Shannon Manders talks to Severstal CEO Alexey Mordashov about the recommendations that world business leaders, the B20, made at the G20 summit in Russia in early September to drive economic growth. Mordashov is the chairman of the B20 taskforce on trade.
GTR: What is the expected impact of each of the trade recommendations that the B20 made?
Mordashov: We expect the B20 recommendation on countering protectionism to improve global business confidence by deterring governments from introducing further protectionist policies over the moratorium period.
The recommendations on trade facilitation are mainly aimed at cutting the cross-border shipment costs related to customs red tape and procedural inefficiency, as well as making import and export processes less time-consuming. For businesses involved in complex supply chains all over the world, it will become less complicated and expensive to move goods across international borders. According to think tanks and trade analysts, the trade facilitation agreement will contribute up to an additional US$1tn to the GDP of the global economy, and will provide 20 million new jobs.
The key aim of the recommendations on preferential trade agreements was to promote the transparency of the existing and forthcoming trade agreements and thus improve business confidence. The trade agreements should be fully compliant with WTO rules and multilateral trade liberalisation goals, and should be inclusive, rather than exclusive in nature.
GTR: What are the potential pitfalls of these recommendations? What might hinder them from being realised?
Mordashov: The statements published in the G20 communiqué were all fully approved and supported by all of the governments that participated in the summit. After the G20 summit, these individual governments become responsible for ensuring that their actions adhere to the agreements they signed at the summit. Adherence to the standstill on protectionist measures is also monitored on a regular basis by the WTO, OECD and UNCTAD at the request of the G20 governments.
GTR: How will they affect your specific industry? How much of a problem is protectionism in the steel market?
Mordashov: Free trade is extremely important for the steel industry as every third tonne of all steel produced globally is traded. Russia, which is one of the lowest-cost producers in the world, currently exports about 40% of the steel it produces. Low trade barriers are essential for steel industry consumers to source the steel they need from the locations where production is most efficient.
On a global scale, reduced protectionist pressures will work to improve the investment climate and international business confidence, as well as facilitate the build-up and efficient functioning of the global value chains.
GTR: How are Severstal’s trade finance needs being met?
Mordashov: Historically, Severstal has successfully used trade finance for different purposes. These have included export credit agency (ECA) financing and pre-export finance (PXF) trade financing to supplement the company’s traditional financing sources. Today, trade financing instruments are primarily part of Severstal’s special customer service, providing funding solutions for customers and suppliers. This entails no added risks for the company, which is currently focusing on deleveraging rather than new financing.
The company looks at a broad range of options when choosing a finance facility, and these range between: letters of credits, guarantees, trade credit insurance and factoring.
Due to the company’s ongoing deleveraging, pre-export financing (PXF) is currently not an attractive option for Severstal, and some PXF terms are not as competitive as other sources of funding available to the company, particularly regarding tenor and security. Severstal’s last PXF facility was executed in 2008 and repaid in 2012.
GTR: Russian banks have been lauded for increasing their presence in syndicated deals. Is this a trend that you’re seeing?
Mordashov: We can see that the level of participation and range of funding products provided by Russian banks have risen considerably during the past three years. Severstal hasn’t concluded any syndicated deals in the last two years and, because of our deleveraging target, we currently have no plans to initiate any new deals. According to market feedback however, major Russian banks are eager and well-positioned to participate in, and lead, all kinds of syndicated deals in the Russian market. Russian banks have become much more diversified and professional in their funding, and we have committed to joining with top Russian banks to provide bilateral revolving credit facilities.
GTR: What affect does China’s recent surplus of steel have on the global steel market?
Mordashov: Overcapacity in the steel industry is a global issue that has been with us for a while. It is detrimental to the international economy as it creates no value and unused capacities overburden and distort national economies.
According to international consulting companies, for example a recent study by McKinsey, a significant percentage of the global steel overcapacity is concentrated in China, where the volume of overcapacity is comparable to the combined volume of overcapacity for the rest of the world.
The Chinese government recognises the negative impact of overcapacity on their national economy and is responding by implementing national and regional schemes to shut down its inefficient plants. Although a step in the right direction, so far these initiatives have been insufficient to stem the steady growth in steel overcapacity.
We estimate that overcapacity is likely to remain a global issue for the next few years, and will begin alleviating in 2015, as the slowdown in capacity development begins to take effect.