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By John Helmer, Moscow

If you are a steelmill owner working at safe distance when the bombs, rockets and body-packs explode in your market, the more destruction the better for demand, sales, and profit margins, especially at this point in the current cycle of the steel trade. Magnitogorsk Metallurgical Combine (MMK), the Russian steelmaker owned by Victor Rashnikov (right), has a near front-seat on the battlefield now extending from Iraq to Iran and Syria, because it is the sole owner of MMK-Metalurji (aka Atakas), a 2.3-million tonne capacity steel complex, in Turkey. In addition to losing revenues from direct sales to Iran because of US and European sanctions, MMK has been losing money hand over fist at Metalurji. In response, MMK’s management has been issuing contradictory signals of what it aims to do next.

This week MMK suspended crude steel production at MMK-Metalurji, leaving the rolling lines to continue working with stockpiled semi-finished steel. But the company doesn’t want to admit it. There has been no public announcement on the MMK website. Polina Rudyaeva, a spokesman for MMK headquarters in Moscow, said the company isn’t commenting on the issue for the time being.

Alfa Bank steel analyst Barry Ehrlich reported to clients this morning the financial impact on MMK of closing part of Metalurji will be negligible “since finished products continue to be produced and presumably sold from working capital release. On the one hand, the additional news that 500 workers have been sent on unpaid leave until November 30 may suggest that the production suspension is short-term, on the other hand the information that the plant started selling out scrap inventories used for crude production suggests the opposite.”

In its 3rd quarter operating report, released a month ago, MMK said it has slashed crude steel output in Turkey to 170,000 tonnes, down 40% from the 2nd quarter. Cold-rolled steel was reduced to 49,000 tonnes, a cut of 61%. Production of hot-rolled steel there is “not economically sustainable in current market conditions”, the company reported. In earlier financial reports MMK-Metalurji recorded negative earnings (Ebitda) of $18 million in the first quarter, and $8 million in the second.

Other Russian steelmakers have taken similar measures at their non-Russian units. Evraz said earlier this month it has halted crude steelmaking at its Czech subsidiary, Evraz Vitkovice Steel. Mechel is trying to sell its idled mills in Romania; Novolipetsk Metallurgical Combine put its Danish plate mill, Dan Steel, in partial closure and may impose more drastic measures at the La Louviere plant in Belgium. Since July Severstal has stopped work at five of its mines at PBS Coals in West Virginia. According to statements from MMK, it would like to sell all or part of MMK-Metalurji. The shutdown suggests there is no real buying interest at present.

Nonetheless, on November 7, during a visit to the mill at Iskendrun MMK’s chief executive Boris Dubrovsky announced he wants to spend $100 million on keeping Metalurji. “We are constantly looking for new ways to substantially increase our current technological and production capacities in Turkey. Currently we are working on several projects in our investment portfolio that may see investments of upwards of USD 100 million. Further development of MMK-Metalurji is a priority for MMK.” A website posting by the company claimed the projects being considered for Metalurji include construction of an OxiCup shaft furnace and briquetting plant, “to reduce dependency on the correlation between scrap and coil prices, make efficient use of production waste and replace bought-in cast iron with MMK’s own; and modernization of the plant’s hot-rolling mill along with introduction of additional stand, to expand the product range and increase the share of high-margin products.”

Vitaly Galkin, who heads MMK-Metalurji, said during the chief executive’s Turkish visit that war pressures in Iran, Iraq and Syria are having an impact on the steelmill. “We think Iran and Iraq are very promising markets. In the near term, Syria too, God willing, if there are political changes, because it is a very promising market both in terms of scrap, which has already been processed in large quantity, and from a sales standpoint. On Iran we expect increasing sales. I think that the political situation will still allow us to enter these markets,” he said, adding that MMK Metalurji has already supplied small volumes to Iran.

There the hyper-inflation of the riyal, and the disruption of regular trade financing channels by US and European Union sanctions, have halted lucrative, large-volume cross-Caspian steel shipments across the Caspian Sea for the time being. The volatility of the currency and the reluctance of Russian steel traders to accept the riyal or the rouble for the dollar-denominated trade have been bigger obstacles than western sanctions on direct trade.

THE IRANIAN RIYAL TO US DOLLAR EXCHANGE RATE, YEAR TO DATE:

So long as the Israelis have been threatening to bomb Iran, Russian steel exported to the country has commanded premiums of 10% to 15% over the prevailing spot-market price, though not now.

MMK isn’t in a waiting mood. Galkin also acknowledged in Iskenderun last week that MMK is trying to get rid of the plant. “Currently, we are holding talks with large market players from Latin America to the Middle East.”

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