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By John Helmer in Moscow

The dispute that has haunted Evraz’s operation of the Czech steelmill at Vitkovice since 2005 when the Russian group won a disputed privatization tender for the plant, has escalated this week into a threat of closure. It is the second time the Evraz management in Moscow has issued a closure warning in disputes this year outside Russia. The first was in the Ukraine over rivalry for railroad access between Evraz’s Sukha Balka iron-ore mine and Igor Kolomoisky’s Krivoi Rog Iron-Ore Combine (KZhRK) (see http://johnhelmer.net/?p=2680).

Bought for 7.05 billion Czech crowns ($285 million) in November 2005, Evraz’s Vitkovice mill has the capacity to produce 965,000 tonnes of crude steel per annum; its thick-plate mill can turn out up to 755,000 tonnes per annum. It also produces heavy steel sections and piles used in construction. Current production at Vitkovice is not disclosed in Evraz’s quarterly operating reports, but the company website claims that in 2007, a good year, the plant’s crude steel output was 890,000 tonnes, 8% below capacity. Output fell substantially in 2009 when Evraz disclosed that Vitkovice was operating at 40% of capacity – at that rate, the Czech plant was at the lowest operating level of any mill in the Evraz international group.

Evraz’s annual financial and annual reports reveal little about the operations at Vitkovice, except that the group has loaned the Czech subsidiary $49 million, and recovered repayment last year; collected a dividend from Vitkovice from its 2008 operations; and is currently guaranteeing the Czech subsidiary for an €82 million loan, due for repayment in 2012. Evraz acknowledges that the mill was loss-making last year and in the first quarter of this year.

The Czech media reported last week that Evraz is considering a shutdown if the price of iron materials supplied to the mill by ArcelorMittal’s Ostrava combine, Vysoke Pece Ostrava (VPO), is not lowered. Pavel Tatyanin, the head of Evraz’s international operations, confirmed the threat yesterday, adding: “Evraz is hopeful it can resolve the pricing dispute over raw materials with ArcelorMittal that has led it to consider halting some operations in the Czech Republic”. Earlier, he had been reported by Reuters as warning of “a temporary or permanent shutdown of the steel-shop at Vitkovice.” Tatyanin also said the blame for Vitkovice’s losses was “due to the high cost of hot iron that we buy from Mittal.”

The dispute over pricing of iron supplies (Evraz says this is in the form of liquid pig iron) precedes Evraz’s takeover of the mill. In part, it reflects the hostility generated in early 2005 when Lakshmi Mittal (see image in the pig house) was excluded from bidding for the privatization award, which Evraz went on to win. That outcome, and the winning price, were also challenged in court at the time by other Czech bidders (see CRU Steel News, May 8, 2009).

The current pricing agreement between Vitkovice and VPO was signed a year ago for five years; it provides for liquid pig-iron supplies re-priced annually. Evraz claims that last month VPO raised its price to a level at which the mill cannot break even on the steel produced. According to a report this week on the dispute by Moscow investment bank Renaissance Capital, “we believe that this is a typical commercial dispute. The current steel prices on many markets, including the EU, have already touched the cost curve. We don’t exclude temporary idling of production at Evraz’s Vitkovice site during the ongoing buyers’ strike to avoid oversupply. However, we should note that EU plate prices remain broadly steady at $770-780/tonne EXW.”

Although the two sides have failed to agree on terms for the new supply contract, VPO has not implemented its counter-threat to cut supplies of iron to Vitkovice. Instead, it has offered a period for negotiation. “VPO wants to give Vitkovice enough time to properly examine the new offer and make a decision,” according to a statement released to the Czech media by Andrej Hampl, a press representative for the Czech Mittal Steel company.

In 2006 and 2007, following the Evraz takeover, the dispute continued between Vitkovice and VPO, as ArcelorMittal continued to press the Czech government to reconsider the privatization award, offering a premium of 29% or 9 billion Czech crowns ($321 million) to beat the Evraz takeover price. When that failed, Evraz said it was committed to supplying the mill with VPO iron, rather than importing slab for re-rolling from Evraz’s Russian mills. “Evraz strongly believes that pig iron supplies from VPO would be the most beneficial for Vítkovice in terms of logistics, technology and economics,” said Irina Osadchaya for Evraz at the time.

The fight between Mittal and the Czechs continued until May of 2009, when ArcelorMittal announced that it had agreed to pay the Czech government $339 million in instalments over several years. This covered the government’s remaining 11% stake in VPO – ArcelorMittal had taken 72% in a privatization of what was then called Nova Hut in 2003 – and other conflicts, including litigation claims by ArcelorMittal for $1.74 billion over the disputed Vitkovice sell-off. According to Sudhir Maheshwari, a member of the group management board at ArcelorMittal: “We are very pleased to have reached this agreement with the Czech government. It highlights the good relations between us and puts all past disputes behind us.” That deal, in May 2009, also included a long-term undertaking for VPO to supply pig iron to Vitkovice.

Tatyanin of Evraz has now revived the slab import option, saying that Vitkovice will continue to operate using imported slab, if ArcelorMittal will not agree to lower its price for iron.

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