when the index changes by 50%, says Andrei Dementyev, deputy minister of Industry and Trade.
During a meeting at the Ministry of Industry and Trade on Friday, metallurgists were advised to reduce the threshold for revising the price to 10% of SBB change to make it less sensitive for the auto industry, said a ministry official. In that case contracts would become less stable, says Alexei Morozov. However, Dmitry Smolin adds, this could be good for automobile companies during a down market. For example, the export price for rolled sheet has dropped by about 15% since May, if the threshold had been lower, steelmakers would have had to cut their prices.
The agreement with AvtoVAZ is important for the steel industry, but difficult negotiations with other industries lie ahead. On Friday the senior vice president of Russian Railways, Vadim Mikhailov, said that the steel makers wanted to raise their prices by 20%, which the rail monopoly cannot afford. A source close to Russian Railways earlier told Kommersant that the monopoly's investment programme and financial plan proceed from the prices of materials as stipulated in the forecast of the social and economic development of Russia for 2010 which envisages a growth of supplier prices by 7.2% for ferrous metals and 3.7% for finished metal goods. Vadim Mikhailov added that the question of pricing would be discussed at a meeting chaired by Prime Minister Vladimir Putin on Monday.
Dmitry Belikov, Roman Asankin