May/June 1991
Optimism about opportunities for metal trading with the Soviet Union has given way to industry doubts. Why?
By Si Wakesberg
Si Wakesberg is a New York City-based consultant to the Institute of Scrap Recycling Industries (Washington, D.C.).
Tremendous economic upheaval, a shift to decentralization in trading, political unrest, instability of the ruble--all of these facets of the Soviet Union are contributing to a dampening of that nation’s metal trading with the United States.
While newspapers publish stories of U.S. megacompanies forming partnerships with Soviet bureaucratic firms, there are behind-the-scenes reports that small- and medium-sized metal companies have pulled out of earlier commitments. What appeared at the beginning of Soviet President Mikhail Gorbachev’s glasnost campaign as a promise and opportunity for expanded business relations has become mire in bureaucratic uncertainty, political stalemate, and economic confusion. In fact, according to U.S. metal executives who have done business with the Soviet Union in the past, current conditions are making it “almost impossible” to trade with the Russians.
“Soviet traders have always been tough negotiators who received top dollar for their goods and always paid their bills on time,” notes one U.S. merchant. “Lately, however, deliveries have been stalled, payments have been slower, and it has become harder to open letters of credit.”
Other U.S. executives echo these sentiments. “It is becoming increasingly difficult to do business with the Soviet Union,” says Noah Liff, chairman of Steiner-Liff Iron & Metal Co. (Nashville, Tenn.). Liff, who recently visited the Soviet Union to address the Supreme Soviet Committee on Economic Reform, believes the volatile economic conditions there will not be stabilized soon. In addition, he cautions, regardless of whether these conditions are brought into equilibrium, Americans who consider doing business with the Soviet Union should be aware of the wide differences in business protocol because of dissimilar economic systems.
Large Ventures Continue
Large U.S. and international metal companies seem to have a better track record in establishing trade relations with the Russians than smaller corporations. In recent months, in fact, there have been numerous reports of developing partnerships. Some examples:
Kaiser Aluminum & Chemical Corp. (Oakland, Calif.) has concluded agreements with VAMI Institute of Leningrad to raise smelting capacity at the 80,000-ton-per-year smelter at Krasnoyarsk on the Trans-Siberian Railway.
Salomon Inc. (New York City) has announced it will form a joint venture with a Soviet export company to market platinum-group metals, principally to North America.
A Swiss company, Inter-Maritime Management S.A. (Geneva), is reportedly investing in a joint venture to rebuild the Soviet shipbuilding industry.
Other large concerns based in the United States and Canada have established offices in Moscow and developed some ongoing business in metals with the Soviet Union.
Despite the positive impressions these deals may give, some analysts doubt whether any ventures with the Soviet Union will work out. Quoted in a late-1990 article in theAmerican Metal Market, John P. Hardt, associate director and senior specialist in Soviet economics at the Congressional Research Service, told members of the National Economists Club: "I wouldn't invest a penny of my own right now.”
Dealing With the Agencies
One recent Soviet change that has affected metal traders in the United States has been the switch from centralized government metal sales to a decentralized system in which various agencies in different republics have set up their own sales departments and are said to be directly negotiating with buyers of metals. One of the startling effects of the shaking off of centralized bureaucracy is the rivalry that has emerged between two existing agencies: Norilsk Nickel, which has been selling nickel to foreign buyers, and Raznoimport, a longstanding official agency that, since 1990, has to certify all nickel shipments to the United States. (Between 1983 and 1990 there was a U.S. ban on imports of Soviet nickel.)
What's been the effect of the switch? Says one U.S. merchant: “I dealt directly with one of these republics and was told, ‘You don't have to go to Moscow for anything. We'll take care of everything.' Unfortunately,” he adds with a wry smile, "it isn't that simple. You still have to get the OK from the central government before you can ship the material out of the Soviet Union.”
Other U. S. metal executives tell of similarly frustrating experiences in seeking to develop negotiations with Soviet republic sales agencies for aluminum, nickel, copper, and steel products.
