By John Helmer in Moscow

Fitch, the international ratings agency owned by the Paris-listed Fimalac, has issued a downgrade notice for Severstal, lowering its issuer default and senior unsecured ratings from BB to BB-. The agency has also placed Severstal on a further watch for the possibility of deteriorating financial information leading to a further downgrade.

A report issued by Fitch says the action reflects the “view that Severstal’s profitability and credit metrics will deteriorate in 2009-2012 to levels that are not consistent with a ‘BB’ rating. EBITDA margin dropped to -5.7% and 7.4% in Q109 and Q408 respectively, from an average 23%-24% in 2006-2008. Fitch forecasts that EBITDA margin will remain in single digit in 2009-2010. Fitch is also concerned about uncertainty surrounding steel product volume and pricing trends over 2009-2010, especially in the automotive and construction sectors to which Severstal is most exposed. ”

Responding to Severstal’s financial report this month, disclosing that Severstal North America made a $243 million Ebitda loss in the first quarter, and to this site’s publication last week of borrowing covenants in Severstal’s 2013 and 2014 Eurobonds, Fitch has announced: “Severstal’s attempts to restructure its US assets have failed to improve the performance of its North America division, which in Q109 reported an EBITDA margin of -25%… Fitch expects Severstal’s 2009 profitability to remain under pressure and to materially weaken from 2006-2008 levels. As a result, the agency believes that Severstal could breach covenants under various facilities.”

Fitch told the market it will “assess expected developments in Severstal’s key markets and the adequacy of anti-crisis measures announced by management to reduce financial and operational risks.”
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by John Helmer - Monday, May 25th, 2009
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By John Helmer in Moscow

Russia has seized a shipment of Egyptian oranges at Novorossiysk port, after discovering Mediterranean fruit-fly infestation. The orange move has been reported in the Russian media as tit for tat for Egyptian moves to seize three shipments of Russian wheat since May 13.

Rosselkhoznadzor (RSN), the government’s food and farm product inspectorate, confirmed that the imported oranges have been impounded, but said this is not a retaliation for last week’s arrest by the Egyptian prosecutor-general of Russian wheat. Alexei Alexeyenko, the RSN spokesman, said the arriving citrus was inspected, and after the pest was found, the shipment has been quarantined and fumigated. In time, it will be allowed to be delivered to the consignees.

Alexeyenko also told Fairplay that two weeks after the Egyptians claim to have found infestation in 137,000 tonnes of arriving Russian wheat, there is still no official report from the government in Cairo of any contamination; and no official Egyptian government complaint. He said RSN has run special laboratory checks on grain from the same source as the wheat exported to Egypt, but no trace of weevil infestation has been found.

Alexeyenko said that traditionally, Egypt buys medium quality (4th and 5th class) wheat. “It always corresponds to the GOST [state inspection standard] and to the quality indicated in the [sale] agreement.” Alexeyenko reflects government thinking in Moscow that the Egyptian seizures are a ruse to cut the trading price of the Russian grain in the Egyptian market, and to favour competing exporters from other countries. The timing, he said, is related to the World Grain Summit, when world grain producers and buyers will assemble in St. Petersburg on June 6.
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by John Helmer - Friday, May 22nd, 2009
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By John Helmer in Moscow

Alexei Mordashov, controlling shareholder and chief executive of the Moscow-based Severstal group, has set a sale price on the group’s North American assets of $3.6 billion, according to a source close to the company. Lazard Freres is the investment banking firm advising Mordashov on the deal.

The disclosure comes after press leaks of talks Severstal North America (SNA) has been holding with potential buyers. These have included talks with AK Steel for the Warren, Ohio, mill; with Nucor for the SeverCorr minimill in Mississippi; and with CSN, Essar, and ArcelorMittal.

Severstal is refusing to comment on the negotiations, but bank sources have been speaking to the industry press. They are reported as telling The Deal Reporter early this month that “other than its SeverCorr mini-mill …Severstal’s North American assets are considered nothing spectacular, and the company is likely to struggle to find an entity willing to take on the entire portfolio in the current climate.”

CRU Steel News has been told that the only interest so far shown in Mordashov’s sell-off proposal has come from Nucor. The source claims that Nucor’s interest is limited to SeverCorr. But Mordashov has been told that no deal is possible now, and that the price must come down to cost. No other steelmill in the Severstal North America (SNA) portfolio has attracted buying interest to date, the source claims.

