Global Steel Trade; Structural Problems and Future Solutions

available through eight different channels, each with a different price. The most unusual channel was
direct sales between the producer and end-user. Some sales first went through related intermediary
companies and then onto normal international trading companies. Other sales were initially made by the
suppliers of the raw materials, who may have sold to Russian intermediaries, who then sold to trading
companies. Any particular transaction might involve multiple Russian intermediaries. The excessively
low initial price at which steel could be obtained allowed even steel that went through multiple
intermediaries to be sold at highly competitive prices.
• Sales for Export by Input Suppliers. The increasing use of barter to obtain inputs for steel
production—due to the shortage of working capital—provided an opportunity for trading companies to
acquire Russian steel. Steel producers increasingly provided steel to suppliers of energy, raw materials,
and transportation services in lieu of cash payments. As a result, a large amount of all steel produced
ended up in the hands of input and freight providers.
The coal, gas, electric, and railway companies were often ill-prepared to sell, no less market, the steel
they received through barter. Some government-owned raw material suppliers, who obtained steel
products through barter were in the same, if not worse, financial shape—they needed the cash and were,
at times, not diligent in ascertaining the appropriate asking price in the interest of taking possession of
an exportable product that could be sold for dollars.
In sum, the input suppliers did not have the time or the wherewithal to determine, and fight for, the best
possible price for the steel products they had. Russian middlemen and trading companies were able to
acquire this steel at very low prices, mark it up substantially, and still be able to sell it at below market
prices throughout the world.
• Enhanced bargaining position of international trading companies. Trading companies capitalized on
the Russian steel producers’ shortage of working capital in other ways too.
For those steel companies unable to purchase or barter for raw materials, trading companies either
directly provided the necessary inputs, loaned money to purchase the inputs, or prepaid for their sales
order. If a producer reneged on a deal, the chances of getting one’s money back were slim. Therefore,
the risk involved was great. However, control over the acquisition and provision of raw materials gave
the trading companies an inordinate amount of power when negotiating the price at which they obtained
the finished steel.
Seeing both the desperate straits of many producers and an opportunity to make money, some trading
companies bought stock in the Russian steel companies. Sometimes this resulted in the trading company
having effective control over the steel producer. While this equity stake could have resulted in real
restructuring, trading companies typically operate on shorter-term horizons given their reliance on
commissions.
• Middlemen markups. Usually, international trading companies dealing in metals make 2.5 percent on
their sales. For Russia, due to the higher risk involved, trading companies require a margin of at least 4
percent. 129 Some trading companies have estimated their markups in the range of 5 to 7 percent. These
figures are only with respect to the international trading company involved in a transaction. As noted
above, there are often other Russian intermediary companies involved.
While an analysis of the normal markup by these companies can get very murky, very quickly, the
experience of one of the top three companies, Severstal, sheds some light on the issue. After reducing
the number of intermediaries to one established, well-respected trading company per sale, Severstal has
been able to raise its sales price $20–$25, or roughly 10 percent. Nonetheless, after the elimination of
58 Global Steel Trade: Structural Problems and Future Solutions