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DANCES WITH BEARS
Musical chairs in
Russian steel
By John Helmer
MOSCOW - Two of Russia's top three steel makers
announced a few days ago in Moscow that they are forming
an alliance, one of whose aims will be to defend against
a hostile takeover expected next year. If there was any
other reason for the deal, it should have provoked a
noisy anti-trust reaction from the government. But the
silence from that quarter has been telling.
Victor Rashnikov, the general director of
Magnitogorsk, joined Vladimir Lisin, chairman of the
board at Novolipetsk, to say that they had agreed to
coordinate their export marketing activities and their
investment in new production facilities. On the ladder
of Russian steel making, Magnitogorsk ranks first;
Severstal second; Novolipetsk third; and Evraz Holding -
a shareholding that combines the Nizhny Tagil, Zapsib,
and Kuznetsk steel mills - fourth.
According to
Lisin, "It doesn't make sense for us to compete with
Magnitogorsk on the same markets, or invest into
construction of similar production facilities." He cited
production of galvanized sheets (mostly for auto
manufacture) as an example, where Magnitogorsk already
has a production line, and against which a new venture
by Severstal with the international Arcelor will
compete. "The situation on the Russian steel market will
not change radically in the next several years," Lisin
said, "and so competition between different producers
can only result in decrease of prices and
profitability."
Lisin and Rashnikov have
confirmed that they expect further consolidation of
Russia's steel makers, but would not predict the
details. "Consolidation of the steel industry is a
worldwide tendency," Rashnikov said, "which demonstrates
that companies that have merged into greater entities
work effectively. Consolidation of the Russian steel
sector is inevitable, but so far it is not yet clear
when it will happen - today, tomorrow, or the day after
tomorrow."
Last year, Lisin warded off a threat
of a takeover of his plant from Vladimir Potanin, the
controlling shareholder of Norilsk Nickel, who sold back
to Lisin a 32 percent stake he had earlier acquired from
the Reuben brothers and Transworld of London. Potanin
had been lured by Boris Jordan into believing that he
could knock Lisin out of business. Jordan walked away
with his reward, and Lisin taught Potanin that he could
outflank the attack, taking an 11 percent shareholding,
plus a seat on the board, of Potanin's treasure, Norilsk
Nickel. If there ever comes a time when Russian steel
and nickel can be combined to produce more than
stainless steel, Potanin should worry about a takeover
from Lisin's direction.
On another front, a year
ago last October, Lisin announced that he and Evraz
Holding were forming an alliance to combat what they
claimed was the unhealthy influence of the partnership
of the two largest steel makers, Magnitogorsk and
Severstal. The Novolipetsk-Evrazat alliance was
christened Russkaya Stal ("Russian Steel"), and in a nod
towards the Anti-Monopoly Ministry, termed "a
non-commercial partnership". No exchange of shares or
cash occurred. Industry sources told me at the time that
Lisin and the Evraz shareholders were simply moving to
help each other defend their property, including stakes
in coal suppliers to the steel industry.
All you
need to know is that without an assured supply of coal,
the furnaces of steel makers go cold. Magnitogorsk and
Severstal said at the same time that they had combined
to protect their coal supplies, and prevent a hostile
takeover bid for Magnitogorsk launched by Iskander
Makhmudov, one of the controlling shareholders of Evraz.
The first and second steel makers had cooperated to
acquire control of Kuzbassugol, a major coal producer,
outbidding Evraz in the privatization of the coal
company, while Novolipetsk hung on to its 16 percent
stake in the same coal supplier through another, related
company. According to Evraz, it was the fear of losing
their coal that had driven Magnitogorsk and Severstal to
pay much too much for Kuzbassugol - without gaining the
real protection they were after from Makhmudov.
The latest announcement turns the tables on
Evraz, and reinforces the impression that Magnitogorsk
is expecting a fierce fight from Makhmudov next year,
when the state shareholding of 17.8 percent in
Magnitogorsk is scheduled to be auctioned. Makhmudov has
lodged a court claim asserting that he already owns a
substantial stake in Magnitogorsk. Addition of the state
stake would give him majority control, and make him the
undisputed master of Russian steel.
Commenting
on the privatization, Rashnikov said that his company
would participate in the auction, and is hoping to win
and "guarantee a smooth transfer of the shares from the
state to new shareholders". According to Rashnikov, the
Magnitogorsk management "now has an agreement with the
holders of about 83 percent of the shares of the plant,
including the 17.8 percent of shares held by the state".
Lisin and Rashnikov hinted that they were ready to act
jointly in the privatization bidding.
Lisin has
claimed that a merger between his company and
Magnitogorsk is possible, though there are other
alternatives for consolidation. "The main issue is the
economic efficiency of such consolidation," he said,
"while the forms of this consolidation may be varied."
For the time being, he claimed "the companies have
agreed to carry out coordinated investment policy [by
not investing into similar types of production] and
coordinate their export policies, where competition
leads only to the situation when buyers can play with
prices, which leads to decrease of profitability of the
steel plants' operations".
He added that the
alliance would also deal jointly with energy and
transport suppliers, and use "common companies in charge
of repairs and technical maintenance of metallurgical
facilities".
Makhmudov doesn't mince words when
he says he wants Magnitogorsk. Other Evraz executives
say that, for the time being, they prefer to concentrate
on solidifying their control of the iron ore they draw
from the mines, and enhance their bargaining power with
the government over the cost of rail and port
transportation. Winning the government over on costs,
and on tolerating vertical integration of production,
has so far proved easier than gaining the Kremlin
approval that is required before Magnitogorsk can be
sold off.
For several years now it has been
easier for the federal government to postpone the
privatization of the remaining Magnitogorsk stake, and
avoid taking sides in Makhmudov's litigation against
Rashnikov. Officials close to Makhmudov say that they
can't say much about the bidding because there is no
telling whether the government will once again postpone
the sale. Nor does Makhmudov want to risk a test of
strength in case the Kremlin rules against him. Thus,
the most convenient outcome for all players in this game
of musical chairs is to make sure the music doesn't
stop.
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