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IN BRIEF
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*** Coking coal producers Mechel, Evraz and Raspadsky this week were all placed under investigation by the Federal Antimonopoly Service in an anti-trust probe alleging unfair pricing practices on the domestic market. Mechel and Raspadsky are the biggest and second-biggest producers in Russia, and the three companies control over 50% of the country's market. Complaints believed to have been initiated by steelmaker NLMK, a major client for Mechel, led to a scathing attack on Mechel last week by Prime Minister Vladimir Putin, whose comments saw the company shedding around $6 billion in stock value, around 40% of its estimated worth. Russian markets and listed companies worldwide were all affected as investor confidence plummeted on fears of a repeat of the Yukos case. If found guilty the companies could face fines approximately four times greater than the tax already paid, representing the difference between prices Mechel is alleged to have charged domestic buyers and its offshore companies in Switzerland.
*** Rumors that billionaire metals magnates Oleg Deripaska and Vladimir Potanin are holding talks on a merger between aluminum giant United Company RUSAL and mining and smelting major MMC Norilsk Nickel to create a diversified state metals champion resurfaced this week, although RUSAL quickly denied any such talks had been conducted or confidentiality agreements signed. Talks of a Metalloinvest-Norilsk tie-up are currently suspended over the former's plans to float. Meanwhile, Russian Federal Travel Agency chief Vladimir Strzhalkovsky has been invited to run Norilsk in a move "directly connected" with the company's plans to set up a global mining and metallurgy company on the basis of Norilsk Nickel.
*** Norilsk Nickel this week launched an internal investigation into the reported transfer of some of its assets to MMC Intergeo, a new company being set up by Mikhail Prokhorov's Onexim Group on the core of the geological exploration assets it acquired from Interros as part of an asset split with KM Invest. The investigation is being carried out as part of the transfer of the business handled by Norilsk deputy general director Maxim Finsky, who is leaving the company to head up Intergeo.
*** Russia's Evraz Group and China Metallurgical Group Corporation (MCC) this week signed an agreement on the joint development of the Cape Lambert iron ore field. Shareholder's in Australia's Cape Lambert Iron Ore Ltd earlier approved the sale of an iron ore product to MCC Mining after Evraz, which is also interested in the Australian company's iron assets, was unable to block the sale of the deposit due to owning a stake of less than 20%. Evraz will own a 75% stake in the joint venture at the deposit, which has estimated reserves of 1.56 billion tonnes of iron ore. All iron produced from the project will be shipped to Chinese plants.
*** Blackrock Investment Management this week increased its stake in Irkutsk-based Vysochaishy (GV Gold) to 19.99% after acquiring an additional 6.39% in shares. As a result of the deal, Polyus Gold subsidiary Lenzoloto is no longer a shareholder. The near $29 million deal was carried out ahead of its expected Q209 LSE IPO. GV Gold also this week announced net profit under RAS was up over 110% in H108 and that it expects to have consolidated production in 2008 of over 130,000 oz, mainly sourced from the Golets Vysochaishy vein gold deposit.
*** Alexei Mordashov's Severstal could be one of the contenders vying to purchase U.S. iron producer Cleveland-Cliffs Inc. Severstal, which has recently bought up a number of U.S.-based assets, will have to part with an estimated $14 billion if it wants to own the company outright, although Cleveland-Cliffs' management is believed to be opposed to any sale. The U.S. is itself looking at acquiring significant coking coal assets, which could provide Severstal with invaluable access to the resource, which is becoming in ever shorter supply. Meanwhile, Severstal announced H108 RAS net profit up 10% and that steelmaking in the same period was up 12%.
*** The Russian Federal Environmental, Technological, and Atomic Oversight Service (Rostekhnadzor) this week announced it has suspended the activity of over half of all coalmines operating in the Kemerovo region following an industrial safety inspection. A total of 40 out of 72 mines in Russia's main coal producing Kuzbass region have had operations stopped until such a time as working conditions are made safe for their staff.
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Mechel, coking coal producers under investigation over prices
NIZHNY NOVGOROD. (Interfax) - Russian Prime Minister Vladimir Putin slammed the pricing policy of the Mechel Coal & Steel Group in a meeting of ferrous metals industry figures in Nizhny Novgorod on July 24, leading to its U.S. stock falling nearly 40% and its RTS shares shedding a third of their value, costing the Igor Zyuzin, the group's main beneficiary an estimated $6 billion from falling ADR value.
Mechel, the country's leading coking coal producer and a top-six steelmaker, was attacked by Putin for charging artificially high prices on the domestic market, with exports alleged to have been sold at 25% of the cost charged to Russian buyers. Putin also said he is opposed to setting up a tax and tariff regime to stimulate exports of scrap metal and nonferrous metals as he focused on a number of problems in the ferrous sector.
The comments sparked fears among investors, already growing wary of Russian markets over the ongoing shareholder dispute at Russian-British oil major TNK-BP, that a repeat of the Yukos case could be unfolding, fears First Deputy Prime Minister Igor Shuvalov moved quickly to calm.
The Federal Anti-Monopoly Service announced later in the week it has also opened investigations into unfair competition practices at Mechel's peers Evraz Holding and Raspadsky Coal. Between them, the three companies control over 50% of Russia's coking coal market.
Claims
Putin said he has ordered the FAS and the Prosecutor General's Office's Investigative Committee to investigate raw materials exports by the Mechel company.
"I ask the Federal Anti-Monopoly Service and perhaps even the [Prosecutor General's Office's] Investigative Committee to pay special attention to this problem. We need to know what's going on here," he said.
