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By John Helmer in Moscow

If this wasn’t Russia, the amount of negative scrutiny the Evraz steel group, owned by Roman Abramovich and Alexander Abramov, is getting lately from the federal government would signal that the owners are in trouble with the rulers.

Also, if this wasn’t Russia, assurances from stock brokerages calling on investors to bid up and buy Evraz shares would sound so counter-intuitive and self-serving as not to be worth the credibility risk of publishing. But this is Russia: if Prime Minister Vladimir Putin and his deputy, Igor Sechin, are beginning a shakeup of oligarch concessions in the mining and metals industries, there isn’t a steel analyst or an investment banker in Moscow who believes they are serious. More shakedown than shakeup is how the brokers and bankers think of it.

Still, it was unexpected when on Thursday, Russia’s Federal Antimonopoly Service (FAS) issued an announcement that it has opened an investigation into the pricing of coking coal on the domestic market. The coking coal grades identified by the FAS are Zh and G in the Russian classification system; the comparable international classifications are Fa and Gas, referring to high volatility bituminous coals; in the industry lingo, fat coals, which burn fast and furiously, with greatest cost efficiency for steelmaking.

The FAS announcement also reveals that an earlier investigation of Evraz’s steel pricing, which began in May after Prime Minister Vladimir Putin publicly ordered it, had been extended up the steel production chain. According to the FAS, it has already picked up evidence of discrimination by the coalminers in favour of the higher profitability export market, and against domestic buyers. The FAS says it suspects the coal companies of setting different contract prices to favour export clients “by economic, technological or other means, without justification.”

The investigation of rolled steel prices is still ongoing, the FAS said; in addition to Evraz, that inquiry covers Magnitogorsk, Severstal, Mechel, and Novolipetsk.

Evraz has posted a website announcement that it plans to cooperate in the new investigation, but “has not been provided with any details of the investigation at the current time.” The script hasn’t changed, with the steel company, Russia’s largest, implying that its management is suffering from a hearing impediment. On May 24, when the first investigation was announced by the anti-monopoly agency, the company said: “Evraz has not been provided with any details of the investigation as of the current time. Evraz will cooperate fully with the investigation, and will make a further announcement once official communications from FAS are delivered.”

Evraz dominates coking-coal supplies in Russia through Raspadskaya, in which has a 50% equity stake, and Yuzhkuzbassugol, which it owns outright. Of the 31 million tonnes of the fat coal grades (Zh,GZh, and GZhO) produced in Russia in 2009, Raspadskaya mined 10.2 million tonnes and Yuzhkuzbassugol, 6.2 million tonnes, comprising 53% of the market. Since May 8, when the Raspadskaya mine blew up, most of this supply has halted. Imports of coking coal of the fat grades have begun to compensate for the shortfall.

In 2009, other local suppliers of coking coal were Severstal’s Vorkutaugol division, which produced 5.8 mt (19%); Belon, wholly owned by Magnitogorsk, 3.5 mt (11%); and Sibuglemet, a mine company independent of the steelmaking groups, 4.9 mt (16%).

The Moscow stock market was slow to react to the FAS news, and the listed share prices of those targeted for investigation were unaffected in the first day of trading. The brokers have taken the view that although FAS takes its running orders from Putin, the FAS is toothless – and Putin is making a circus out of the appearance of cracking his whip.

Alfa Bank steel analyst Barry Ehrlich reported to clients this morning that “investors should take into consideration that the typical penalty for such a violation is a token fine”. Uralsib Bank reported that “in the worst case scenario, the FAS may fine the companies 1% to 15% of revenues from fat coking coal sales for the period, which is the equivalent of $8–$120 mln in total for the three companies. While the initial reaction to the news in the names may be negative, we believe any potential fines from the investigation will be insignificant and should not have any material impact on the companies’ financials.”

The analysts believe that the profit margin for domestic sales of coking coal is very close to the export margin, and so they say they anticipate no discrimination effect will be found. Evraz has announced that since it doesn’t export its coking coals (through Yuzhkuzbassugol), it can’t be found guilty of price discrimination. “Evraz uses these types of coals mostly for consumption in its own coke batteries in Russia,” claims the company statement of July 8. This begs the question Putin apparently told the FAS to investigate – are the oligarch-owned steelmaking groups transferring an increase in their coal pricing to the profit line of their domestic steel sales, and helping themselves to more of this profit offshore, where the taxation rates for export revenues are lower than in Russia? Because Putin has never before attacked transfer pricing as practiced by the oligarchs, the threat that the FAS may use the current investigative opportunities to do so simply isn’t taken seriously.

According to a report favouring the coal-miners, Renaissance Capital steel analyst Boris Krasnojenov said: “we do not believe this investigation is an attack on domestic coal producers…The anti-monopoly watchdog is trying to help the government to monitor and manage the current situation in the metals and mining sector, in our opinion. We do not think Mechel will be on the list of FAS targets, as the FAS is investigating only fat coal grades (Zh/GZh, according to the local classification), while Mechel primarily produces lean coal grades (K-KO-KS).”

“In our view,” Uralsib steel analyst Dmitry Smolin chimes in, “the current FAS probe is simply following government instructions… and should not have any negative long-term impact on the industry.” Smolin is also keen on the bucketsfull. He is urging investors to buy Evraz shares with a target price of $41, up 75% on the current price; and Raspadskaya shares with a target price of $6.87, also up by 75%.

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