The government is preparing a global revision of the fiscal policy in relation to the metallurgical industry. Yesterday, Prime Minister Mikhail Mishustin instructed to promptly prepare documents on the introduction of a temporary export customs duty on metallurgical products. It was the initiative of the head of the Ministry of Economic Development Maxim Reshetnikov. First Deputy Prime Minister Andrei Belousov supported her, specifying that the increase in the duty is an exclusively temporary phenomenon, the purpose of which is to compensate for the rise in the cost of projects in the field of state defense orders, housing construction, roads, etc., associated with the rise in metal prices. In total, additional budget revenues from the duty will amount to more than 160 billion rubles, Belousov specified.
Later, the measure was approved by the subcommittee on customs tariff and non-tariff regulation. Its final parameters are as follows. The duty will be applied to a wide range of products: rolled products, rebar, billets, wire, ingots, as well as copper, nickel and low grade aluminum. At the same time, a combined duty is provided, which will consist of a base rate (15%) and a specific one, which will be calculated in dollars per ton.
But the changes in the tax regulation of the metallurgical industry do not end there: two more options for raising taxes are being discussed. One of them is the introduction of mechanisms similar to the tax maneuver in the field of oil production, said a source close to the government and confirmed by two federal officials. In particular, an increase in the mineral extraction tax (MET) with the parallel introduction of a system of incentive deductions “like a reverse excise” is being discussed. Earlier, Belousov in an interview with TIme said that the best way to withdraw excess profits from metallurgists is to increase the MET.
Another interlocutor close to the government assures that an increase in MET is unlikely. According to him, mechanisms of regulation are being discussed, first of all, through profit tax – stimulating its direction in investments in fixed assets. According to Vedomosti’s interlocutors, the new tax rates have not yet been finally determined.
The Ministry of Finance, the Ministry of Economic Development, and the government’s press service did not respond to Vedomosti’s request to confirm options for a subsequent increase in taxes for metallurgists. MMK, Mechel, Evraz and Russian Steel declined to comment. OMK, Metalloinvest, Norilsk Nickel, UC Rusal, UMMC and Russian Copper Company did not respond to Vedomosti’s request at the time of signing the issue.
According to the Federal Tax Service, the tax burden on the metallurgical industry is one of the lowest at 5.4% versus 48% for the oil and gas industry and 12.6% for other extractive industries. The share of gross taxes (MET and customs duties) in the revenues of mining companies is one of the lowest in the industry and does not exceed 8%, while for oil and gas companies this figure varies from 40 to 60%, according to calculations by Vygon Consulting. The leveling off of the situation gradually began.
Last year, the severance tax in the extraction of raw materials for ferrous and non-ferrous metals due to the “rental coefficient” increased by 3.5 times. This will increase budget revenues by more than 100 billion rubles. in 2021–2023
The decision to introduce a 15% export duty affects the entire range of metal products, including those types that are not supplied to the Russian market in principle, such as semi-finished steel and cast iron, NLMK told Vedomosti. The introduction of a duty on such products will neither increase the volume of supplies to the Russian market, nor reduce prices for Russian end consumers. Therefore, it can be stated that the duty is exclusively fiscal in nature and is aimed at direct withdrawal of funds from the industry. Severstal is sympathetic to the government’s concerns about the rise in prices for ferrous metallurgy products, said Alexei Mordashov, chairman of the board of directors of Severstal, which was disseminated by the company’s press service. “We hope that the draft resolution, which was discussed at the government meeting, will contain balanced measures that will allow the ferrous metallurgy to get out of the crisis and continue development,” he said.
The Chairman of the Board of Directors of the Aluminum Association Alexander Zazhigalkin noted that the production capacity for aluminum in Russia is at least 3 times higher than the current consumption, while the volume of imported raw materials is about 65%. Therefore, it is far from a fact that prices on the domestic market will go down after the introduction of the duty, he added. At the current export prices, the profitability of metal products according to EBITDA exceeds 40-50%, said Yuri Sahakyan, Director General of the Institute of Natural Monopolies Problems. In his opinion, the emerging trend towards stabilization and a possible further decline in prices on world markets will affect the domestic pricing policy much more strongly.