"The old patterns are changing and it win take time before the economic system becomes viable," explains Joseph Filner, president of Project Development International (New York City). Filner, long regarded as an authority on nickel and stainless steel, is a veteran in U.S.-U.S.S.R. trading. In 1987, he recalls, Soviet trading enterprises established within the republics were officially given the right to export. For a while, he says, "We did a lot of business and we never had any trouble with delivery or payments. ... But now everything seems to have changed and export licenses are difficult to arrange."
Nevertheless, Amtorg Trading Corp. (New York City), the veteran trading corporation involved in Soviet-American trade, continues to operate on behalf of the centralized Soviet trading companies. According to Gennady T. Romanov, Amtorg's product manager for metals, while decentralization has created sales agencies within the republics, "U.S. buyers of metals don't have to knock themselves out looking for sellers in the Soviet Union." Shrugging off questions about direct negotiations with the republics, Romanov notes that Amtorg, which has handled U.S.-U.S.S.R. business arrangements for years, “continues to fulfill that function today through Raznoimport." Amtorg also will help U.S. traders "in the sales and promotion of Soviet goods in the U.S. market on a commission basis," he says.
Gloomy Economics?
Metal officials report the Soviet banking system is in "disarray," with rubles being sold on the black market for one-fortieth of the official price. The reason, says one trader, is simple: "There's an overabundance of rubles in the Soviet Union. Nobody you deal with wants them. They all want hard currency."
The general state of the Soviet economy seems to reflect that theory. "The changing economic situation has put business in a state of utter confusion, " says. Jerry Solomon, former chairman of Hunter Douglas Metals Inc. (Homewood, Ill.). Solomon, who has visited the Soviet Union at least three times a year over the last 20 years, notes, however, that traveling there during 1989, as compared with previous years, "was a much more pleasant experience.”
In Search of Metal Answers
Nevertheless, despite these negative indications, Solomon says, it's been reported that the Soviet Union is selling primary aluminum to Western Europe via the London Metal Exchange (LME) as well as to the Eastern Bloc. Some remelt ingot, he says, has been going to Japan and the United States. There also have been widespread reports that the Soviets have been selling aluminum through Marc Rich & Co. (Zug, Switzerland), which is said to have an active office in Moscow. Industry sources add that both prime aluminum and concentrates, as well as nickel, have been sold through the Marc Rich organization. When questioned on this subject, however, Amtorg's Romanov said he had no information about it. Nevertheless, Romanov confirms that most of the Soviets' past aluminum business had been done through Philipp Brothers (New York City), a company that is being dissolved and has reportedly sold its European aluminum business to Marc Rich.
Has any Soviet nickel already found its way into the United States? According to Romanov, it's doubtful that any sizable nickel shipments have arrived from the Soviet Union since the U. S: ban on them was removed last year, but some material may have been shipped through third-party countries. The same might be said about prime aluminum, he adds, since "the duty is high and the Soviet Union still does not have favored-nation status." If the Soviet Union were to gain such status, he says, there would probably be an increase between the two nations in trading of copper, aluminum, and nickel. In addition, he notes, there is a certain amount of "bartering" taking place in which the Soviet Union exchanges some raw materials for finished products or foodstuffs that it needs.
In November 1990, Robert J. Bothwell Jr., a vice president of Asarco Inc. (New York City), was quoted in the American Metal Market as saying that LME inventory levels of copper were being bolstered by Soviet cathodes. Speaking before the New York Society of Security Analysts, he said that about 100,000 tons of lower-grade copper cathodes made in the Soviet Union were being melted down and recast by European producers and sold throughout Europe. At the same meeting, Asarco Chairman Richard de J. Osborne said that the Soviet Union's sale of copper has been "caused by the nation's need to generate capital."
