Memo from Moscow

Steel News from Russia, Ukraine and other CIS States

Automotive recycling in Russia, December 2009

Further to recent Government rulings, Russia will soon adopt a used car recycling programme, similar to the one adopted in a number of EU countries such as Germany and UK in 2009. The recycling project - developed by the Ministry of Industry and Trade of the Russian Federation - will commence in Russia from January 1, 2010.

In accordance with the programme an owner of an old car will be given a special incentive payment for scrapping an old car when making a purchase of a new passenger vehicle. The incentive will comprise a compensation certificate for 50,000 Rubles (about $US 1650). The compensation will be allowed as a discount when buying a new vehicle from a special list of Government-approved automotive dealers. Cars accepted for the recycling programme will include domestic and imported vehicles older than 10 years with a total weight less than 3.5 tonnes and registered for the last owner for not less than for one year.

The compensation payment of 50,000 Rubles will be allowed as a discount against payments for new domestic vehicles only. Similar car scrappage schemes in Germany involved compensation of Euro 2500 per vehicle. Russian officials openly discuss key benefits of the scheme as helping to reduce number of high polluting and even unsafe vehicles on Russia's roads. The main benefit of the scheme however is expected to be a stimulus in demand for cheaper Russian cars such as the Lada produced by Russia's AvtoVAZ.

Expectations are that some 200,000 cars will be recycled as a result of this programme, which will last till the end of 2010. Finance amounting to 10 bn Rubles (about $US 340 mln) has been set aside to fund the programme.

The automobile industry is one of the bigger branches of the Russian economy, and accounts for around 30% of domestic mechanical engineering output volume. The sector consumes several million tonnes of steel each year and uses a large proportion of Russia's rubber output. The automobile industry's share of total Russian gross domestic product is about 2.5%, with a labour force of some 650,000 directly employed by the industry. Up to 5 million people are thought to work in allied industries, and further depend on Russia's automotive sector. Factoring in families as well, up to 15 million people are estimated as depending to a significant extent on the health of this industry.

Currently, the steel consumption of the Russia heavy mechanical engineering and transport industry remains low; no major growth is expected in 2010. According to the estimates of the Ministry of Economic Development, Russian manufacture of vehicles and the equipment in 2009 will be much down on 2008 levels. Manufacture of trucks will be reduced by 64%, of passenger cars by 59%, and of tractors by 25% (see table).

Because of increases in car import customs duties and greater State emphasis on domestic purchase of automobiles, the share of imported vehicles in Russia is expected to fall from ~63% in 2008 to ~47% in 2012. It is anticipated that this will support significant growth and development of Russian automotive assembly operations in the coming years. Since 2005 the Ministry of Economic Developments has signed some 26 agreements with foreign motor car manufacturers and a further 30 or so with local manufacturers of automotive components; and at present there exist about 15 industrial production lines for foreign car assembly in Russia. These assembly plants are located in the St. Petersburg, Kaliningrad, Moscow and Kaluga regions. Among them are some of the global firms such as Peugeot-Citroen, Hyundai and Mitsubishi; other leading producers such as Toyota, Ford, Volkswagen, Renault, Nissan, GM, Opel, BMW also have an increasing presence. It is expected that the new Russian car scrappage programme will benefit many of these foreign investors.

The Russian scrap processing industry suffered large losses in 2009. Scrap consumption for the first 9 months of 2009 fell by 48%; and ferrous scrap export fell by ~66% in comparison with the first 9 months of 2008. By way of example, scrap supplies to Turkey [which has been a key Russian scrap export market in recent years] fell from 1.9 to 0.36 mt over this period. Today in Russia there are only about five small capacity facilities which recycle old cars; these recycling centres generally have poor press technology and use practices that lead to high contamination of the resulting scrap. It is hoped that the new automotive recycling programme will significantly bolster the development of scrap processing capabilities in Russia.

According to Ministry of Economic Development, new vehicle recycling enterprises should have the capacity to recycle at least 40 cars per shift, and should be constructed with adequate space for storage / materials segregation / processing. At present, few if any recycling centres meet these requirements. As part of the Volzhsky Automotive Plant State Support Program, AvtoVAZ will however be actively involved in the planned automotive recycling initiative. As there are no scrap melting capacities at AvtoVAZ, old cars will be disassembled; and after pressing, steel will sold to steelmakers as scrap.

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