Evraz and OMK wagon wheels are getting more and more expensive

The Federal Antimonopoly Service (FAS) of Russia has initiated antimonopoly proceedings against Russia’s largest producers of wheels for railway cars – Vyksa Metallurgical Plant (VMZ; part of OMK) and Evraz structures Evraz NTMK and Evraz TK. The department announced this on June 8.

According to the FAS, companies, occupying a dominant position in the market, unreasonably overestimated the price of products in the third quarter of 2022. “Analysis of the economic performance of companies showed that the prices they set exceeded the amount of necessary expenses and profits for production and sale,” the agency explains. .

The service also points out that the market for solid wheels for railcars is “highly concentrated” and characterized by the presence of barriers, and access to it “requires significant time and financial costs.”

The representative of the FAS explained to Vedomosti that since the third quarter of 2022 in Russia there has been a decrease in the cost of raw materials used in the production of wheels for railway equipment, and the companies “have developed conditions for reducing prices” for their products. But there was no commensurate change in value. “The reasonableness of prices in other periods will be analyzed by the service as part of the consideration of (already filed) cases,” the source added.

Sergey Grishunin, Managing Director of the NRA Rating Service, recalls that, according to industry media, in mid-2022, a wheel set was sold at a price of up to 300,000 rubles. with VAT, and this happened against the backdrop of a decrease in prices for rolled steel. Now prices are at the level of 250,000–270,000 rubles. per wheelset, while the cost of production during this time fell by about 30%.

Railway wheels are made from a round steel billet, which is not a common market item (supplied only to wheel manufacturers). Evraz manufactures it itself, while OMK acquires it from Ural Steel (since 2022, it has been owned by the Zagorsk Pipe Plant). But the cost of other types of steel products fluctuated wildly in 2022. For example, prices for rolled steel (hot-rolled sheet) in Russia, according to the Metals & Mining Intelligence (MMI) agency, decreased by 1.5 times in the II quarter – from 88,400 rubles/ton with VAT based on CPT Moscow (“with delivery to”) in March to 57,900 rubles/t in June, in the third quarter the price stabilized at the level of 51,000-52,000 rubles/t.

If violations of antitrust laws are proven, companies face fines. Andrey Tenishev, head of the Department of Competition Law at the RANEPA (until 2021, headed the anti-cartel department of the FAS), explains that the amount of the fine can be up to 15% of the companies’ annual revenue from the sale of railway wheels for 2022. OMK and Evraz have not yet published financial results under IFRS and production indicators for 2022

In 2021, Evraz’s IFRS revenue from sales of railway products (rails and wheels) amounted to $1.08 billion (excluding assets in North America). The company sold 1.2 million tons of such products. At the same time, the company’s total revenue amounted to $14.16 billion. In the first half of 2022, the segment’s revenue increased by 52% to $734 million, while total revenue grew by 31% to $8.1 billion.

OMK last published production results for 2020. At that time, the production of railway wheels by the company amounted to 778,000 units. (-18% by 2019). The total revenue of the company in 2020 amounted to 169.7 billion rubles, the company did not provide data on the distribution of revenue by segments.

According to the SPARK-Interfax system, Evraz NTMK in 2020 (latest available data) received RAS revenue in the amount of 186.1 billion rubles. (-2%), net profit – 65.3 billion rubles. (-41%). Revenue according to RAS Evraz TK in 2022 amounted to 10.8 billion rubles. (-11% by 2021), net loss – 583.6 million rubles. against 745.3 million profit in 2021. VSW revenue in 2020 amounted to 133.2 billion rubles. (-10% compared to 2019), net profit – 8.2 billion rubles. (decrease by 3.4 times).

In addition to railway wheels, VMZ produces pipes and rolled steel. Evraz NTMK also produces rolled metal products and rails, Evraz TK sells Evraz NTMK products.

This is not the first antitrust case against steel companies in recent years. In 2017, the Federal Antimonopoly Service found Evraz guilty of inflating prices for wheels for locomotives with a diameter of 1058 mm in 2013–2015. The profitability of production then “4 times or more” exceeded the profitability established in the competitive market for the main type of product.

In July 2020, the antimonopoly service found VMZ guilty of overpricing. It was about the delivery during 2019 of solid-rolled wheels with a diameter of 957 mm. FAS came to the conclusion that as a result of VMZ’s actions, wheel prices for some consumers increased by more than 40% by June 2019 (compared to 2018).

In April 2021, the Federal Antimonopoly Service initiated proceedings against Severstal, MMK and NLMK for violating antimonopoly laws in the flat steel market, suspecting them of setting and maintaining monopoly high prices from January 2021. In February 2022, the agency found the metallurgical companies guilty. But the amount of fines for them has not yet been determined, litigation is underway (the companies are challenging the conclusions of the FAS).

Tenishev notes that the new trial is about the collective dominance of companies in the commodity market. According to him, VMZ is the market leader in the production and sale of wheels for railway cars with a share of more than 50%, Evraz takes 2nd place. Boris Krasnozhenov, Head of Securities Market Analytics at Alfa-Bank, clarifies that VSW accounts for about 55% of the Russian market, Evraz for about 30%, and the rest for imports. According to Mikhail Burmistrov, General Director of Infoline-analytics, railway wheels are imported from Kazakhstan and China.

Vedomosti sent inquiries to OMK, Evraz, the main consumers of railway wheels, and the Union of Railway Transport Operators.

Burmistrov notes that the wheel market “has a complex pricing system.” “Car builders buy products under long-term contracts, the prices for which are significantly lower than for car repair enterprises. Base price lists for smaller buyers are even higher. Moreover, they are significantly higher than the cost of supplies, since they do not take into account discounts,” he explains. The expert admits that the FAS could “not fully understand the situation.”

Grishunin adds that earlier the prices for wheelsets “were driven and kept not by wheel manufacturers, but by car repair plants that assemble a pair of axles and wheels.” In his opinion, wheel manufacturers are likely to be able to prove their innocence to the FAS.