Severstal’s financial reports indicate that atotal of about $1.9 billion in debt matures this year, and must either be repaid or refinanced. In February already, the group repaid $325 million in Eurobond obligations; and must repay another $480 million by year’s end. In 2010 Severstal will have another $900 million in debt repayments. Then between 2010 and 2013, about $4 billion in debt will reportedly fall due.

Although Severstal has indicated confidence it has enough cash on hand, and current cashflow, to handle this year’s repayments, the Eurobond loan agreements which Severstal signed are putting pressure on Mordashov to remove losses from his current balance-sheet by sellingloss-making SNA mills. At the same time, the loan covenants sharply curtail the company’s refinancing and restructuring options.
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by John Helmer - Thursday, May 21st, 2009
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By John Helmer in Moscow

Russian steelmakers in Moscow have confirmed that their export surge towards China, on which the revival of Russian mill capacity is currently based, is now threatened by an anti-dumping (AD) inquiry launched by Beijing.

According to an unconfirmed report from Interfax China this week, Beijing has ordered an AD investigation against Russian flat steel imports. Three Russian exporters — Novolipetsk, Severstal, and Magnitogorsk — decline to comment on the record, but they acknowledge knowing of the Chinese government’s trade move. One mill executive said that, for the time being “we have heard about the investigation starting. We don’t know the details. We are trying to find out.”

The Chinese move strikes at one of the most sensitive growth points of Russia’s current steel position, which is boosting mill output and increasing the proportion of steel exported abroad, mostly to China. Chinese imports in the first quarter have enabled Russian mills to lift production, and take the global lead among steel exporters.

It is believed in Moscow that Beijing may be retaliating against Russian anti-dumping moves against Chinese steel imports. The most recent of these was initiated by the Russian trade ministry in late March against stainless steel products, and was lobbied by the dominant Russian stainless producer, Mechel; Mechel’s Asian export market is primarily one for coal, not steel.

A representative of the Chinese steel industry association is reported by Interfax as having mentioned the new AD investigation in an interview with local press. Industry observers now concede that a serious steel trade row between Russia and China is brewing.

Alfa Bank steel analysts Barry Ehrlich and Dennis Vodnev told clients in Wednesday’s bank report: “Our view has been that protectionist retaliation from countries losing market share to Russian imports will begin much earlier in this cycle than in the post-1998 period. Unlike in 1999, Russia is not viewed sympathetically in most foreign capitals making it easy for domestic lobbies to push through measures to defend their markets.”
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by John Helmer - Thursday, May 21st, 2009
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By John Helmer in Moscow

The president of the Russian grain exporters’ association went on the offensive against Egypt today, charging the Egyptian government has so far failed to report any findings, or lodge any claims, against Russian wheat imports. According to Egyptian media reports, 137,000 tonnes of Russian grain cargoes have been detained from three shipments since May 13. The volume represents about 4.5% of this year’s estimated deliveries from Russia to Egypt of 3 million tonnes. GASC, the Egyptian state buyer and distributor of grain, and two commercial traders, Union Trade and Horus, have been identified as the consignees, according to Russian reports.

Russia provides roughly one-quarter of Egypt’s import requirement, more than double the next largest exporter, India. The cargo arrest orders appear to have been signed by the Egyptian Public Porsecutor’s Office, alleging infringement of the sanitary norms in the cargo contracts. The halt to the trade in the world’s largest-volume importer of wheat appears to have triggered a 4% increase in wheat futures trading in the US commodity market this week.

Arkady Zlochevsky, head of the Russian Grain Union, said that certificates of quality for Russian grain exports are routinely issued by the government’s farm product inspectorate, Rosselkhoznador, while sanitary checks and warranties are issued by international surveyors. Fumigation in ship holds then follows. According to Zlochevsky, allegations of infestation in cargoes that have arrived in the past week at the Egyptian ports of Safaga and Damietta are not official, but have been leaked to the press. Novorossiysk was the port of origin, he said. Novorossiysk port is reporting that the volume of its grain shipments in the four months of the year to April 30 is 3 million tonnes, a fourfold jump over the same period of 2008.

