An Enigma Still

Imagine bowling with a curtain hanging in front of the pins. Each time you roll the ball, you hear some noise behind the curtain. But you have no idea whether you knocked down all the pins, got a split, or even on which side the remaining pins are standing.

Doing business with the new Soviet states and much of Eastern Europe is quite similar, recyclers say. Sometimes material comes out of the countries. Sometimes a bit goes in. But nobody seems to have any realistic idea of exactly what is going on behind the curtains. In many cases, that “nobody” includes the government and other organizations that are the official trading partners with the Western World.

While some of the former Russian states—the Ukraine in particular—are moving material, others are still trying to figure out what is going on.

There is much off-the-record talk of gray markets and black markets. Some Russian market veterans talk of the growing need for greasing palms to be certain material moves. “You’ve got to remember the go-fers and the go-betweens,” one said.

While not universal, this third-world style of business prevailed in the chaotic, uncertain times after the breakup and the back scratching has far from disappeared. But, as the markets become more regular and standardized, some of the call for baksheesh seems to be dwindling (see sidebar, page 64).

Although there have been difficult frames in the latest game, it hasn’t been all 7-10 splits. The freight market has fallen dramatically for all size vessels in the past six to nine months. Rates have fallen by as much as 50 percent in some markets.

Reports, such as that concerning a shipload of material being guaranteed a $9 per metric ton rate and then moving at $6.75 per metric ton from Europe to the Gulf, are not unusual. It’s difficult to find a domestic trucker to move material at that rate, let alone a shipload.

Tougher to predict is the effect the Asian financial crisis will have on markets in other sections of the world. Exports to the Far East have pretty much dried up. The one exception appears to be Taiwan. However, the Taiwanese know they are in the driver’s seat and, logically, are hammering at the prices.

Official, up-to-date information on who is buying and selling often can be found at the U.S. Department of Com-merce’s Internet site. Check out HYP-ERLINK http://www.mac.doc.gov   for starters. The BISNIS group—it stands for Business Information Services of the Newly Independent States—at Commerce also can provide information on market conditions and activities.

Just as every bowling game has its own character, all of the individual countries and each commodity area has its own nuances.

FERROUS MARKETS

Ever since the collapse of the Soviet Union, the steel market has been in the tank. Production has fallen across the board nearly every year.

Although there was a slight increase in output from the Ukraine, for example, it still represents only a fraction of what was being produced in past years.

For some time, a great deal of material was moving in smaller (2000 to 4000 ton) vessels from Ukraine to Turkey. The Turkish billet market has died recently as prices fell, and the volume has dropped.

Meanwhile, the trend in exports has been upward as the Russian Federation looks overseas for hard currency. The rise has been steady: from 485,000 tons exported to 1.3 million tons to 1.7 million tons, according to figures from the U.S. Department of Commerce. Aggregate figures from Eastern Europe also show an increase, although not as marked.  

According to the most recent figures from the United Nations Economic Commission for Europe, the aggregate amount of scrap exported from Eastern Europe was 283,000 tons for the first quarter of 1997. That figure was sharply off from the previous year’s Q1 figure of 495,000 tons. The 1995 Q1 shipments were 687,000 tons as opposed to the 495,000 tons in 1996. In addition, the 1996 annual figure for Eastern Europe (3,075,000 million tons) was off from the 1995 total of 3,229,000 tons.

However, the aggregate numbers mask some trends from specific nations. Estonia, for example, exported 68,000 tons in Q1 of 1997 as opposed to 28,000 in 1996. Indeed, Estonia’s exports increased steadily through 1996.

Although the 1996 total was still somewhat below 1995, both years were well ahead of either 1993 or 1994’s annual shipments.

On the other hand, the Czech Republic made no shipments early in 1997. In 1996 they shipped 905,000 tons. Lithuania and Poland both had shipments over 400,000 tons in 1996, yet shipped nothing early in 1997.

