By John Helmer in Moscow

Russian steel proprietors are showing their anger at negative market reports, and share price cuts, following recent disclosure of their heavy investment spending on North American assets. But there has never been a time when the future growth and profitability of Russian steelmaking has depended less on the United States — or more on decisions being taken in China. How long it will take the Kremlin to deal with this contradiction between the national interest and the self-interest of the steel oligarchs is anyone’s guess.

The outcome of the Chinese government’s new stimulus programme, and of contract negotiations between Australian, Brazilian, and South African coal and iron-ore suppliers, are being closely watched in Moscow. That’s because the Russian steelmakers believe their future depends on Chinese demand for low-priced Russian steel. If Chinese buyers do no better than a 20% to 30% cut in spot and contract prices for these raw materials, Russian steel will still be better priced for Chinese importers.

Novolipetsk Steel (NLMK), Russia’s third largest steelmaker and slab specialist, says that a recent surge of sales of its steel slabs to China may enable the company to increase mill capacity and steel output next month. But the steelmaker also warns that this increase in steel production may not prove to be sustainable, because Chinese buying depends on the relative low price of Russian steel in the current international market. This price advantage for Russian exports in the Asian market could be lost, Novolipetsk believes, if competing steel producers benefit from significantly lower iron-ore and coking coal supplies from Australia, Brazil, and elsewhere.

A report of the Novolipetsk assessment has been issued by Uralsib Bank in Moscow. “Currently”, the bank says, “the Russian steel industry and NLMK in particular have a cost advantage over those steelmakers around the world who use expensive Brazilian and Australian iron ore and Australian coking coal. This has enabled Russian steel producers (who produce more than domestic consumption) to find an attractive export market for their semi-finished and low value-added finished steel products, particularly in Asia.”
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by John Helmer - Thursday, March 5th, 2009
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By John Helmer in Moscow

More than one worker in ten in the Russian mining and metals sector is currently out of work, or facing company-ordered reductions of work time or pay, or both.

The statistics are being gathered by the Russian Mining and Metallurgical Trade Union, which has been monitoring job and pay conditions at 240 enterprises in the sector since last October. At that time, a total of 752,409 workers were on the employment rolls. A union source said their data have been compiled up to the end of February. At this point, the union says that 14,039 have been dismissed; 66,747 have had their working hours reduced, but retain their jobs; 1,384 are on enforced furlough without pay; and 1,247 are on furlough with partial pay. In total, 83,417 production and support workers at Russia’s mines, mills and metal works have now been hit by the economic crisis; about 11%.

The union also charges that many of the layoffs and pay cuts have been made illegally. An estimated 5,430 of those on the dismissal list, 42%, purportedly agreed to severance, but there is ample anecdotal evidence that they were forced by company managers into signing resignation papers. The union also charges that 35 companies in the sector are paying wages to 11,598 employees at a two-thirds reduced level that is not allowed under Russian labour regulations.

Layoffs of between 2,000 and 4,000 workers on the payrolls of Evraz (EVR:RU) steelmills and mines in Russia are a violation of the agreement Evraz signed with worker and regional representatives in November, a union leader told Minesite.

Lyudmila Zavzyalova, secretary of the Nizhny Tagil municipal authority, in Sverdlovsk region, told Minesite that 1,400 workers from Evraz’s lead Russian mill at Nizhny Tagil were recently listed for dismissal, and 582 workers from the nearby Vysokogorsky iron ore mine.
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by John Helmer - Wednesday, March 4th, 2009
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By John Helmer in Moscow

Sergei Vybornov, the chief executive officer of Alrosa for the past two years, is mobilizing federal government and industry support in Moscow to oppose a bid by Sakha President, Vyacheslav Shtirov, to replace him, and take over the top post at Alrosa.

Shtirov made his bid at a meeting with Prime Minister Vladimir Putin on February 25. A spokesman for Putin told PolishedPrices that Shtirov was alone with Putin at the meeting. The spokesman declined to say what the two men had discussed on the subject of the diamond industry and the future of Alrosa.

The official text from the prime ministry is in the form of a partial transcript, in which Shtirov refers to the problems of his region, but mentions Alrosa only once, diamonds once. The transcript of Shtirov’s remarks refers in some detail to the region’s oil, coal, and gold-mining developments. All Putin is recorded as saying is that while the market prices of oil, coal, metals, and diamonds are declining, the price of gold is rising. He is reported to have repeated himself on this point, while Shtirov is reported as pointing out that gold production from the region, while a healthy 18 tonnes (579,000 ounces) last year, cannot be expected to increase without fresh and costly capital investment, which the Russian banks are reluctant to finance. According to the transcript, Putin said: “We’ll solve the problem with gold mining.” Shtirov then says that he expects a solution for state guaraneteed advance funding of goldminers will be devised soon. The published transcript ends with Putin saying: “Good.”

