Russian Council Warns of Scrap Shortage

The Coordinating Council of the Russian Scrap Processing Industry has warned that there is likely to be a shortage of scrap in the near future.

The current situation on the iron and steel scrap market and legal aspects to regulate the market were discussed at a meeting of the council this month, the council said.

According to council materials, an analysis of the dynamic of scrap collection shows that the market volume in Russia last year. Actual scrap collection - about 30 million metric tons per year, has come close to the estimate for production of scrap of between 30 million - 35 million metric tons. The further expansion of the market is being restricted by the low effectiveness of scrap collection in Russia. Without significant changes in the system for collecting scrap even an increase in the purchase price by 50 percent will only provide a slight increase in scrap collection (about 15 percent). Scrap collection this year is forecast at 29 million metric tons, which is lower than last year.

Growth in steel production in Russia as a result of the launch of new electric smelting capacity and an increase in the utilization of old capacities has led in recent years to a significant increase in demand for scrap in Russia. By the end of the year the average-monthly demand for scrap will reach almost 2 million metric tons.

To accumulate winter reserves metallurgy plants need to increase purchases. However, additional volumes can only be created by redirecting exports to the domestic market. To supply the growing demand for scrap on the domestic market the share of exports should fall to 20 percent-25 percent, while last year and the year before it amounted to 40 percent-50 percent.

To redirect scrap from the export market, metallurgy companies need to support a difference in purchase price compared with prices at ports of not less than $20-$30 per metric ton.

The planned launch of electric smelting capacity will lead to a situation where in two to three years metallurgy combines will experience an shortage in scrap supplies to the domestic market, even if exports are stopped altogether.

According to Coordinating Council President Viktor Makushin, at the moment the level of scrap collection in the country amounts to only 50 percent- 55 percent of the total scrapped metal stock, compared to about 70 percent in developed European countries. He said that without attracting investment into the scrap collection and processing system it will be impossible to increase scrap collection in Russia and to meet growing demand for scrap.

However, a key factor hindering the attraction of investment is the significant share of under-the-table cash payments for scrap. Legalization of the business is only possible if VAT is lifted from scrap operations, and the rights of taxpayers to "voluntarily" refuse VAT exemption is done away with.

Sales of non-ferrous and iron and steel scrap have not been subject to VAT since January 1, 2006. However, a number of companies involved in metal scrap supplies expressed the desire at the start of the year to refuse these breaks. Interfax