(This version of the February 15 story corrects pipe diameters to 53 centimeters, not 5.3 meters, in paragraph 7)
By Vladimir Soldatkin and Polina Ivanova
MOSCOW (Reuters) - Gas giant Gazprom is demanding big discounts from Russian pipeline suppliers for its major projects, industry sources told Reuters, following the emergence of a producer charging significantly lower prices.
In a move likely to shake up the pipe and metals sectors, the Kremlin-controlled Gazprom is seeking the discounts - put by the sources at 20 percent - as it tries to limit investment spending that is due to peak in the next two years.
Gazprom is involved in three international gas pipeline projects. It is already building TurkStream to Turkey and Power of Siberia to supply China, and is preparing for the Nord Stream 2 link to Europe. Its average annual investments to 2035 are planned at 1 trillion rubles ($17.3 billion), reaching their highest point between 2018 and 2020.
Trying to stand up to Gazprom, a major client which has a de facto monopoly on Russian gas exports by pipeline, appears hopeless, sources at the producers said. “You can’t say no to Gazprom,” one told Reuters.
Gazprom’s demands for discounts concern large diameter pipes (LDP), a market which is currently oversupplied, one source at a pipe producer and a Gazprom source said.
“We looked at the market and decided that we were paying above the market price. We wanted to discuss this with the pipemakers,” the Gazprom source said.
LDP pipes - those with a diameter of 53 centimeters or more - constitute over 90 percent of Gazprom’s pipe purchases. According to Gazprom’s report for the first half of 2017, it bought them almost entirely from four Russian firms - steelmakers OMK and Severstal, plus specialist pipemakers ChelPipe and TMK which buy in steel.
Talks are still underway between Gazprom and the LDP producers, another source at a pipe maker and the Gazprom source said, on condition of anonymity as they were not allowed to talk to the press.
The press departments of TMK, OMK and ChelPipe declined requests for comment. Gazprom did not respond.
Severstal, which supplied a quarter of Gazprom’s LDP needs in the first half of last year, said it was continuing to make and deliver pipes from its factory in St Petersburg following negotiations with Gazprom.
“We held talks and agreed the main parameters of our cooperation. We have contractual obligations, which meant production at our Izhora plant did not stop,” a company spokeswoman said.
Gazprom’s hand appears to have been further strengthened by the fact that it has already bought many of the pipes needed for Power of Siberia and TurkStream, with the bulk of investment spending channeled into other project costs.
Its insistence on a different deal for the pipes it still requires for the Russian domestic link to Nord Stream 2, follows the arrival on the scene of a newcomer, ZTZ, industry sources said.
ZTZ, which produced its first pipe only two years ago, says it has offered prices between 13 percent and 30 percent lower than its competitors. “Our colleagues need to justify their artificially high prices to their client,” a company spokesman said, adding that it was buying steel “at a more optimal price”.
ZTZ is ramping up production at its plant near Moscow just as domestic demand for LDP is falling. Last year it dropped 19 percent to 1.7 million tonnes, according to the Foundation for Development of the Tube Industry, a lobby group.
In 2017 ZTZ injected 146,000 tonnes of LDP into the market, while the quartet of established producers had to run their factories at less than half capacity.
Demand is expected to fall a further 2 percent this year, the lobby group said, as a number of major projects such as the Southern Corridor - a 2,500 km (1,500 mile) domestic link to TurkStream - were wrapped up in 2017.
Meanwhile, ZTZ said it expects to raise production to 550,000 tonnes this year. ZTZ is a private company whose shareholders are not disclosed. It is headed by Denis Safin, 37.
“This is a buyers’ market. If the buyer can push down prices by 20 percent... companies will have to survive with a very low level of profitability,” Boris Krasnojenov, head of metals and mining research at Alfa Bank, said.
Apart from the large investment program, Gazprom’s costs could be further under pressure from external factors, particularly with the Nord Stream 2 which is due to run under the Baltic to Germany.
Denmark has passed a law that could allow it to ban the pipeline from its waters and a new U.S. law imposing more sanctions on Russia could also complicate the $11 billion project.
Russian steelmakers ramped up production in 2017, making the most of rising prices and demand after a two-year downturn, expecting a further increase in the domestic consumption this year helped by an economic recovery.
If the discounts with Gazprom are finalised, the pipe producers will try to reduce costs to protect their margins, analysts say, with the specialists likely to seek discounts in turn from their steel suppliers.
For TMK, for example, Russia business makes up around 15 to 20 percent of its core earnings (EBITDA), Nikolay Sosnovskiy, director of metals and mining at Prosperity Capital, said. TMK also has operations in the United States, Europe and Middle East.
“Obviously such sharp fluctuations in the price are a big deal, especially if the company doesn’t change its cost structure. They’re unlikely to just accept the discount as it is,” Sosnovskiy said.
One of the sources at a pipe company said that his firm had already started negotiations with its steel suppliers over a discount, following Gazprom’s demands. Another source confirmed that pipe producers have turned to their steel suppliers to find a way to pass the discount down the supply chain.
“Pipemakers are profitable, so this is not a tragedy for them,” a leading figure in the pipe industry said. “But when you are squeezed, hard... everything will come down to individuals’ talent for business. Overall, it will have a positive effect on the industry. It’s a signal - time to start sweating. The fun is over.”
Reporting by Polina Ivanova, Vladimir Soldatkin, Diana Asonova, Oksana Kobzeva, Olesya Astakhova, Ekaterina Garshenina, Veronika Savchenko and Anastasia Lyrchikova; Writing by Polina Ivanova; Editing by Katya Golubkova and David Stamp