Since sources familiar with what was discussed claim that Shtirov’s bid to leave the presidency of Sakha and retake Alrosa was the piority of discussion with the Prime Minister, they interpret Putin’s reported remark about goldmining as taken too crudely out of context to make sense; and also to be irrelevant to the decision Shtirov was asking for.
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by John Helmer - Tuesday, March 3rd, 2009
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By John Helmer in Moscow

Layoffs of between 2,000 and 4,000 workers on the payrolls of Evraz steelmills and mines in Russia are a violation of the agreement Evraz signed with worker and regional representatives in November, a union leader told CRU Steel News today.

Lyudmila Zavzyalova, secretary of the Nizhny Tagil municipal authority, in Sverdlovsk region, told CRU Steel News that 1,400 workers from Evraz’s lead Russian mill at Nizhny Tagil were recently listed for dismissal, and 582 workers from the nearby Vysokogorsky ore-processing combine.

Alexander Mironov, a spokesman for the Kemerovo region branch of the Russian Mining and Metallurgical Trade Union told CRU Steel News the numbers to be laid off at Evraz’s plants and mines in his region were revealed in a company document, dated December 30. According to Mironov, the shutdown of two blast furnaces and two coke batteries at the West Siberian Metallurgical Combine (Zapsib) and Novokuznetsk Iron & Steel Works, both in Novokuznetsk city, will cost 700 and 150 jobs, respectively. Another 900 workers were targeted, according to the union official, at mines of the Evrazruda (“Evraz ore”) subsidiary.

Combining worker layoffs in the two regions makes a total of 3,732. The official payroll of the Evraz group, which is controlled by Roman Abramovich and Alexander Abramov, is not cited in the last company annual report, nor in any of the company’s references to its operations on the official website;. except for a note that 90% of the Evraz group workforce is employed in Russia; 10% in the rest of the world. According to the company’s 2007 Annual Report, labour accounts for 10% of the costs of the Russian steel division.
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by John Helmer - Monday, March 2nd, 2009
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By John Helmer in Moscow

Moscow has been having much the same week for the past four months – everyone down at the pier tossing streamers, and waving goodbye, as the flagship investment funds toot their horns and pull away, to sail swiftly over the horizon.

It’s cold comfort to the flag-wavers of the Moscow mining and metals sector that the flow of funds into and out of comparable emerging markets – China, India, Brazil, Africa, other Latin America — has now begun to sail in the same direction as the Russian trend. Back in October, the weekly fund flow charts showed the withdrawal of capital from Russian energy and hard-rock resource companies was less dramatic than the flow of funds out of other emerging markets. But then from mid-December to mid-February, China, India and Brazil became a positive destination for investment again. With the exception of just a couple of weeks in February, when a pickup in the Russian RTS stock market attracted a modest inflow of cash, the Russian trend has been continuing loss of capital – and a concomitant drop in the RTS aggregate index of almost 20% over the past three months.

In percentage terms, the Russian equity market has said goodbye to more money than the markets of China, India or Brazil. The $330 million of accumulated net outflow from Russian funds since the first week of November compares with $210 million from Indian funds. Brazil has accumulated a net inflow over the period of $306 million; China has received a net inflow of $30 million.

The course of the bigger Russian golds looks like an exception. Polymetal (PMTL:LI, PMTL:RU), the St.Petersburg-based silver specialist that is no longer owned by frontman Suleiman Kerimov, is up 168% in the three-month period. Polyus Gold (PLZL:RU), still being carved up in the fight between shareholders Vladimir Potanin and Mikhail Prokhorov, is up 118%. Internationally listed juniors, with producing Russian gold assets, have turned on a mixed show. Peter Hambro Mining (POG:LN) is up 150%; Highland Gold (HGM:LN) is down 14%; Zoloto Resources (ZR:CN), down 25%; High River Gold (HRG:CN), almost flat. Virtually all the explorers who lack production, like Silver Bear Resources (SBR:CN), are down, or at best flat. The gold internationals with Russian mine production or capital exposure have also been mixed. Kinross (KGC:US), with a significant share of its global growth supplied from the Kupol mine in Chukotka, is gaining equity value. Barrick’s (ABX:US) minority stake in Highland Gold is too small to make a market difference.
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by John Helmer - Friday, February 27th, 2009
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By John Helmer in Moscow

Mechel (MTL:US), owned by Igor Zyuzin, fell sharply in Moscow stock market trading Wednesday on news the company is to acquire unlisted, West Virginia-based Bluestone Coal.

