Main developments in Russian scrap market in 2006

When viewing the Russian scrap market in 2006, three main developments can be identified. First of all, in 2006 the narrowing of the gap between A3 grade scrap prices in the domestic and the export markets was very noticeable. For instance, if at the end of 2005 the difference between the Russian domestic procurement price for A3 grade scrap and the FOB Black Sea A3 scrap price was about $40/mt, then the current difference is only about $15/mt. It should be stated clearly that the narrowing in the price gap occurred not due to the increase in world scrap prices but rather because of the sharp price rise in the Russian domestic market. Thus, if the FOB Black Sea A3 scrap price increased by approximately $55/mt over the year, then the domestic scrap prices increased by approximately $95/mt during the same period of time. The main reasons behind the sharp rise in the domestic scrap prices lay in an increase in total domestic crude steel production, due to the implementation of both new steel projects and the upgrading of existing steel capacities, and also the reduction in scrap collection activities during the period in question. Thus, during the January-November 2006 period the production of crude steel in Russia registered a seven percent increase year on year while the volume of scrap collected in the country decreased by five percent over the same period. Consequently, in such a situation, Russian steel mills have to raise prices to ensure steady scrap supplies. As a result, the gap between the domestic and export scrap prices has narrowed. With the emerging scrap scarcity in the Russian domestic market, the second main development – the acquisition of scrap processing facilities by the domestic steel mills - came to the surface. For instance, the major Russian steel producers, such as MMK, Severstal, NLMK and Ural Steel, acquired their own scrap collecting and processing facilities to ensure at least some part of the scrap supplies they required. With such a development, small and average scrap processors were almost forced out of the market. Currently, if a plant in the Russian domestic market cannot satisfy its needs in scrap independently, it prefers to buy scrap from the ’monsters' of the Russian domestic scrap processing industry such as MAIR (20 percent market share), Tulachermet (15 percent market share) and Alfa-Metal (eight percent share). The lack of scrap in the Russian domestic market has also led to an increase in import deliveries. According to the operational data, during the first nine months of 2006 Russian scrap imports increased by 44 percent year on year and are expected to continue their rise further in 2007. The main source of imported scrap in Russia is Kazakhstan – covering more than half of all imported scrap in the country. Scrap exports from Russia, on the other hand, decreased considerably during the year 2006. Once one of the largest scrap exporters in the world, in 2006 Russia exported approximately only 6-7 million metric tons of scrap (estimated volume).