In the CIS, the drop-off in scrap exports was almost total. The U.N. gets data from Armenia, Azerbaijan, Belarus, Kazakstan, Kyrgyzstan, Moldova, the Russian Federation and the Ukraine. The Q1 figure for 1997 exports was just 92,000 tons from all of those nations combined. That represents less than one-seventh the reported exports of scrap in the same period of 1996. The 1996 total figure was 3,620,000 tons. Only Belarus and Kazakstan reported exports in Q1 of 1997 but, ironically, the tonnage shipped from both countries was up—in Kazakstan’s case its 42,000 tons of exports is more than triple the previous year’s figure of 13,000 tons. However, when such small figures are involved the numbers are not as spectacular or significant as they may appear at first glance.

Some observers, like Bob Blum, Lion Metals, Ft. Lee, N.J. see more material flowing from certain areas. “It all depends, of course. You’re dealing with Russia,” he says. In addition, he does business in the Ukraine and Uzbekistan.

“They still are looking for hard currency,” he continues. One help, on both sides of the market, is that markets are somewhat more organized than they have been since the breakup of Russia. Another plus is the increase in quality of the material coming out of Russia and the CIS. Several observers noted the quality of the shipments has improved over the past couple of years.

“When this started, it was helpless confusion,” Blum says. Part of that can be traced to the presence of people who had no business being in the scrap business. As things sort themselves out, more knowledgeable players appear to realize that quality, as well as tonnage, counts in this business.

The statistics on exports can be misleading. Much of the scrap produced in the CIS filters to the Ukraine where it is exported through the Black Sea. Statistically, it shows up as a Ukrainian export. A lot of the scrap produced in Russia stays at home for internal use.

Perhaps the country hurt most by the Asian crisis is Poland, which traditionally looked to the Far East for exports. That market has been very soft.

Not all markets are the same, however. Stephen Strulowitz, of Stephen Strulowitz Co., Bettendorf, Iowa, deals in nickel and stainless. He does not see a lot of material coming out of the CIS, mainly Russia, but credits it to the fact that the people there have more cash than they require.

“They sold billions in scrap metal over the past several years,” he says. “Now they don’t need to sell it.” So, just like a yard in Iowa, they are sitting on the material.

Five years ago, he says, the Russians were desperate for hard cash. Those times have changed and now the Russians are waiting for higher prices.

Before more nickel-scrap comes out of the CIS, Strulowitz says he thinks the LME (London Metals Exchange) will have to go up. “The fundamentals have to change as we approach producer cost,” he says.

“The price now is not that attractive,” he continues. While some nickel scrap will move from the CIS, he predicts the traditional sellers will continue to accumulate material, anticipating higher prices.

“It is important that Americans go to Russia to establish themselves as reliable partners who have an idea of how to do business there and know what it is going to take,” says Sue Simon in the Commerce Department’s Office of Environmental Technology.

TOPSY-TURVY PLATINUM

Another good example of the confusion in the Soviet States is the topsy-turvy platinum market. In 1997, for the first time in recent memory, spot prices substantially exceeded the futures prices. In June and July, the spot market for platinum went to $500. The reason is that Russia simply did not ship materials. In 1996, Russia supplied about 1.1 million ounces to the market. This year, shipments are closer to 500,000 ounces. There is little backup possible.

Andy Sabin, president and owner of Sabin Metal Corp., East Hampton, N.Y., returned from his 26th trip to Russia in October. “Almost nothing is flowing out of Russia,” he says. “There has been nothing coming out of Russia in over a year.” His firm is a major platinum recycler and the largest palladium firm in the U.S. In his opinion, there are no stockpiles of platinum in the ground, either. The mines are producing a lower grade of ore and the result is less product. He also says he feels their secondary market is low.

Some precious metals are flowing out of the other CIS republics. The Baltic States and the Ukraine are moving material, when they get it. However, the Baltic States are not producers of precious metals, so they are only able to ship material that they get — by whatever method – from Russia. Sabin says he believes the reason for the lack of deliveries from Russia was not due to an attempt at market manipulation, but rather bureaucratic snafus. “Treasury was fighting with Customs was fighting with Transportation,” he says. For example, Customs wants to put a tax on the refining charges. Other departments object to that. So, nothing happens.