Without an official company statement so far, Mechel has revealed to brokers and Moscow industry sources that it has agreed to a valuation of Bluestone, owned by James Justice, of about $870 million, and will acquire 100% of Bluestone’s shares for $425 million in cash, and an issue of 80 million Mechel preference shares, currently worth about $310 million. The cash was paid at the end of last year, it has now been revealed, and the share issue will amount to a 19% dilution for current shareholders. Mechel’s acquisition will also mean taking on $135 million in Bluestone debt.

Mechel spokesman Ilya Zhitomirsky told Minesite the company is making no comment at this stage. He did not deny the Bluestone takeover. But he said he could not explain why there has been no reference to the purchase in Mechel’s filing to the US Securities and Exchange Commission (SEC) on January 22, when operational results for the past year were reported, despite the fact, now known, that the takeover had already been signed with Bluestone, and the down payment made.

Mechel is listed on the New York Stock Exchange, but owns no steelmaking assets in the US, and can claim no coal supply synergies in that country. Last year, Mechel produced 26 million tonnes of coal, 15 million of coking coal, and 11 million tonnes of steam coal; along with smaller volumes of iron-ore, nickel, ferroalloys, and steel. Until now, its only operations outside Russia have been steelmaking in Romania, Bulgaria, and Lithuania; and chromium mining in Kazakhstan.

The larger Russian steelmaker Severstal (CHMF:RU) owns considerable steelmaking capacity in the US, and has bought US coalmines to supply it through its wholly owned mining division, Severstal Resources, which is currently expanding into iron-ore in west Africa and gold in Russia.
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by John Helmer - Thursday, February 26th, 2009
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By John Helmer in Moscow

And the winner of the Slumdog Millionaire award goes to….Oleg Deripaska, Moscow oligarch, London mansion owner, and controlling shareholder of United Company Rusal, for announcing in Moscow over the weekend that he does not need any financial support from the state. Rusal, in which Deripaska holds a control stake of 56.8%, and which he currently runs as chief executive, is Russia’s monopoly producer of primary aluminium, bauxite, and alumina; in the global market for primary aluminium production, Rusal comes second after Rio Tinto.

The collapse of the aluminium price – the current London Metals Exchange cash price of $1,264 was last seen in 2002 – the full payout of Rusal’s cash dividends, and the liquidation of $200 million in cash, reported by the company in mid-2007, leaves Rusal in dire financial condition. As an unlisted private company, it issues no financial reports, and its spokesman Vera Kurochkina has repeatedly refused to answer questions.

Total debt requiring repayment was recently estimated by Victor Vekselberg, an 18.9% shareholder in Rusal, at $16.3 billion, of which $7 billion is reportedly owed to foreign banks, and $6.5 billion to Russian banks.

On the list of more than 70 foreign banks currently owed money by Rusal, the two largest are reported to be ABN Amro with exposure of $2.3 billion; and Natixis, owed $2.2 billion. ABN Amro’s obligations are now closely supervised by the UK and Netherlands governments; Natixis is indirectly controlled by the French government through its stakes in Natixis’s principal shareholders, Caisse d’Epargne and Banque Populaire.

While it is speculated – without independent corroboration or comment from the banks – that Rusal has been in technical default of loan agreements and loan covenants, the political and commercial implications of a formal default are international in scope. They are particularly problematic for Deripaska, who owns residences in England and France, but who is reportedly lacking the visas to enter these countries to negotiate on Rusal’s behalf.
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by John Helmer - Monday, February 23rd, 2009
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By John Helmer in Moscow

Among the hard-pressed global diamond miners, only one, Russia’s Alrosa, has the capacity to sustain last year’s mining volumes without adding to the inventory overhang, or flooding the market, both of which will crush the price. This is because the Russian state stockpile agency Gokhran is ready to spend state funds in order to buy, and to hold the stones off the commercial market until demand begins to recover, and diamond prices revive.

De Beers acknowledged last week, according to remarks by spokesman Stephen Lussier, that it is “going to significantly reduce production levels to align them with levels of demand. There’s no point in digging a diamond out of the ground when you don’t have a client ready to buy it.” The company, which has been producing roughly 51 million carats annually, about 30% of the world’s rough diamond supply, is not estimating the size of its mining cutback beyond the statement from London spokesman Lynette Gould that “the reduction in production will be significant”.

