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By John Helmer, Moscow

Many Hindu gods are depicted with multiple arms. This is a pictorial way of illustrating for believers the many qualities which the god is believed to exercise. By assigning many arms, the illustrator was able to demonstrate the many things the deity can pull off at the same time.

As an oligarch steelmaker Alexei Mordashov (image), owner of Severstal, is in a pantheon which he shares with very few others. Not so long ago, his icon depicted one of his arms selling assets he had acquired with money he had borrowed from his company back to the company, while another arm put the profit safely in his personal pocket.

Then Mordashov’s arms started buying US steelmills at large premiums above the price lesser beings thought they were worth. Mordashov confided to the Financial Times, one of the only bibles he believes and whose Industry Editor, Peter Marsh, is his only disciple, that it was his ambition to become, first one of the top six steelmakers in the world, and then the very largest, the Numero Uno. “I think the new company will aim as soon as realistically possible to reach through mergers and acquisitions an output of 100m tonnes a year,” he was reported as claiming to the FT on June 1, 2006.

Heaven can play tricks even with the gods, especially if they forget where they are. What happened to Mordashov was that he became one of largest loss-making steelmakers in the world, with just 12.1 million tonnes of total annual production last year; 12.9 million tonnes in the nine months of this year to September 30. Had Mordashov cut off each of the arms he despatched to buy steel plants in Michigan, Maryland, Ohio, West Virginia, Mississippi, Piombino, Trieste, Bari, Condove, Lecco, Les Dunes, Hagondange, Le Cheylas, Fos sur mer, Le Marais, and Custines, he would be a great deal more divine, profitwise. Instead, he’s an example in business school for misjudgement of the ordinary over-leveraging type.

So how does he suppose he will fare in India, home of the many-armed Vishnu, God of Gods? What ambition this time drives the Russian to imagine he can compete against Indian steelmakers on their own territory after he and his Russian peers have spent the past decade making sure Indian steelmakers cannot compete by making steel inside the Russian market?

According to a Moscow newspaper story of today, Severstal has agreed to spend more than $2 billion to build a new steelmill in India in partnership with the state-owned iron-ore miner of India, National Mineral Development Corporation (NMDC). The Indian company describes itself as producing annually almost 30 million tonnes of iron-ore for steelmaking applications, and to be planning a 3 million-tonne annual capacity steelmill at Jagdaklpur (Chhattisgarh state), which is close to the existing mine operations. NMDC has also told the Indian papers that tomorrow it will sign a joint venture agreement with Severstal to build an entirely new steelmaking plant, with 5 million tonnes of annual capacity. The location is said to be to the southwest at Bellary, in Karnataka state.

The Indian Express reports that for its diversification downstream into steelmaking, the big Indian miner “has been scouting for a partner to set up the plant and after due diligence the ministry gave the go-ahead to ink MoU with the Russian firm as they have the preferred expertise in producing specialised steel. They are among the top 10 profitable steel majors in the world,” a steel ministry official said.” It is not known how the Indian due diligence apparently missed Severstal’s loss-making record.

Marat Gabitov, steel analyst for Unicredit in Moscow, reported to clients “we see the news as generally positive for Severstal, as increasing exposure in India, one of the world’s fastest-growing markets, would allow the company to increase shipments in the longer term and ensure stable offtake of its coking coal from the Ulug-Khem coal deposit. We believe that the project may be just the beginning of the company’s expansion on the Indian market.” Additional Indian reports suggest that the proposed new steelmill will take its coking coal from Severstal’s mines in Russia.

Boris Krasnojenov, an analyst at Renaissance Capital in Moscow, is more cautious. He warned clients that with the Indian iron-ore price roughly double that of the Russian cost, Severstal’s Indian steel may turn out to be too high in cost to be profitable.

Mordashov has already confided to Marsh of the FT that whenever he makes his moves, he always consults the Russian government, so it’s near-certain he has applied to Prime Minister Vladimir Putin for permission to spend at least half the $2 billion required for the new mill in India. Where the cash will come from the heavily indebted Severstal is another matter again, especially since Mordashov has signed covenants with Severstal’s bankers not to undertake new borrowings for new acquisitions without their permission. Perhaps he has asked Putin, chairman of Vnesheconombank (VEB), the oligarch bailout cashbox, to lend him fresh money.

“It is a very big exaggeration to say I am a friend of Mr Putin,”Mordashov told Marsh in 2006, as he announced a merger offer for Arcelor. This ultimately failed for lack of cash to match the competing offer from Lakshmi Mittal, but permission for making the bid was given to Mordashov by then President Putin at a meeting several weeks before the bid became public knowledge. “Regarding our links with the Russian government, Severstal is a private company with no government participation. We are answerable to our shareholders. In a literal sense, even a private company of course cannot do everything that it wants without some discussion with government. As a good corporate citizen, Severstal discussed the idea of a merger with Arcelor with the Russian government. People in the government were very positive and supportive. But there was no sense we had to get permission. I think it’s better to say we had consultations and everyone felt happy about the concept of the merger.”

Severstal has not yet disclosed anything to its shareholders on the Indian deal, or the terms of the proposed MoU. In the first hours after disclosure of the news, Severstal’s share price was almost unchanged in Moscow trading; but the stock market sentiment was negative in India, where the NMDC share price fell 6.3%.
Severstal was asked to confirm the Moscow and Indian press reports of the new mill venture with NMDC. It was also asked to say whether Mordashov has obtained permission from Putin for another disinvestment of resources from Russia to a foreign country; and how Mordashov explained to Putin to trust him in this Indian venture. Severstal spokesman Oleg Bykov said the company refuses to comment on the new steel mill project in India.

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