The situation could continue for at least six months to a year, he feels. Is there hope to resolve the problem any time soon? “I don’t think so,” he says. “They are in for a tough time the next six months or more. “My basic feel is that they still haven’t solved their bureaucratic problems,” says Sabin. Proof of that can be found in the ever-rising price of palladium. The palladium market hit $232 an ounce. Yet, Russia’s bureaucracy was so uncoordinated and confused that they were unable to take advantage of the high price. As hungry as Russia is for hard cash, they were unable to capitalize on a market price that had, in effect, doubled in a year’s time.

As the first quarter of 1998 wore on, the situation showed little hope of changing. While a bit more palladium appeared to be squeezing out of Russia, it still was nothing like what the market hoped to see.

Some precious metals material is moving out of Eastern Europe, but compared to what should be coming from Russia it is just a trickle.

THE FUTURE

Not everyone sees Eastern Europe and the CIS as the land of opportunity. In fact, Mike Sheerr, vice president of Garden State Metals, Riverside, N.J. has washed his hands of doing business in the region. He had made a couple of trips to Russia, looking at establishing a market foothold.

“It’s too difficult to do business over there,” he says. “If you’re a nice guy they just ask you to leave all of your money on the table.”

While it may have looked like a good idea to expand to that market at one time, Sheerr says flatly, “I have no thoughts of going back.”

Even old market hands are proceeding cautiously and not planning too far down the road, even given some near-term optimistic signs.

Russians, especially, have a traditional disdain of the middleman. “That feeling comes out of the Soviet era,” says Simon. “It is more a problem for an American or a former Soviet who has left the area and come back.” The Russians do not take well to doing business by phone. Her advice is to establish a presence and a determined interest in doing business.

“With Russia, anything you say today will be wrong tomorrow,” says Blum. He sees the establishment of fresh market channels over the past year as a major bright spot in the market. Time will tell whether they remain “established.” However, he is optimistic that things will keep improving.

“If it takes five to ten years, then they may get it perfect,” he jokes. “But right now things are moving in the right direction.”

The author is an environmental writer and Recycling Today contributing editor based in Strongsville, Ohio.

Sidebar

Soft Money, Hard Currency

Just as polishing up a bowling lane can make the ball move a bit faster, so too polishing the right palm can make commerce move faster. In Eastern Europe and the CIS (as well as in the Middle East, Africa and other areas of the world), a few dollars — sometimes quite a few — can make the difference between a concluded deal and no deal at all.

“When in Rome, do as the Romans,” says the adage. But the 1988 Trade Act, drafted in Washington, D.C. does not acknowledge that expectations may be different in other corners of the world. Unfortunately, American businesses are caught in the middle.

All of the rules and regulations are spelled out in the Foreign Corrupt Practices Act (FCPA). In general, the Act prohibits American companies from making corrupt payments to foreign officials for the purpose of obtaining or keeping business. Enforcement falls under the Justice Department with support from the Securities and Exchange Commission (SEC) and the Department of Commerce.

The FCPA’s anti-bribery provisions cover two areas: one is a basic prohibition against direct bribes; the second covers the responsibility of a domestic concern and its officials for bribes paid to intermediaries.

While it has not been unusual for some officials to expect “grease” payments to expedite shipments through customs or even to place an international phone call, FCPA slams the door on such activities. The rules are pretty plain: It is illegal for any individual, citizen, national or resident of the U.S.—or any corporation, partnership, association, unincorporated organization, or sole proprietorship which has its principal place of business in the U.S., or which is organized under the laws of a state of the United States, or a U.S. territory, possession or commonwealth —to bribe foreign officials to obtain or keep business.

One SEC study found 400 U.S. firms willing to admit to paying in excess of $300 million in questionable or illegal payments. It is also unlawful to make a payment through an intermediary, an area that gets awfully cloudy in some cases. The law, however, makes “conscious disregard” or “willful blindness” illegal, too.

There is one small loophole. The law pertains only to payments to foreign officials, foreign political parties, or party officials. That includes government agencies and offices , but not private individuals.

Still, one runs the risk of heavy fines. A corporation could be hit with up to $2 million in penalties. A director, officer or employee of a company could be fined $100,000 and given five years in jail. There are civil penalties as well, ranging from $10,000 to the total amount of the gain as a result of the offense.

It’s little wonder, then, that newcomers stay in more familiar markets while old hands toe the letter of the law when asked for under-the-table payments.