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Russia adopting steel excise duty based on prices, exchange rate

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Russia adopting steel excise duty based on prices, exchange rate

Highlights

Tax based on slab, billet export prices

Excise to sensitive to exchange rate: BF-based companies

The Russian legislative assembly has enacted changes to the country's tax code that introduce an excise tax on liquid steel expected in force from Jan. 1, 2022, to replace the current 15% export duty on steel.

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The new tax is based on Russia's slab and billet export prices, as well as domestic prices of steel scrap; its link to the foreign currency is seen as a risk.

The tax changes passed three readings in Russia's legislative assembly Nov. 18 and are on the way to be approved by the Federation Council (the upper house of the parliament) before being signed by the president will introduce from 2022 an excise tax on liquid steel, according to the information on the website of federal Duma, the assembly.

The excise – as an additional revenue to the state budget – will replace Russia's 15% tax on ferrous (and base) metals exports (in place since August) that will expire in the end of December.

For blast furnace-based producers, the excise will be calculated as an average dollar denominated monthly export price of slab – on an FOB basis – in Russia's Southern federal district ports, multiplied by a royalty interest coefficient of 0.027 and the monthly average dollar-ruble exchange rate. The excise will drop to zero in the event of slab price sinking below $300/mt FOB.

With Rb71.36/1$ October's average exchange rate and October CIS slab price – as assessed by Platts – of $687/mt FOB Black Sea (equates to Rb49,028/mt), should the excise be applied in November, it would have come to Rb1,320/mt, Platts estimates.

The excise for electric arc furnace-made steel – to be payable by both standalone EAF producers and major steel companies owning EAF mills – will be based not on slab, but on the price of steel scrap, billet and ferroalloys and hence looks more complex.

The excise for EAF-made steel will be calculated as an average dollar denominated monthly export price of billet – on FOB basis – in Russia's Southern federal district ports, multiplied by the monthly average dollar-ruble exchange rate, cleared of the monthly average CPT price for heavy melting steel scrap (Russian grade A3) in Russia's Ural Federal District, cleared of Rb12,500 historic billet-scrap spread and of 50% of the EAF mills' average monthly expenses on ferroalloys and alloying additives. The final then is multiplied by a royalty interest coefficient of 0.3.

For example, with October average CIS billet price – as assessed by Platts – of $637/mt FOB Black Sea (equates to Rb45,460 at October exchange rate), Rb25,550-26,000/mt CPT Urals October scrap price (according to ratings agency Rusmet), Rb12,500/mt spread and 50% of the $35-$50 (Rb2,500-3,570)/mt ferroalloy expenses per ton of steel, November's excise for EAF-made steel could have come to Rb1,630-1,760/mt.

Levied on steel produced, not sold

The good news, though, is that the maximal excise level for the EAF-made steel is limited to Rb1,000/mt, which more or less protects EAF operators from currency fluctuations; for BF-made steel there is no cap though and the BF-based mills will be much more exposed to any slip in Ruble value.

"With dollar currently worth Rb72, theoretically, our excise would have been Rb1,050-1,100/mt, a source at an EAF-based mill said. "Should the exchange rate shift to Rb75/1$, the excise would move up to Rb1,250/mt, but luckily we will never be paying more than Rb1,000/mt on any formula outcome above Rb1,000/mt."

For BF-based companies, the excise is made too sensitive to the exchange rate, meaning any ruble depreciation will automatically lift the tax and later will be applied to the whole output, while only a part of mills' revenues comes in dollars and foreign currencies.

The other causes of discontent is that the excise – unlike the current export tariff – will be levied on steel produced, rather than sold, meaning even unsold and unrolled volumes are going to be taxed.

"Sold or not, rolled or not – all made steel will be taxed," an industry source told Platts.

That said, the steel excise is seen as the lesser evil compared with the 15% export duty.

"The full year of the excise will withdraw less money [from the industry] than the 15% export duty did in the five months [August-December]," said another industry source.

The 15% export duty of the Nov. 19 Black Sea slab price of $707.5/mt FOB totals $106/mt, or Rb7,780/mt.