BHP-Billiton (BHPB), which claims it produces about 3% of global diamond supply from the Ekati mine in Canada, has said its mine plan is unaffected, and there are no shutdowns. However, in its report of February 9 on production in the six months to December 31, 2008, BHPB disclosed that it had mined just 1.4 million carats; that was drop of 27% on the same period of 2007. This is not a market cutback by another name. BHPB spokesman Iltud Harri told Minesite: “BHP Billiton hasn’t announced any cutback in terms of our diamond production. However, actual production for the first half was 27 per cent lower than the corresponding period last year due to lower grades following changed ore sources. In terms of the future, as Ekati – BHP Billiton’s only producing asset – transitions from open pit mining to underground mining, the mix of ore processed will change from time to time.”

BHPB’s sales policy in the present market, Harri added, is that “we sell at the market price and always sell what we can.” He said data on the company’s diamond inventory are “commercially confidential.”
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by John Helmer - Thursday, February 19th, 2009
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By John Helmer in Moscow

The Russian oil industry. and the state treasury too, have breathed a sigh of relief as the Chinese and Russian governments announced this week their agreement on a revolutionary shift in future Russian crude oil flows.

According to the announcement from Beijing on Tuesday, where Deputy Prime Ministers Wang Qishan and Igor Sechin were meeting, China and Russia have finally agreed on terms for a China Development Bank loan of $25 billion to Russian state oil exporter Rosneft, and pipeline company Transneft, to finance future crude oil shipments over a 20-year period of not less than 241,000 barrels per day (15 million tonnes per annum). The fine print of the financing and oil supply deals have not been released yet. However, the availability of $15 billion in 10-year finance for Rosneft, and $10 billion to Transneft, at a sub-market interest rate of around 6%, will guarantee China’s priority for East Siberian crude oil deliveries for the foreseeable future.

The loan and oil supply agreements implement the inter-government Memorandum of Understanding signed more than three months ago, on October 29, 2008. They are the second major initiative between Beijing and Moscow, following the Chinese financing in 2004 for Rosneft’s acquisition of Yuganskneftegaz, in exchange for delivery of 48.4 million tonnes (194,000 barrels per day) between 2005 and 2010.

For China in the medium to long term, according to one Russian bank, the new deal will “provide an impetus to massive development of Eastern Siberia” from which China is best placed to benefit. “We believe that two options are possible: greater [Chinese] access to the East Siberian fields (currently two upstream projects via a JV with Rosneft) and the potential transformation of East Siberian Pacific Ocean pipeline network into a joint stock company, with China getting 49% or 50% control in it.” If the latter materializes, that would give Beijing a control stake in the new oil port to be built at Kozmino Bay, near Nakhodka, on the Sea of Japan.
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by John Helmer - Wednesday, February 18th, 2009
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By John Helmer in Moscow

Alrosa is negotiating with Lazare Kaplan International (LKI) to decide whether to renew their expiring rough supply and polishing contract, or wind up their relationship. The talks and the details of the longstanding relationship between the two companies remain shrouded in unusual secrecy.

Alrosa sources say it is not certain whether the expiring contract, signed for a 10-year term in March 1999, will be renewed.

A Russian source told PolishedPrices that “everything regarding the Alrosa-LKI contract is hidden and non-transparent. The reason for this is that LKI has very advantageous conditions under this contract, according to which they have the right to pick the stones before buying.” In 2005, Alexander Nichiporuk, then Alrosa’s chief executive, sought to terminate the contract, because he believed Alrosa was penalizing itself in supplying rough on LKI’s terms. He did not prevail, and in February 2007, Nichiporuk was replaced by Sergei Vybornov. He is supervising the current negotiations, along with Sergei Uhlin, who runs Alrosa’s international marketing strategy. Neither agreed to comment on the issues in negotiation at the moment.

LKI, which reported in January that it is currently losing money on rough and polished sales, does not publish the value of the diamonds it buys from Alrosa, and cuts in Moscow, before exporting them. A company statement last month referred to the March 1999 agreement, and added: ” Under the terms of this agreement, the Company sells polished diamonds that are cut in facilities jointly managed and supervised by the Company and ALROSA personnel. The proceeds from the sale of these polished diamonds, after deduction of rough diamond cost, generally are shared equally with ALROSA.”

In the six months ending November 30, 2008, LKI is reporting that revenues from its sales of polished were down 21% to $61.1 million. Sales of rough in the same period fell 50% to $58.5 million.
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by John Helmer - Tuesday, February 17th, 2009
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