Steady growth in steel output should sustain in parallel steady growth in steel

Tag : channel steels
On Friday, the Russian index fell 5.6% on the day, but somesteelmakers dropped further. According to the London Stock Exchangetrading data, Novolipetsk fell 7.2%; Severstal, 6.7%; Evraz, 5.5%;and Magnitogorsk Metallurgical Combine, 4.4%.
As Moscow trading ended on Friday, and US trading opened, Mechel issued its first official statement; this followed a day of nocomment from spokesman, Ilya Zhitomirsky. The statement said:"Mechel shares the concerns of the Government of the RussianFederation, steel plants and metallurgical industry in regard tothe growth in prices for steel products and raw materials in therecent time. As was previously announced, Mechel has started theprocess of forming long-term commercial relationships with keypartners and has signed a number of agreements for delivery of itsproducts to the end of this year. Mechel is ready for cooperationwith federal authorities of the Russian Federation and, ifrequired, will provide complete information on any arising issues."
There was a brief intra-day revival on the New York Stock Exchange,where Mechel is listed, but the stock price fell back to close at$26.20; that was 8% above the crash-point for the day. At the newlevel, Mechel's share is 46% down on the month.
Industry and Trade Minister Victor Khristenko, who accompanied theprime minister to the meeting with steelmakers, told a localtelevision channel that Putin's charges are not political, and arelimited to the pricing problem for coking coal and steel. "In myopinion, the situation will be settled when all members of thischain, suppliers and purchasers, build normal relationships basedon long-term contracts."
The emphasis on normality was a gloss on Putin's remarks the latterevidently did not intend.
In Putin's attack on Zyuzin, he had threatened criminalinvestigation. Referring to Zyuzin's illness and the company'sproblems, Putin had said: "I ask also the Federal AntimonopolyService [FAS] to pay special attention to this. Perhaps, even theInvestigatory Committee of the Office of the Public Prosecutor. Itis necessary to understand what is happening."
The Russian market understood this as a threat of concession orownership change. For one thing, the FAS investigation intoprice-rigging in the coking coal market had already been publiclyannounced, well before Putin's initiative. For another, Putin'sreference to price increases and the spread between between exportand domestic coking coal ignored the fact that the baseline for hiscomparison had been set more than a year ago, before Mechelacquired one of its coking coal suppliers.
The third spook factor was Putin's hint of criminal proceedings.Targeted at individual executives like Zyuzin, and often initiatedbefore civil proceedings have run their course, this is standardoperating procedure for senior government officials, when a changeof proprietorship is being engineered.
In the case of the Yukos oil company, the principal shareholders,Mikhail Khodorkovsky and Platon Lebedev, were arrested andimprisoned before they had time to flee the country. In thealuminium industry, criminal proceedings at the regional level wereused in the takeover of the Novokuznetsk smelter, while thetargeted shareholders were driven to asylum in France. Criminalproceedings were also used against the controlling shareholder ofthe Krasnoyarsk smelter, triggering his flight. Last year, as theRussneft oil company was targeted for tax violations, its ownerMikhail Gutseriyev was forced to flee to London. In several recenttakeovers of shipping companies, the threat of criminal proceedingshas been used to drive senior executives to asylum, also in London.
A source, who knows both Zyuzin and his former co-partner inMechel, Vladimir Iorikh, told Mineweb that Zyuzin has alienated many in the Russian steel community withhis over-confidence. Iorikh, the source said, preferred to move tothe safety of Switzerland with $1.5 billion in cash -- a fractionof what his stake has grown to over the past year in Zyuzin'shands. Until now, that is.
Zyuzin was reported in the Russian media to have been admitted to acardiology clinic the day before Putin's public rebuke.Hospitalization was a standard haven in the Soviet period forofficials expecting, but unwilling to face, public censure. WhetherZyuzin knew what was going to happen and had sought haven, orwhether he was suffering genuine symptoms, is unknown.
Putin's spokesman, Dmitry Peskov, was reported as saying on Sundaythat the attack was limited to Mechel's anti-monopolyviolations."No Yukos parallels are relevant with Mechel," Peskovsaid. "Yukos was charged with lots of criminal cases. ... [The]measures against Mechel are taken not because it is Mechel as aconcrete company, but just because the company committedviolations. We are satisfied with Mechel's intentions to cooperatewith the state. But everything will depend on how this cooperationwill develop in practice now."
A source inside Mechel told Mineweb that Mechel has now signed long-term fixed-price coking coalcontracts with Novolipetsk, Evraz and Magnitogorsk MetallurgicalCombine, but not as yet with Severstal. The company had alreadydone so before Thursday's crisis.
Mechel says it does not know whether Novolipetsk will withdraw itscomplaint to the FAS, and Novolipetsk is not saying. But if Mechelis telling the truth, and Novolipetsk had signed for its cokingcoal before Putin's attack on Thursday, why did Novolipetsk owner,Vladimir Lisin, go public with an endorsement of the apparentcharges against Zyuzin?
According to Interfax, Lisin claimed: "if a company behavesproperly on the market, it will be fine." Lisin was reported astelling the news agency that Putin's attack was focused on "asituation when someone falls out of mutually accepted norms ofbehaviour." Was that wishful thinking, regarding his ownconcession? Or was Lisin trying to reassure the share market thatNovolipetsk's share price (NLMK:LI) should be spared?