As of one hour ago, Rosselkhoznador has received no Egyptian complaint or cargo claim, Zlochevsky added. “No matter what is written in press,” he told Fairplay, “we have not received a single officially drafted claim. ” Neither the Egyptian Embassy in Moscow, nor GASC, the state wheat buyer, is speaking to the press.
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by John Helmer - Wednesday, May 20th, 2009
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By John Helmer in Moscow

Russia has abandoned its anti-piracy policy of fire, capture, arrest, and trial. Instead, the Defence Ministry and Navy have begun issuing orders to the destroyer Admiral Panteleyev, off the Horn of Africa, to put ashore the group of pirates it took on April 28. The Navy also appears to have changed the rules of engagement to emphasize firing to deter, disperse, or kill attackers, not to secure their surrender.

The General Prosecutor, Yury Chaika, has abandoned the stance he took at a meeting on May 4 with President Dmitry Medvedev to put on trial in Russia Somali pirates charged with attacking Russian vessels. Medvedev appears also to have abandoned the position he told Chaika to implement, in favour of an “international practice”. This was reported by Russian wires as a Kremlin proposal for an international court to try pirates.

However, the Rusian officials refuse to answer questions to clarify the policy shift. Instead, Captain Igor Dygalo, the Navy spokesman, requested a fax. There was no reply, and his office claimed to have lost it. The Defence Ministry spokesman told Fairplay: “I would comment if you were a friend of mine”, then insisted on a fax. The Foreign Ministry spokesman, Andrei Nesterenko, requested a fax, but did not reply. Marina Gridnevoi, spokesman for Chaika, did the same.

The only public admission came yesterday, after Fairplay began questioning, when Colonel-General Alexander Kolkmakov, the first deputy minister of defence, announced: “according to our legislation, we will hand them over to a third party.”
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by John Helmer - Wednesday, May 20th, 2009
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By John Helmer in Moscow

Severstal, the third-ranked Russian steelmaker, continues to suffer from owner and chief executive Alexei Mordashov’s past ambitions to be the world’s largest steelmaker, with safe-haven production lines in the United States. What has already happened to other Russian oligarchs has arrived for Mordashov: caught in the ring with his bankers, the debts he ran up to buy stakes beyond the Kremlin’s reach have now now turned into liabilities giving the foreign creditors power to dictate terms. Until now, the small print in Mordashov’s loan agreements, which give the bankers this punching power, has not been disclosed.

On May 15, Severstal headquarters reported in Moscow that in the first quarter ended March 31, the company sustained a negative earnings (Ebitda) figure of $158 million, and a foreign exchange loss from ruble devaluation of $381 million. On revenues for the quarter totaling $2,796 million, Severstal reported an after-tax loss of $644 million. This was well below industry analyst estimates, prior to the disclosure. Revenue was down 30% on the fourth quarter of 2008, and down 35% on Q1 2008.
The results were, according to Troika Dialog steel analyst Sergey Donskoy, “the lowest point in the company’s history since its London IPO.”

Mordashov claimed, in a statement attached to the financial report, “we continue to act decisively to reduce fixed costs and improve working capital management, with benefits already coming through in the first quarter…. Despite current difficulties we are well-positioned to weather the challenging year ahead given our robust financial position and competitive cost structure.”

The plummeting Ebitda, according to Michael Kavanagh, steel analyst for Uralsib Bank, was “driven mainly by the weaker operating performance of Russian steel operations (EBITDA margin of just 8%)…The biggest disappointment came from the company’s Russian steel operations, as EBITDA for the segment fell by 69% QoQ to $88 mln in 1Q09, implying a weak EBITDA margin of 7.6% (down from 16.2% in 4Q08). We view the deterioration in the operating performance of Russian operation as a very negative sign, which shows the very thin margins on export sales and high costs at Severstal’s coal assets, which were essentially subsidized by the profitable Russian steel segment.”
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by John Helmer - Tuesday, May 19th, 2009
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By John Helmer in Moscow

A meeting of Alrosa management board, followed by the board of directors, last week decided to modify earlier estimates of this year’s mine production plan, but slashed this year’s target profit figure. This is the first official indication of how effective the state purchasing scheme for Alrosa diamonds is proving to be. But it also reveals the low, virtual cost price at which the state stockpile agency Gokhran is purchasing the goods.

According to a prominent international diamantaire, the outcome should mean that Alrosa will operate a much higher capacity than its international rivals, De Beers and Rio Tinto, but without a bottom-line loss.

