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ALEXEI MORDASHOV AND IGOR ZYUZIN VIOLATE THE NEW KREMLIN RULE ON NOT AIRING THEIR DIRTY LINEN IN FOREIGN AIR

dirty_linen

By John Helmer, Moscow

Two Russian steelmaking oligarchs, Alexei Mordashov (above, left) of Severstal, and Igor Zyuzin (right) of Mechel, went to court early this month over a debt of $4 million. The debt stems from a contract for delivery of Mechel-made metallurgical coke to Severstal’s steelmill in Dearborn, Michigan. The court is the US District Court for the Northern District of Illinois, Eastern Division, in Chicago. The claim was filed by Severstal’s local lawyers on May 5.

Russian reporting [1] of the case this week noted the irony in the situation that both Mordashov and Zyuzin are trying to sell the companies which are now facing each other in court as plaintiff and defendant. As yet unreported is the Kremlin directive, informally but directly from President Vladimir Putin to the control shareholders of Russia’s large metals and minerals companies, not to take their business disputes to foreign courts. The order, confirmed by insiders at a well-known metal company, has been put in the context of the threat the Russian economy is now facing from US sanctions over the conflict in Ukraine.

Metallurgical coke (metcoke) is produced in high-temperature ovens known as coke batteries. They refine a blend of coking coal into a product used in smelters for turning iron ore into iron metal, and on to crude steel.

coal

In Russia Severstal is fully self-sufficient in making its own coke from its own coal. According to Severstal’s annual report [2] for 2013, the cost of the coke for the Russian division’s steel production was $43 million, or about 0.7% of the Russian cost of sales. In 2012 Severstal’s coke cost $96 million, 1.4% of the total cost figure. Comparable cost data for the coke used in Severstal’s American steel production have not been released.

At Severstal’s Dearborn steelmill, according to the 2013 annual report, about 60% of the coke requirement comes from a joint-venture coke battery which Severstal runs with the Renco Group, called Mountain State Carbon LLC. Mountain State turns out about 1 million tonnes of coke yearly. Of the remainder required by the Dearborn mill, Severstal said in its 2012 annual report [3] that it had “signed a 15-year contract with Sun Coke Company for annual deliveries [to Dearborn] of 270,000 metric tonnes of coal from Ohio-based Haverhill Coke Plant.”

SunCoke [4] says it produces coke at three subsidiaries – Jewell in Virginia, Indiana Harbor in Illinois, and Haverhill in Ohio.

In a September 2008 presentation [5] of its North American strategy, Severtstal outlined its aim to become more self-sufficient in its coke requirements. By 2012, Severstal said, its “estimated run-rate 2012 coke requirements [would be] 3.35m tonnes per annum.” In 2007, the company noted, it was just 32% self-sufficient. In 2009 it aimed to be 64% self-sufficient, counting “established strategic alliances with SUN.” Eventually, Severstal said it “targeted 99% self-sufficiency in coke in the run-rate period.” These targets have been overtaken [6] by Mordashov’s disposal of most of his US steelmills.

In the normal course of the coke, coal and steel business, when the price of coking coal falls — which it has been doing for more than two years now — the price of coke supplied to the steelmaker ought to fall too. The price of coke is generally fixed [7] at between 1.5 and 2 times the price of coking coal. The pricing for coke deliveries is usually fixed in contracts between coke battery and steelmill with a formula for correction in line with a benchmark. The contracts also commit to a regular volume of supply.

The terms of these commercial relationships are complicated and contentious enough to produce disagreements. Severstal North America has a record for litigating to enforce terms it cannot secure by negotiation [8]. The latest case involves the smallest sum of money Mordashov’s lawyers have been sent into court to collect.

According to the claim in the court file, “the Defendants [Mechel] have breached the Settlement Agreement by failing to make the second settlement payment installment of $4 million, which was due in November of 2013. Severstal brings this action to recover the monies owed and the damages incurred as a result of the Defendants’ breach of the Settlement Agreement. In the alternative, Plaintiff asserts a claim for Unjust Enrichment based on the Defendants’ inducement of Plaintiff to forestall asserting timely claims for breach of certain coal supply agreements.”

The court papers reveal an earlier out-of-court, still confidential settlement in Delaware state. This resulted after Severstal had sued Mechel in a court in Newcastle, Delaware, the state where Mechel’s Bluestone coalmine subsidiary is legally registered. This earlier deal, dated January 2013, provided that Mechel “agreed to pay Severstal and another group of companies (referred to herein collectively as the “SunCoke Parties”) a total of $15 million for settlement of the claims asserted in the Newcastle Lawsuit. The $15 million settlement amount was to be paid in accordance with a schedule of three payments to be made over a three-year period. The initial payment of $6 million was made by the Defendants on or about December 31, 2012. Severstal received $4.8 million of that payment, in accordance with the Settlement Agreement. The second installment of $5 million, of which Severstal was to receive $4 million, was required to be made on or before November 30, 2013.”

The court papers do not reveal whether the money was compensation for a shortfall in coke deliveries or to correct a price defect.

Severstal now claims that Mechel tried to chisel or weasel out of the final instalment payment. While negotiations were going on during 2013, Severstal claims it agreed not to go back into the Delaware court. As a result, “Severstal has consequently been prejudiced in its right to assert its claims against the Defendants in a timely manner while said defendants have received a benefit in not having to defend said claims or perform their duties pursuant to said coal supply contracts. The benefit received by the Defendants as a result of their actions far exceeds the monies paid to Plaintiff pursuant to the Settlement Agreement described herein, and thus, the Defendants have been unjustly enriched by an amount in excess of four million ($4,000,000.00) dollars.”

Severstal is heavily indebted. Total liabilities reported as of March 30 this year come to $6.8 billion, of which $2.7 billion is owed by Severstal International. This month’s disclosure of the selloff of the Dearborn and other US assets is part of Mordashov’s plan to reduce his obligations, and improve his income, as reported [6] last week.

Mechel is much worse off. Its current debts are between $9 billion and $10 billion, and the company is being kept from default and bankruptcy by the Russian state banks. Zyuzin has also been trying to sell off his Bluestone coalmines in the US, and a minority stake in his Russian coalmines. The Russian government has been reluctant to let the coalmines in Kemerovo and Sakha fall under control of South Korean, Japanese or Chinese steelmills or traders.

There have been no takers for Bluestone, whose cost of production allows no profit [9] at the current price of coking coal. The Bluestone acquisition at a cost to Zyuzin of almost $800 million in 2009 has been problematic from the start [10]. On April 29, Mechel announced it has now stopped mining because prices for coking coal are now “at their minimum since 2007, which makes coal production at Mechel Bluestone unprofitable. We will make the decision to re-launch depending on the market situation.”

At their Moscow headquarters spokesmen for Mechel and Severstal are refusing to comment on the Chicago court claim. They are also reluctant to provide a copy of the court papers. Here [11] they are.