Following the positive developments that occurred in Russia’s nonferrous metals industry during 1999 and 2000, negative effects started building up starting in the fourth quarter of 2000, including the worsening of the foreign market situation and price increases for electricity and railroad transportation.

These factors caused the financial standing of the sector’s enterprises to deteriorate in 2001 relative to 2000. Despite a 7 percent increase in the volume of commercial production in the first half of 2001, profits were down almost 50 percent due to a dramatic increase in production costs. In the first half of 2001, electricity rates rose 18.2 percent, gas prices increased 33.1 percent and railroad-transportation tariffs went up 11.3 percent, while prices for nonferrous metals and products fell 0.5 percent. Holding back the metal prices is the low purchasing power of domestic consumers.

To make things worse, world market prices for nonferrous metals suffered drastic downturns in 2001 compared to 2000: Aluminum fell by $96 per ton, copper by $163, nickel by nearly $1,500, zinc by $270 and tin by $555. For a number of metal articles, domestic prices even exceeded world market levels.

When assessing the short-term prospects of the domestic nonferrous metals sector, it has to be noted that, by and large, the industry is in a complicated situation due to a number of factors, including the existence of unprofitable ore deposits, deterioration of major production facilities and equipment, outdated technologies and the imbalance of capacities of related productions.

Many enterprises in the sector are more than 50 years old and need fundamental reconstruction and modernization, as their facilities are in a state of severe physical and relative technological deterioration. Due to poor funding, the rate of equipment replacement is far below the required figure. During recent years Russia’s nonferrous metals enterprises have invested only 1-2 percent of their sale proceeds into modernization and production development, while the corresponding figure in industrially developed countries is 6-11 percent.

The technologies currently in use at Russia’s leading enterprises are not inferior to those used in the West but, by and large, in terms of efficiency and equipment, Russia’s nonferrous metals industry is behind those of the leading metal-producing countries. Specifically, fuel and electricity consumption per unit of metal output is higher and labor productivity is lower. Another problem hampering modernization of the domestic nonferrous metals factories is the inability of the domestic machine-building industry to manufacture up-to-date automated equipment, while importing it is too expensive.

Other acute problems plaguing the sector include lack of access to credits and price hikes for goods and services provided by the so-called natural monopolies. This year’s expected price increases for these goods and services will put the survival of many nonferrous metals enterprises in jeopardy.

No radical improvement is expected to occur in world metals markets this year and no price increases for nonferrous metals are expected any sooner than in the second quarter.

Another negative factor is the peak of Russia’s debt-servicing and repayment expenses coming in 2003, which may have a negative impact on Russia’s economy as a whole.

Also, Russia’s hurried entry in the WTO may cause additional troubles. On the one hand, Russian membership in the WTO will make Russia’s metals industries full-fledged participants in the market, protect them from various unfair sanctions and simplify dispute-regulation procedures but, on the other hand, Russia will forfeit the right to protect domestic producers by means of quotas, licenses, import duties, etc.

When entering the WTO, Russia should negotiate for herself import-duty rates on a level that would protect certain segments of the market and stimulate development of competitive domestic enterprises, specifically those that produce articles currently imported. In addition to that, non-tariff regulatory measures and mechanisms can be brought to bear.

Finally, the implementation period should be long enough to ensure adequate protection of domestic metals producers and resolve the problems of their competitiveness (cost reduction), environmental protection and standardization.

(The author is Chief of Prognosis Laboratory for Nonferrous Metal Industry, Central Research Institute of Economic and Information for Nonferrous Metal Industry.)