By John Helmer in Moscow
Mechel metal & mining group threatened by price-rigging charge.
There is an old Russian expression that the only way to run anything is “sknutom i pryanikom” — with the club or the cake.
Prime Minister Vladimir Putin was therefore doing what comes traditionally when, yesterday in a provincial river town, at a policy session on steelmaking, he berated the Mechel group (ticker MTL:US) — Russia’s fifth largest steelmaker and largest coking coal miner — and its owner, Igor Zyuzin.
Zyuzin’s steel business benefits from two vital forms of government protection — penalty duties on imports of European stainless steel, and an export tax on steel scrap; the former removes price competition from the European product entering the Russian market; the latter helps lower export demand and enables domestic mills to buy scrap for their furnaces at a lower price. Mechel’s coal reserves — on which the company’s market capitalization depends — benefited last year when the Kremlin ruled that major foreign bidders, such as ArcelorMittal, should be excluded from the state auction of Sakha region coal assets.
On Thursday morning, Mechel’s market cap was $17 billion; by evening it was $9.5 billion. This is the one of the largest one-day crashes in privately held Russian corporate value since Putin launched the state campaign against the Yukos oil company, and Mikhail Khodorkovsky, in the autumn of 2003.
The steelers and miners are holding their breath, in case this marks the start of a change in state-awarded concessions for their sector.
For the moment, Putin is fixing his attention on price inflation and supply. “I’m asking the Federal Anti-Monopoly Service [FAS] to pay special attention to the problem,” Putin said, adding a reference to possible criminal charges — ” and maybe even the Investigative Committee of the Prosecutor General’s Office.”
Bloomberg and other western news reports initially quoted Putin as saying: “Mechel was selling steel in Russia at twice the price it put on exports. And where has the margin for the state taxes gone?”
Russian media reports, and the Industry Minister, Victor Khristenko, insist Putin spoke of Mechel selling raw materials for export at twice the domestic price. He meant coking coal, not steel, Khristenko is reported as telling a Moscow newspaper after the policy session. Mineweb has verified that, in the television broadcast of Putin’s remarks, he said “raw materials”. Bloomberg has subsequently corrected its text.
Zyuzin, who bought out his partner Vladimir Iorikh two years ago, and currently holds about 70% of the US-listed company, was absent from the meeting with Putin. “The director has been invited, and he suddenly became ill,” Putin said. “Of course, illness is illness, but I think he should get well as soon as possible. Otherwise, we will have to send him a doctor and clean up all the problems.”
By the time word of Putin’s attack hit Russian television screens, the Moscow stock market had closed. The New York Stock Exchange, however, saw frenzied selling of the stock, which has risen by almost 300% over the past year, primarily on the back of rising coking coal prices and steel profits. The Mechel shares fell 38% on the day. Other Russian steelmakers — most of them listed in London — followed it down on the expectation of a significant cut in steel and mining margins.
Mineweb reported ten days ago on the charges the Mechel group is already facing before the anti-trust authority, FAS, on its coal pricing and delivery record. To rebut charges that it had cut off some mills from deliveries, Mechel issued a press release early in the week, claiming it has signed new long-term supply fixed-price agreements. Ilya Zhitomirsky, Mechel’s spokesman, was not available to answer questions about these contracts. Zhitomirsky told Mineweb on Friday morning his company is declining to make comments.
At the start of the week, Zyuzin had tried another ploy. In a regulatory notice filed with US Securities and Exchange Commission (SEC) on Monday, he announced that he wanted to increase his stake in Mechel by 3%. The filing disclosed that Zyuzin’s Cyprus-registered holding company, Calridge Ltd., had agreed with Credit Suisse Securities to buy up to 12.5 million Mechel shares. The filing also stated that Zyuzin “is not aware of material, nonpublic information concerning the Issuer or the ADRs and is entering into this Instruction in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1 or other United States federal securities laws.”
The buy-back announcement failed to attract buyers of Mechel shares, which had started falling before Putin made his move. It was down 14% over the previous week, down 21% over the past month. Michael Kavanagh, steel analyst for UralSib Bank, reported the “intention of Mechel’s core shareholder to buy 3% of Mechel shares in the market may support the share price in the mid-term and is a vote of confidence for the fundamentals of the business.”
Over the past year, Mineweb has reported on the interest in acquiring Mechel’s steel business from the state-owned steelmaker, Russpetstal (“Russian Special Steel”), a division of the Russian Technologies holding run by Sergei Chemezov. The takeover threat had been considerable at the time Yorikh decided to sell to Zyuzin. It has subsequently diminished, and Mechel’s market value multiplied. Notwithstanding, Zyuzin has recently made moves to break up his group into autonomous, independently listed shareholding units for steel, coal, ferroalloys, and transportation, with IPO’s promised for the coal and ferroalloy units; this has suggested that he was building a defensive bulwark against attack.
According to Vladimir Lisin, owner of Novolipetsk Steel — one of the steelmaking groups, which lodged complaints against Mechel at FAS — “if a company behaves properly on the market, it will be fine.” Lisin is reported as telling Interfax that Putin’s attack was focused on “a situation when someone falls out of mutually accepted norms of behaviour.”
Vladimir Zhukov, steel analyst for Lehman Brothers in Moscow, expressed the hope of the brokerages that the damage to Russian steel shares will be limited and temporary. “The government is trying to [persuade] coking coal producers to enter into long-term contracts with the largest domestic customers and impose better discipline on contract pricing.”
To control selling prices and reduce production costs, Putin said he backed “canceling import duties on steel raw materials, as well as on certain types of rolled products that we don’t manufacture in sufficient quantities.”
It is too soon to say what impact Putin’s comments will have on Zyuzin’s spinoff and IPO plans for his mining units. In 2007 Mechel mined 21 million tonnes of coal, half coking coal, half steam coal. With last year’s Kremlin assisted acquisitions in Sakha, this unit is planning to build production up to about 60 million tonnes per annum, making it one of the largest coal sources in Russia. In late 2007, market valuation of the coal mining division was estimated at between $7 billion to $9 billion.