In Monday trading, the London-listed share of Novolipetsk continuedto move down in price, though it recovered in Moscow. Between thetwo markets, it is obvious that investment analysts do not agree onwhat is happening. If Zyuzin is in Lisin's sights, then that isbecause of Lisin's zero position in coking coal. For the moment,the Novolipetsk group has the lowest level of coking coal undervertically integrated management among all the major Russian steelgroups -- 0%.
In May, Novolipetsk announced it had drafted an agreement withEuropean partner Duferco to improve on the shortfall of coalsupplies under its control. An earlier attempt by Lisin's group todraw its coal requirement from Prokopievskugol, in central Siberia,was a catastrophic failure. A spate of fatal accidents betweenAugust 2006 and March 2007 killed 34 miners.
Lisin then decided to abandon the asset, rather than invest inregulation-compliant safety measures. The mine company was turnedover to the municipal authority of Prokopievsk, in the Kemeorovoregion, for a nominal rouble. The terms were negotiated, but notfully disclosed, by Lisin, who worked them out with the Kemorovogovernor, Aman Tuleyev.
Lisin's latest plan calls for Steel Invest & Finance (SIF) tosupply coal to Novolipetsk; SIF is the joint venture entity createdon a 50/50 basis by Novolipetsk and Duferco, which already ownssteel making and rolling facilities in the US and Europe. Theproposed contract is estimated to be worth about $175 million, andwould run through the end of 2008. A Moscow analyst reported thiscontract was "good news...the contract with Duferco should serve toprovide the company with a reliable coal supply in a high demandmarket."
In the longer term, Novolipetsk is holding a mine development licence for the Zhernovskoe-1 coal deposit in the Kemerovo region.First production and delivery from this mine is hoped for nextyear.
If a takeover of Mechel's coal-mining assets might be on Lisin'swish-list, Mineweb has also reported interest on the part of thestate-owned specialty steelmaker, Russpetstal, in the stainlesssteel operations that were the original core of Mechel, beforeZyuzin and Iorikh bought out the controlling shareholder at thetime, Glencore.
If all Putin was doing was to add teeth to government jawboningagainst domestic price inflation, it remains to be seen what theprice effects will be. As the steelmakers and their suppliers feelthe pressure from the government to commit to long-term, six-monthor year-long fixed pricing, Inprom CEO Igor Konovalov told Minewebhe believes there will be a downward correction in steel prices bythe 4th quarter. Inprom is one of Russia's leading steel servicecentre operators and domestic steel suppliers.
Russian producers, said Konovalov, "have been claiming they willboost their prices in August again, and they promise to hold themstable until the end of the year. We doubt this is realistic. Weare expecting a 5% to 10% decline of prices in the market."
A week ago, Lehman Brothers' Moscow steel analyst, Vladimir Zhukov,reported an upgrade in his price forecasts for the Russian market.According to Zhukov's analysis -- which was completed beforePutin's intervention in the steel market last Thursday -- the majordomestic mills have been "looking for another 10-15% q-o-q priceincrease in 3Q 2008, while we expect a seasonal slowdown ofconstruction activity from September onwards to take steel pricesdown 8-10% q-o-q in 4Q08. Therefore, on an annualised basis, weexpect steel prices in Russia to be up 45-50% y-o-y in 2008E,except for semi-finished and certain construction products that areexpected to be up 60-70% y-o-y."
Zhukov and other analysts believe that the 10% premium, which hasrecently prevailed for domestic steel prices over export prices,will shrink to zero by the year's end, as the rate of growth indomestic demand for steel slows down. But a slowdown in domesticconsumption of steel is not what Putin has in mind.
In his speech to the steelmakers, Putin said that steady growth insteel output should sustain in parallel steady growth in steelconsumption, and the growth of the allied industries -- housingconstruction, ship building, mechanical engineering, and the like.If today's Russian output of 72 million tonnes of steel is to meetprojected domestic requirements for 70 million tonnes in 2015,Putin said, then current export volume of 28 million tonnes willeither shrink, or be met by newly added steelmaking capacity.
This was growth talk. But Putin failed to do what his Ministry ofIndustry and Trade officials had expected. He did not say what thegovernment has decided to do about redirecting steel scrap exportsto domestic mills, applying a penalty export tax, and perhaps aquota on export volumes. He failed to say whether he has acceptedor rejected other ministry proposals for export duties on sometypes of steel products.
Instead, he referred to "the establishment of zero import customsduties on metallurgical raw materials, and also on some kinds ofsteel which we produce in insufficient quantity." The first part ofPutin's proposal appears to refer, according to industry andcustoms sources, to steel alloy materials, such as chrome,manganese, silicon, titanium, molybdenum, and others. Eliminatingduties on these would benefit most of the Russian steelmakers,especially Mechel.
Putin implied that he is also in favour of dropping import dutiescurrently imposed on a variety of specialty alloyed steels. Thattoo would boost Mechel's position as the premier Russian specialtysteelmaker.
Unless Putin is thinking of something else. "All of us still lackspecial steels and alloys," he wound up his speech. "Theorganisation of such manufactures can be carried out, includingwith the application of the principles of private-statepartnership." If that last phrase is the cue for Russpetstal toreopen its bid for Mechel's specialty steels, in a falling pricemarket, it is little wonder that Zyuzin's heart has skipped a beat.