How steel rose in price
A sharp rise in prices for metals and metal products all over the world began in the 4th quarter of 2020. Steel rebar, iron ore and ferrous scrap have risen in price at the moment by more than 1.5 times, coil steel – more than 2 times, etc. There is no average indicator of Russian prices for metals and metal products as such, but since the fall of 2020, Rosstat has been reporting monthly on their growth in relative terms. In November, prices for various types of metal products increased by 5.2–38.8%, in December – by 8.7–11.9%, in January – by 10.1–36.5%, in February – by 13– 30%, in March – by 11.6-26.2%, in April – by 11.4-43.8%. In May, the growth in prices in manufacturing industries amounted to 19–32.7%, and for ores and concentrates of other non-ferrous metals not included in other groups – 2.4 times.
The rise in metal prices affected many industries. “There are a number of traditionally metal-intensive industries,” noted Boris Krasnozhenov, head of analytical research at Alfa-Bank. “The rise in metal prices is putting pressure on production costs in these industries.” These are housing construction, automobile construction, production of freight rolling stock, etc. In May, inflation reached 6.02% year-on-year, and the Bank of Russia raised its key rate by 0.5 pp to 5.5%. “It is difficult to assess the exact contribution of metallurgists to inflation,” notes Ekaterina Kosareva, managing partner of the analytical agency WMT Consult. – But the fact remains: in 2021, the rise in metal prices caused a shock rate of inflation. Much has risen in price in Russia ”.
It is hard to deny that during a period of favorable export conditions – rising prices on world markets, weakening of the national currency – the state often wants – and has the right – to defend its interests, including through adjusting fiscal policy, President of the Russian Union of Industrialists and Entrepreneurs Alexander told Vedomosti Shokhin. But, firstly, this raises the question of the possibility of providing state support to entrepreneurs during a period of low prices. Secondly, business needs predictability – it needs clear mechanisms with which it would be possible to calculate how the situation will develop in the event of certain scenarios. “If, in this particular case, the purpose of the duty is to compensate the industries that have suffered from the rise in prices for their losses, then the problem could be resolved through the conclusion of long-term contracts for the supply of metals,” Shokhin suggested.
This option – compensation through long-term contracts with discounts – was discussed at a meeting of the Ministry of Industry and Trade of the Russian Federation and the heads of Russian metallurgical companies, after Belousov, in an interview with TIme, accused the industry of “squeezing” the state by 100 billion rubles. The introduction of the duty does not cancel the agreements on discounts on supplies under long-term government contracts, a source familiar with the discussion of the “metallurgical problem” in the government said to Vedomosti.
The introduction of export duties is a justified and somewhat long-awaited measure, believes Vladimir Salnikov, head of the real sector of the Center for Macroeconomic Analysis and Short-Term Forecasting. In his opinion, an understandable and transparent way of regulating the gap between world and domestic prices was necessary, and the introduction of a fixed rate is definitely a temporary measure, he is sure. Despite assurances that the duties will be temporary, their effect may be extended if prices in export markets are consistently high, Ilya Makarov, director of the corporate ratings group at ACRA, suggested.
The duty will become a kind of subsidy to the state if it helps to compensate for the rise in the cost of public procurement, added Oleg Buklemishev, associate professor of the Department of Macroeconomic Policy and Strategic Management at Moscow State University. But the question of how acute this problem is and how the introduction of the duty relates to the market economy remains open, the expert noted. However, at the moment there are no alternative solutions to reduce metal prices, Buklemishev clarified: the State Duma of the seventh convocation went on vacation, and in the fall the chamber will be re-elected. Amendments to the Tax Code, unlike changes in customs duties, cannot be approved without the State Duma.
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