MOSCOW - Meerkats are among the most
charming creatures in the animal kingdom, and they
are expert at coping with the extremes of the
Kalahari desert in Southern Africa. The meerkat
bands mark their foraging territories; but they
are also opportunists - if rival bands don't post
guards, the territory will be raided for food.
Unguarded, hapless meerkats may be kidnapped and
eaten by their rivals, if the latter are hungry
enough.
India's Lakshmi Mittal claims the
charm, but Russians suspect him of less pleasant
appetites. Accordingly, the recent record of his
forays into Russia has been a consistent series of
repulses from the domestic steelmaking and
coalmining industries, backed
by
the Kremlin.
This week, Mittal, president
and chief executive officer of steel giant
ArcelorMittal, announced he is trying to cross the
Russian border again, this time with a sale and
purchase agreement for two mid-Siberian coalmines,
and one exploration deposit. The seller is the
steelmaker, Alexei Mordashov, whom Mittal humbled
and defeated with a surfeit of cash and acumen in
mid-2006, when Europe's largest steelmaker,
Arcelor, was up for grabs, and Mordashov's merger
offer was beaten by Mittal's.
This time,
Mordashov has relieved Mittal of US$720 million in
cash. According to Mordashov's property Severstal,
"Arcelor Mittal will acquire the assets for a
total consideration of around US$650 million in
cash." The ArcelorMittal announcement claims "a
total consideration of US$720 million". The $70
million difference reflects asset value, for which
Mittal will pay minority shareholders in the
mining companies that are being acquired.
According to his own press release, Mittal
himself claims to be "pleased to be acquiring
these mines which will provide an important and
competitive source of coking coal supplies for our
steel production, raising our self-sufficiency
from 10% to 15%. This acquisition also helps
ArcelorMittal establish a presence in Russia, a
fast growing market for steel production."
This has mystified Russian steel sources,
since Severstal itself was unhappy at the costs of
supplying its own northwestern Russian steel mill
at Cherepovets, far from the mines it is now
selling, while Russian mills much closer to the
Kemerovo region, where Mittal is making his
purchase, already have the coking coal they
require.
Mittal's nearest steel production
plant is at Temirtau, in the Karaganda region of
Kazakhstan, more than a thousand kilometers to the
southwest. A proposed new Mittal minimill, being
considered for the Tver region near Moscow, is
even further away, and would depend on scrap, not
coking coal, for its processing requirement. The
Krivorozhstal mill Mittal owns in the Ukraine is
more than three times further to the west.
Mittal's London spokesman was asked to
clarify the geography, and explain what coking
coal supply scheme Mittal must be thinking of. She
did not respond by press time.
A leading
Russian steelmaker told Asia Times Online that the
announcement may be Mittal's last shot at entering
the Russian market, but it is far from certain to
succeed.
"First of all they need
permission of the antimonopoly agency to do the
deal, and this is a quite significant and
difficult task in Russia. So I wouldn't say they
have already bought the assets. As to where they
will sell the coal, I have no idea. The assets are
loss-making, and Severstal didn't invest anything
in these mines, or in the region - so it is very
good deal for Severstal, per se. They are getting
rid of a load here, and getting some cash instead.
As to Mittal, this is their last and only chance
to get any assets at all in Russia, and they will
fight for it."
In 2006, when Mordashov was
trying to merge Severstal with Arcelor, his
company set out an optimistic picture of the three
assets now being sold to Mittal. The two operating
coal mines, Beryozovskaya and Pervomayskaya, were
said to have reserves enough for "at least 25
years of production" for the latter; 65 years for
the former. No estimate was provided for the third
asset which Mittal is now buying, the
Zhernovskaya-3 exploration deposit.
In
2007, Beryozovskaya and Pervomayskaya together
produced 1.77 million tonnes of coking coal
concentrate; that amounted to 33% of total output
of the product by the company's mining division,
Severstal Resurs. According to Roman Deniskin,
general director of Resurs: "This is a good deal
for Severstal, allowing us to focus on the
development of existing, strategically important
assets, as well as invest new coal projects." In
other words, good riddance.
Michael
Kavanagh, steel analyst for UralSib Bank, said
there is no doubt Severstal has received a good
price for the Siberian loss-makers, whose costs of
production have doubled recently. "At the 2007
contract price of around $68/tonne of concentrate
these assets were loss making. We note that
Severstal reported production costs of $30/tonne
of concentrate at these assets in 2005. This
implies an increase in costs of over 100% in just
two years."
According to Kavanagh, "the
Kuzbass assets, those sold to Mittal, were not
considered strategic to the supply of coal to
Cherepovets. The price offered by Mittal was a
good one, similar to the price of Raspadskaya
[acquired by Evraz]. The deposits are not
considered as large, or of the same quality as the
deposits at Severstal's other coal operation,
VorkutaUgol. VorkutaUgol is located closer to
Cherepovets, so there are lower transport costs
than KuzbassUgol. The assets sold need a lot of
management time and attention."
Severstal
prefers, Kavanagh told Asia Times Online, "to take
the proceeds and invest them in VorkutaUgol, where
they feel the returns will be better and the
operational synergies with the steel operations
are higher. This is likely to be a short term
positive for Severstal but raises serious
questions about their ability to manage mining
assets."
There is no one in the Russian
steel industry today who disagrees or who claims
to detect Mittal's clever streak.
A senior
executive at one of the few Russian steelmills,
which currently lacks all the coking coal it
needs, said: "I don't see a real reason for Mittal
to buy these coal assets, especially knowing that
they are loss-making. [There's] only one idea -
this is a multi-step strategy, and this one is the
first step to get acquainted with Russia, and then
to do something more, or to show investments. Or
else this is the part of some bigger deal, which
is still not visible."
The source
speculated that the two mines might export to
Kazakhstan, "but I think [Mittal's] Kazakhstan
enterprise is self-sufficient with coal. I know
for sure we are not buying from these mines.”
Lev Chesalov, an analyst with Rusmet, told
Asia Times Online: "It is strange for Mittal to
enter Kemerovo. They will definitely not be
selling to Kazakhstan from there, as they have
their own Mittal coal in Karaganda to supply their
Kazakh enterprise."
John Helmer
has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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