While the Soviet Union is a large and important producer of nickel, aluminum, copper, gold, platinum, and other nonferrous metals, the extent of its production levels remains virtually unknown. In a classic study, Essential Raw Materials, by Bernard Keeling of the Economist Intelligence Unit Ltd. (London), Soviet secrecy on mining and metal details is expressed as follows: "It is not certain how much of a given mineral is produced, how much is consumed, by what industries it is consumed, or what stocks are held." What is "tolerably certain,” Keeling reports, is that the Soviet Union's unusually high exports of nickel in 1986, which pushed low nickel prices even lower, on a properly costed basis must have been exported at a loss. At that time, he says, the Soviets were "pushing sales at any price in order to bring in hard currency." While it is believed the Soviet Union has been more market-oriented in recent years, industry members wonder whether that nation's current need for hard currency will push it again into selling substantial quantities of metals?
On the ferrous side, the Soviet steel industry reportedly produces in the neighborhood of 160 million tons of steel annually, but is said to have fallen behind in its technology. "There are no minimills in the Soviet Union, at least to my knowledge," according to one U.S. traveler, who notes that "everything there was built on a grand scale." As it seems to with other raw materials, the Soviet Union has an edge with ferrous materials, according to international observers. In fact, one says, "It has the best iron ore in the world." In addition, a U.S. scrap executive notes, "Russian iron ore is being turned into direct reduced iron with a price close to No. 1 steel scrap.”
Scrap Specifics
"There are millions of tons of unprocessed steel scrap lying around in the Soviet Union, which has limited facilities to process or ship the scrap," says one U.S. executive, noting that "in many cases, the scrap just stays where it's generated." Compounding this is what one observer calls the "deteriorated" transportation system, "20 years behind in road travel and 10 years behind in rail shipments." For this reason, says an industry executive, "the Soviets have set up their scrap processing centers as close as possible to their industrial and auto plants."
Nearly all Soviet-watchers have called attention to the immense number of tanks and ships that are now being made available for scrapping. One U.S. industry official estimates that "there are about 15,000 tanks, consisting of approximately 650,000 tons of metals, ready to be scrapped."
To accomplish this large-scale scrap activity, many U.S. observers believe, the Soviet Union will need the help of recycling experts. A 1990 article in Metal Bulletin Monthly corroborates that assertion. "The Soviet Ministry of Metallurgy made an unpublicized visit to Tokyo," the article reports, "seeking Japanese help in the collecting, processing, and marketing of steel scrap, mainly for the Soviet Far East." In addition, according to Amtorg's Romanov, Raznoimport plans to find foreign partners for cooperation in recovering metals from slags and tailings, with possible export of finished products.
There's enough home-grown scrap available to the Soviet metal industries, say Amtorg officials, that the. Soviet Union has not needed to buy any additional scrap abroad. On the other hand, they note, the Soviet Union has needed every ton of scrap generated in that country for domestic consumption and has been in no position to export or sell its scrap.
There are indications, however, that recycling technology aid from the United States would be welcome and could result in scrap trade between the two nations. "While the Soviet Union generally needs consumer goods," points out one observer, "it also needs effective organizers and processors with Experience and expertise." What can the Soviets offer in return? "I think if they're involved in joint ventures," he says "they may be permitted to export some scrap."
Eye on Opportunity
While the current situation in the Soviet Union presents particular problems for Americans wishing to engage m metal trading with that country, some industry executives insist that there will be "tremendous opportunities" in the future for those who manage to get in on the ground floor.
Getting in on the ground floor, however, requires overcoming not only the volatile Soviet economy, but also, according to Soviet sources, U. S. customs and duties that put obstacles in the way of U.S.-U.S.S.R. trade. Notes Yuri M. Mashkin, president of Amtorg: "Restrictions that exist in the United States in terms of different limitations on trade and commercial relations make our task of convincing the Soviet enterprises to sell their products in the U.S. market very difficult." If the United States granted the Soviet Union a most-favored-nation status, says Romanov, there would be greater opportunities to ship metals and raw materials to the United States.
Although Project Development International's Filner believes that by the end of next year there will be "less confusion" and a straightening out of some of the country's basic problems, until the political situation eases, until the economy is stabilized, until the currency question is resolved, few U.S. observers foresee any extended metal trading joint ventures with the Soviet Union.•
Optimism about opportunities for metal trading with the Soviet Union has given way to industry doubts. Why?