Incidentally, we invited Mechel's main owner Igor Vladimirovich Zyuzin to this session, but he suddenly fell ill. Well, in the first quarter of this year, the company exported raw materials at prices twice lower than domestic prices," Putin said earlier.
"Of course, illness is illness," Putin continued, and wished Zyuzin a speedy recovery. "Otherwise we'll have to send him a doctor to clear out all these problems," he said.
The Mechel coal and steel group exported raw materials through offshore companies in Switzerland at prices 75% below the domestic market price, Putin said at a government session on July 28.
"I already mentioned at the meeting [on July 24] that one company was exporting its product at a fraction of the domestic market price. The domestic price was 4,100 rubles, and they were selling it to themselves, across the border, for 1,100 rubles, that is 75% less," Putin said.
"It is a reduction in the tax basis inside the country, it's not paying taxes, it's creation of a shortfall on the domestic market, which means an increase in the cost of metallurgical production," he said.
Mechel is Russia's leading producer of coking coal. In the first half of the year the group increased production 58% to 14.03 million tonnes, mainly through merger with the Yakutugol holding company.
The coking coal market has come under the scrutiny of the Federal Antimonopoly Service (FAS). Initially the FAS, concerned over potential price increases on coking coal and concentrate on the Russian market, asked all the major producers to report the volumes of their deliveries to the domestic market, the procedures for setting prices and price trends. Last week it leveled anti-monopoly charges against three companies in the Mechel Group (Trade House Mechel LLC, OJSC Southern Kuzbass and OJSC Holding Company Yakutugol).
The FAS charged that Trade House Mechel had wrongfully halted deliveries of coal concentrate to Novolipetsk Iron & Steel Company (NLMK) and that it and Yakutugol refused to conclude an agreement on coal concentrate supplies to NLMK. In addition, Trade House Mechel had set an unjustifiably high price on coal concentrate, in violation of anti-monopoly law.
The FAS is dealing with the grievances against Mechel, Industry and Trade Minister Viktor Khristenko said.
"The instruction has been formulated. The FAS is dealing with it," he said.
"As for the critical remarks in relation to Mechel's work, they concern not metallurgy but the coal sector and the fairness of the decisions that had been taken on the parameters of the supplies of the coking coal to the Russian market by one of the major suppliers of this raw-material on the free market for companies that do not possess their own coal base," he said.
Investigations
Mechel is willingly cooperating in the FAS investigation into its pricing policies, Arkady Dvorkovich, an assistant to the Russian president, told journalists on July 28.
"A positive signal is that the company has been cooperating with the FAS all these weeks, providing all the necessary information," he said.
The situation surrounding Mechel, which has caused so much investor concern, is being tackled, he said.
"The FAS investigation has been underway for several weeks. Without urgency or haste. The FAS will issue its conclusion in the prescribed timeframe. If the company violated the principles of market operations, Russian law, the FAS has the authority to impose sanctions and, certainly, will do that," Dvorkovich said.
"We hope that these events will be a lesson for everybody, not just Mechel but every company, and we will act in a maximally civilized way. We believe that the FAS investigation will be conducted in full compliance with existing norms and procedures, which will demonstrate that state regulatory practice is becoming subordinate to the law," he said.
"We must adopt a maximally cautious attitude toward public companies. On the other hand, we must respond with quickly if problems arise at those companies," he said.
Prosecutor General Yury Chaika said that the fact that Mechel's products are four times cheaper on foreign markets than in Russia is scandalous.
"We also looked into this situation. It is a scandalous thing when a company sells products to foreign markets four times cheaper than on the domestic one. An investigation is underway but this does not mean that any radical measures should be taken on this issue," Chaika said on July 29.
The Russian Prosecutor General's Office for now is not participating in the investigation at Mechel, he added.
"The Federal Antimonopoly Service (FAS) has been and is tackling this situation" with Mechel, Chaika said.
The prosecutor general thinks that "the fact that the prime minister outlined this problem allows the company and other structures to adjust their positions."
"Our task is to look into whether there are violations and react in a certain manner. Punishment is for FAS, courts and so on," Chaika said.
Artemyev said Mechel could work off a fine equal to 1% of annual revenue if it eliminates all violations of antimonopoly law on the coking coal market.
FAS chief Igor Artemyev, interviewed later on July 28 by Vesti 24 television, said: "We have no other goal than to impose a fine payable to the federal budget in the event Mechel has violated the law."
Mechel may work off a fine equal to 1% of annual revenue if it eliminates all violations of antimonopoly law on the market in coking coal, he said.
"The price [of coal] must be lowered, and deliveries resumed," Artemyev said.
Russian law provides a maximum fine of up to 15% of annual revenue for gross violations of antimonopoly law.
Artemyev has little doubt that Mechel is in violation. "We have gathered enough evidence. One mustn't blackmail steel plants, threatening to recall trainloads of coal in order to win a doubling of the price," he said.
Artemyev called on the FAS personnel carrying out the investigation to speed up their work, so that the case can be heard by the FAS commission ahead of the planned date, August 26. "We want to examine this case as quickly as possible" in order to end uncertainty on the stock market, he said.
Mechel, which was singled out for criticism by Putin, is far from the only violator in the sector, Artemyev said.
"The price situation in metallurgy is out of control; Mechel is not the only candidate for punishment over monopoly pricing," he said, without naming any other companies.
Khristenko was asked about Putin's comments. "It is difficult to say whether [he] assessed the market correctly or incorrectly. At that moment I participated in a session," Khristenko said.
Two days prior to the Nizhny Novgorod meeting, Mechel had announced it would...
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