Steel sector transfer pricing in PM’s firing line

Lower steel product import tariffs, higher ferrous metal taxes, and a more transparent pricing policy. Russia’s big steel consumers want the government to take action and Prime Minister Putin is happy to oblige.

Vladimir Putin regretted that his comments about Mechel’s pricing policy 2 years ago led to a 20 % drop in its share price. But he clearly wasn’t sorry about any other effect he may have had. This time the Prime Minister held up Mechel as an example for others to follow. He said the company treated Russian consumers well and was not under suspicion for price fixing.

The same could not be said about 6 of Mechel’s competitors, which are under investigation for selling their product at a higher price to Russian consumers than for export. It’s alleged there are irregularities in transfer pricing where the producers sell to a friendly offshore company at a much reduced tariff to avoid tax and duties, the offshore company then sells the steel to foreign consumers at normal world market rates. Igor Artemiev, head of the Federal Antimonopoly Service.

“Most of the coal and metal producers present here are selling their product to Russian consumers 15-20% higher than world prices. If we are talking about export price we see the evidence of companies using transfer pricing – export contracts are 2-3 times lower than the world’s price for the offshore companies. It’s discriminatory pricing towards Russian consumers.”

The meeting went for 2 and a half hours was broadcast in full live on Russian TV. Steel producers, as well as their end customers in the auto and oil and gas industries all explained their views on the stumbling points in the chain from coal to steel sheet.

Closing the meeting Prime Minister Putin said that government would take strong measures if the companies continued to misbehave.

“The government wants to provide support to the sector. But if we see that the measures formulated in the law are not enough to ensure the sector acts within the law then we will have to tighten those measures. And Why? Why? I should say that we will do it if we do not see the right feedback.”

And feedback there was in Chelyabinsk. Before the meeting Vladimir Putin made a tour of the city and noted that with all the modernization of the numerous plants in the city, little attention was being paid to the people, even the local beach lacked basic facilities. Next morning sun bathers were pleased to find changing rooms, toilets and sun loungers. It’s clear that Mr Putin expects a similarly prompt response from the steel producers.