The Executive Board met on April 13, and was followed the next day by the Supervisory Board. No decision was taken on the highly sensitive issue of whether to replace the current chief executive, Sergei Vybornov. Sources close to the company confirm that the chief executive’s position has been under review and debate for months. It is now believed that if no consensus candidate is agreed by June 20, the scheduled date of the annual general meeting of Alrosa shareholders, Vybornov will have successfully fought off his critics and rivals.

The latter continue to maintain their confidence the chief executive will be replaced. But Vybornov, who has not responded to direct questions for some time, has issued an optimistic bulletin for the company’s prospects this year. “I believe there is a very good outlook in terms of demand for Russian rough,” he said in a series of statements recently delivered to the Russian news agency, Interfax. According to Vybornov, there is global shift in demand under way, away from the US. “On the whole, demand in America may drop considerably since they all there lived on credit for a long time…As for other markets, they are already recovering. Dubai is a very good market – it is a new world-scale center of diamond jewelry trade…It is likely that the market will shift to Asia and Europe and I think it will virtually balance off the drop in U.S. demand completely.”
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by John Helmer - Tuesday, May 19th, 2009
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By John Helmer in Moscow

The Russian Grain Union has accused the Egyptian government of a legal manoeuvre with an arriving wheat shipment, in order to force a cut in Russian export prices.

Alexander Korbut, vice-president of the producers’ union, told Fairplay a 52,000-tonne shipment of medium-quality wheat has been arrested at the Red Sea port of Safaga, on the warrant of the Egyptian Prosecutor-General. A vessel arriving with a second shipment has been prevented from discharging its cargo at Safaga until samples are checked.

The Egyptian claim is that the Russian grain contains impurities and is unfit for human consumption; officials at the Egyptian Embassy in Moscow were unavailable to substantiate the details.

Korbut said there had been a similar episode in 2006. Sources differ over whether the contamination discovered then had occurred after delivery and warehousing in Egypt, or in Russia before shipment.

Russia delivers more than 3 million tonnes of grain to Egypt annually, and is the largest of Egypt’s import sources for grain. The Russians charge that an Egyptian importer sought the cargo arrest to improve its bargaining position for new contracts.

by John Helmer - Sunday, May 17th, 2009
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By John Helmer in Moscow

Russia’s second oil producer, LUKoil, has successfully moored the first of its new oil production platforms in the Russian sector of the Caspian Sea. The company issued an announcement last Friday. The ice-resistant platform is a production unit of the Yury Korchagin oilfield, which is located at sea, 180 kilometres southeast of Astrakhan, where the platform was built; and 240 kilometres northeast of Makhachkala, where the crude oil will be transshipped. Korchagin is scheduled to come onstream later this year.

Caspian Sea production now ranks as an equally high priority in LUKoil’s future oil production and export plan as the Timan Pechora wells, which feed the Barents Sea terminal at Varandey, in Russia’s far north.

The Korchagin field is expected to produce up to 47,000 barrels daily of crude oil, and 1.2 billion cublic metres of gas per year. It will be followed by the second of the Caspian offshore fields, known as Vladimir Filanovsky, with much larger production — about 181,000 bd, commencing in 2011. Other fields in the same area are also under development, and are expected to come onstream by 2015. In testing so far, Filanovsky has demonstrated an unusually high flow rate, some eighty times the average Russian well flow rate. Reserves of both oil and gas in the Russian Caspian sector are enormous. An estimated 75% of LUKoil’s Caspian reserves will be lifted as crude oil; the remainder as gas. The Russian oil output will be much larger than the Caspian fields opened by Azerbaijan – so large that they are expected to revive and transform the century-old oilfield sector of the Volga River delta.

The crude is expected to be loaded on shallow-draught Caspian tankers, and delivered to northern Iranian ports, where it will be swapped for export cargoes traded out of the Persian Gulf. The new crude will also be shuttle-tankered to Makhachkala, and then transported by Transneft pipeline across the Russian Caucasus to Novorossiysk port. From there the Russian crude will be taken by a second tanker shuttle westwards across the Black Sea to Burgas, Bulgaria, avoiding Turkey and the Bosphorus Straits. Part of the crude will be refined at LUKoil’s refinery at Burgas; most will pumped by the new pipeline to the Greek tanker terminal of Alexandropouli.

by John Helmer - Sunday, May 17th, 2009
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