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Russian scrap exports from April must be bought on exchange

London — Russian traders will only be able to export ferrous and non-ferrous scrap from next April if it has been bought through an exchange.

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Russia will not renew its ferrous scrap export quota, a spokesman for the deputy prime minister told S&P Global Platts Thursday.

The government aims to launch exchange-based ferrous scrap trade on April 1. It had wanted to see the first transactions in January but decided more time was needed for the exchange to prepare.

The hope is that the move will help tidy up the scrap market and make the collection business fully legal: At present, the origin of some scrap collected in Russia is uncertain, at best.

The country's ferrous scrap market is rather opaque with elements of transfer pricing and monopolization.

The bulk of the scrap from major sources -? railways, the defense sector, pipe companies ?- is accumulated in the same hands.

Trading via an exchange will ensure transparency and clarity on pricing, the spokesman said, adding that the Saint Petersburg International Mercantile Exchange could become that marketplace.

Transfer pricing takes place when Russian steel majors buy scrap from their own divisions at prices not matching those on the free market and even higher at times, according to a source with the knowledge of the matter.

Ferrous scrap exporters say that due to varying economic, geographical and climatic conditions in Russia, the same quality scrap may have up to a 50% different price from region to region, making a single market price indicator impossible.

A group of seven export firms operating in Russia's North-Western federal district have been pushing back against the initiative to shift scrap to an exchange, saying it was devastating for the free market.

Yet, the Federal Antimonopoly Service (FAS), which has been drafting amendments to the scrap trade policy, says exchange trading will work in scrap merchants' favor.

"It creates equal conditions for all exporters on non-discriminatory basis," an FAS representative said, adding that under the current quota system, licenses are only available to exporters active from 2016-18.

The new rules will be valid after the government enacts the relevant amendments, possibly at the beginning of next year, according to the FAS.

Shifting scrap to an exchange was also seen as a better alternative to export quotas, as the latter harbor the corruption risk of permits being distributed in favor of certain companies, according to sources.

"The exchange idea is there to benefit Russian steel companies. Trading via an exchange could increase costs by $3-$4/mt and this extra [cost] is likely to be absorbed by exporters, meaning their competitiveness will reduce...to the advantage of domestic mills," an industry analyst said.

"On the other hand, it is also meant to be a once and for all solution to wean mills off urging the government's intervention every time they find scrap prices displeasing," the analyst said.

Every now and again, steelmakers send petitions to the government requesting measures limiting exports and harnessing prices of ferrous scrap.

The result of one such complaint was last month's introduction of a 1 million mt quota for September-December's ferrous scrap export [outside the Eurasian Economic Union]. The quota can only be temporary, given Russia's membership of the WTO.

-- Ekaterina Bouckley, katya.bouckley@spglobal.com

-- Edited by Dan Lalor, daniel.lalor@spglobal.com