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There’s an entertaining spat going on between two of Russia’s premier resource companies: Norilsk Nickel and United Co Rusal.
Its origin seems to stem from Rusal feeling aggrieved that it has less representation on the Norilsk board than Interros, despite having the same shareholding.
One can understand that Oleg Deripaska, the oligarch behind Rusal, might be miffed to see rival Vladimir Potanin, the force behind Interros, holding what he perceives to be an unfair advantage.
It looks like an argument about corporate governance between two of Russia’s most influential industrialists.
But whether equal shareholders in Russia would expect to have equal board representation is an issue I’m not qualified to comment on, although simple fairness suggests it should be the case.
More interesting for those of us involved with non-ferrous business is the way the argument has developed, focussing attention on the two companies’ sales and marketing policies.
Various attacks have been made on the way Norilsk sells – or seems to sell – its metal.
But before looking at the arguments in detail, let’s think about Norilsk in context. I won’t say too much about copper or palladium, important as they are to a company whose major asset is one of the world’s richest polymetallic orebodies; I’ll concentrate on nickel.
The deposits – and therefore production – are in the Arctic Circle of northern Siberia. This is a tough environment and land communications are not easy. The logical route out for the product is by sea, with northwest Europe the obvious destination.
As Europe’s industry grew, a large stainless steel production was created and the regular supply of nickel from Norilsk has been a vital cog in the machine of European stainless production.
In their own breakdown of sales in 2009, Norilsk said that around 60% of nickel production went to Europe ex-Russia.
To me, that seems an eminently logical reflection of the symbiotic relationship between nickel produced in Russia’s arctic regions and the demand from European stainless mills for raw materials.
And yet, reading through one of the MB’s articles on the subject, I find the following quote:
“I know from one of my customers that Norilsk tried to sell to a number of German mills and failed completely,” a trader said. “They do some business but are more or less not represented in the German market, on contracts or spot.”
Really? Obviously I don’t have access to Norilsk’s sales book, but I do have contacts in the market and I would be utterly flabbergasted if that were true.
Does anybody seriously believe that, for example, a major German stainless mill would not buy from the obvious supplier, either on a contract or a spot basis? What else would they do? Some ferro, yes; some scrap, yes; and then?
In the same article, a market participant comments unfavourably on the fact that Norilsk sells in India through merchants, claiming this prevents them from having a full understanding of the market.
Well, that’s one side of the coin.
The other might be to say that when entering a new market with a chequered credit history, perhaps using an intermediary makes sense. That way there’s someone on the ground with local expertise making sure the bills get paid on time.
At the same time as making this criticism, perhaps the questions should also be asked whether Norilsk has had much in the way of bad debt in developing markets, or whether it has ever had to declare force majeure on a contract. The answers are respectively: probably not, and no.
And then there’s the LME warehouse issue.
The first obvious point is that without Norilsk metal, the LME contract would be a lot less secure. Secondly, it’s clear that in 2009, large tonnages of Norilsk metal appeared on the LME. What we don’t know is who put it there.
My guess would be a combination of the producer itself and some of its customers. But in the context of the first half of 2009, is that surprising? The global economic situation meant large numbers of consumers around the world were desperately trying to avoid or delay taking contracted metal.
One of the reasons for registering a brand on the LME is the extra flexibility it grants the consumer when the market is dead.
And on the question of premiums, readers of this column will know that I have argued before that in a low-premium, high-LME volatility environment, the LME can often represent the more sagacious option.
But to come back to where we started, the spat between two companies: one is cash-rich and one has a large indebtedness, and apparently sold a large tonnage to a major merchant – no comment on whether that sale achieved a healthy premium. Oh, and one wants to create a new competitor for itself in the future by locking away some of its tonnage in an ETF.
So who’s criticising whose sales policy?