Mechel in a Pickle
// Putin promises to deal with it and with owner Igor Zyuzin
Russian Prime Minister unleashing a firestorm of criticism on Mechel and sent its stock quotations into a tailspin, as he makes such charges against a company and its owner for the first time since the YUKOS case. Mechel, accused of manipulating prices on the coal market, lost $5 billion on the stock market and its controlling shareholder, Igor Zyuzin, was hospitalized. The prime minister has promised to send Zyuzin a doctor to “clean up” the situation.
Russian Prime Minister Vladimir Putin held a meeting in Nizhny Novgorod yesterday, at which he spoke harshly about the growth of prices for metals and coal. Prices have growth at all smelters, but the prime minister decided publicly to criticize only the Mechel holding, not the largest player on the market, and its owner Igor Zyuzin. “We have a respected company, Mechel,” the prime minister began, “By the way, we invited the owner and leader of the company to the meeting, but he fell ill unexpectedly. Nonetheless, it is known that, in the first quarter of the current year, the company sold raw materials overseas at prices at half the market prices, and that means half world prices. And where was the margin in the form of taxes for the state?”
Later, information agencies quoted sources “in medical circles” saying that Zyuzin was hospitalized on Wednesday (the day after he was invited to the meeting with the prime minister) at the Sechenov Moscow Medical Academy with heart problems. “Of course, illness is illness,” Putin said, “but I think Igor Vladimirovich [Zyuzin] should get better as soon as possible. Otherwise, a doctor will have to be sent to him to clean all those problems up.” Putin has not had such biting words for any company since the beginning of the YUKOS case in 2003.
The prime minister asked the Federal Antimonopoly Service “and maybe even the prosecutor’s investigative committee” to pay particular attention to Mechel pricing. The FAS has been paying attention to the problem Putin was speaking of for a long time in actuality. In April, the FAS began a check of pricing policy in smelting companies, accusing them of jacking up pipe prices. The metallurgists defended themselves by pointing out the prices for raw materials, which rose 80-100 percent, by various estimates, between January and April. In the middle of May, the FAS announced an audit on the coking coal market. At the end of June, coal companies and metallurgists were advised to conclude long-term contracts for their products at a meeting with Deputy Prime Minister Igor Sechin that made the government’s stance clear. On July 22, Mechel announced that it was adopting that practice.
Kommersant sources close to Mechel and the presidential administration say “colleagues in the industry” brought Zyuzin to the personal attention of prime minister. In particular, Kommersant’s sources say, Novolipetsk Steel owner Vladimir Lisin made critical charges against Zyuzin. Last week, the FAS initiated a case against the main companies of Mechel on the basis of Novolipetsk Steel’s complaints. According to unofficial information, Magnitogorsk Iron & Steel Works also made complaints. OAO TD Mechel and OAO Yuzhny Kuzbass, both parts of Mechel, stopped delivering coal concentrate to Novolipetsk Steel and refused to conclude a new delivery agreement with the company. The FAS accused Mechel affiliates of using their dominant position on the market for coking coal to raise prices. Deputy director of the FAS Igor Tsyganov explained to Kommersant that that the maximum punishment for the charges against Mechel is a fine of 2 percent of its receipts on the market for coking coal for the period of the violation.
Tsyganov confirmed that his agency prepared the materials for the meeting in Nizhny Novgorod and Putin’s speech referred to the case initiated by the FAS a week earlier. A source close to Novolipetsk Steel shareholders, however, commented to Kommersant that “Vladimir Lisin was the author of the idea of long-term contracts for the delivery of metals raw materials and discussed it at several meetings with government representatives. Obviously, that is why they are pointing the finger at us.” Kommersant has learned that Mechel supported the idea of such contracts at the meeting with Sechin. However, as industry sources say, a part of those contracts of Mechel’s were not domestic, but export, contracts with foreign companies, while on the domestic market in June and July prices for coke continued to fluctuate.
A source close to the presidential administration explained that domestic prices were higher than export prices at some moment, and that is what infuriated the prime minister. “Now the situation has been corrected, but it is too late,” the source said.
Putin spoke a little after the beginning of trading on the New York Stock Exchange, on which Mechel is quoted. After the first reports by information agencies, the company’s stock began to fall sharply. The fall lasted about two hours and, by 8:20 p.m., the stock had lost 38 percent of its value. At press time, its price had stabilized down 30 percent. The company lost almost $5 billion in capitalization, which was $10.7 billion at press time.
“Undoubtedly, investors will be much more cautious of Mechel after the statements by Vladimir Putin,” commented Troika Dialog analyst Sergey Donskoi. That may mean more losses for Mechel. The company intended to complete the placement of preferred stock on Russian markets this week. Now it has been postponed to August 11. The official reason is low demand and poor market conditions. But the decision was made Tuesday, after Zyuzin was invited to the prime minister’s meeting. “It’s hard to say whether they will be able to make that placement successfully,” Donskoi said, “but now you can forget about it at least until autumn.” Mechel had other plans for the autumn. The company plans to hold an IPO for its Mechel Mining, which has most of the holding’s mining assets. “Of course, after yesterday’s events, that placement will not be made on schedule,” Donskoi commented.
Experts are hesitant to say whether Mechel can turn into another YUKOS. A Kommersant source close to the presidential administration says that no one is planning to take the company away so far. “If it has a correct market policy, everything will be all right with Mechel,” Lisin told Interfax after the meeting with the prime minister.
However, the Russpetsstal holding, founded by Rosoboronexport at the beginning of last year, has shown interest in Mechel. The Chelyabinsk Metals Combine, part of Zyuzin’s group, is Russia’s largest producer of special steels. When Russpetsstal was in the process of being founded, a source familiar with the plans of Rosoboronexport said that it hoped to make Chelyabinsk Metals the centerpiece of Russpetsstal assets. In the summer of 2007, Sergey Chemezov, then head of Rosoboronexport, said that Russpetsstal representatives met with Mechel representatives several times, but they declined to participate in the holding. “I think Mechel may change its mind when the holding gets on its feet,” Chemezov said. Nonetheless, Russpetsstal spoke evasively about its interest in Chelyabinsk Metals yesterday. “The management of Rostekhnologia has not given us any specific task related to Chelyabinsk Metals,” the holding’s general director Sergey Nosov told Kommersant. At the Ministry of Industry and Trade, a spokesman told Kommersant that their information indicates that Rostekhnologia remains interested in Chelyabinsk Metals, however.
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Igor Vladimirovich Zyuzin
Zyuzin was born on April 29, 2960 in Kimovsk, Tula Region. In 1982, he graduated from the Tula Polytechnic Institute. In 1992, he received an advanced degree (candidate of technical sciences) from Kuzbass Polytechnic Institute. He began working at the Raspadskaya mine in Kemerovo in 1987, rising from mining specialist to deputy general director there. In 1994, he became deputy general director of the Kuzbass dressing mill. Then he became owner and head of Uglemet, Mezhdurechenskugol and Yuzhny Kuzbass, which supply coal to metals producers. In 2002 and 2003, Zyuzin and other Yuzhny Kuzbass shareholders bought a blocking package in the Chelyabinsk smelter Mechel. The Mechel Steel Group was founded around those tow companies and other assets. Zyuzin has been chairman of the board of directors of the group since 2003 and general director since 2006. He bought his partner Vladimir Iorkhin’s share in Mechel from him in 2006. Zyuzin currently owns 69.87 percent of the stock in Mechel.
Petr Mironenko, Dmitry Butrin, Elena Kiseleva
All the Article in Russian as of July 25, 2008
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