Talks Instead of Consolidation

Stephen A. Jouline

Future of the Russian metallurgy is vague. High profitability hinders consolidation.

By Russian standards our metallurgy has been developing in favorable conditions. Mining and smelting industry in Russia is excessively profitable (see diagram 1), but after initial attempts to introduce export tax for metal enterprises (same as in oil industry), officials finally decided against it. So where do key players direct their profits?

Satiated metallurgists

Steel giants do permit themselves to buy foreign production capacities and modernize capacities at home. "Black redistribution" in the industry has been completed long ago, and only once in a while new investors join metallurgists (Roman Abramovich joined Euraz) or former partners make their departure (Vladimir Potanin and Mikhail Prokhorov in Norilsky Nickel, and some time back — Vladimir Iorikh and Igor Ziuzin in Mechel). Rusal has completed unification of the Russian smelting industry and presently smelts about 4 million tons of metal annually. The current shareholders of the company, united in 2007, are: En+ Oleg Deripaska (66%), Viktor Vekselberg with assets of Sual (22%) and Swiss Glencore (12%). But the serene picture of general metallurgical well-being looks very strange against the background of kaleidoscopic global mergers and acquisitions. A newly established steel giant Arcelor Mittal made its maiden appearance in the annual list of the most expensive world corporations Financial Times Global 500, immediately occupying position 61 with capitalization 94 bln dollars. Russian owners of steel plants so far have been engaged in something more prosaic: they build vertically integrated holdings, purchase iron ore and coal assets, strengthen their stand at the domestic market and enter quickly growing foreign ones. As a result Russian steel was not represented in FT Global 500 2007 list.

Similar is the situation in non-ferrous metallurgy and mining sector: British-Australian monster BHP Billiton occupied position 33 in FT Global 500 with capitalization 137 bln dollars. Nornickel — the only representative of Russia — had to contend itself with very modest position 239. At present analysts try to find answers to simple questions: do main players have plans to consolidate metals and mining sector? Is it possible for a Russian company from the sector to occupy the second — after "Gazprom" — line in the list of the largest capitalized Russian companies (the cost of Rosneft — second line — this year was 87 bln dollars)? Who is to become a chief consolidator of the metals and mining sector in Russia: Aleksey Mordashov (Severstal, position 9 in Expert-400), Roman Abramovich (Evraz, position 13), Oleg Deripaska (Rusal, position 14), Alisher Usmanov (Metalloinvest, position 22)? Or Russian metallurgists would continue talking instead of consolidating?

Last spring Minpromenergo has approved of "The strategic development of the RF metallurgy industry till 2015" — hopefully, "a chief consolidator" will be supported by the state in making acquisitions abroad and at home. The problem is that every company has its own global plans for strategic development and is not interested in becoming an object for consolidation. Moreover, many analysts are convinced: voluntary mergers between domestic metallurgists are impossible. An interesting fact: as distinct from oil and gas industry, the state has no claims for total control in the metals and mining sector. Officials just make clear that they follow the fate of strategic mines and intent to have access to production of special steels. Companies themselves invite the state to become a partner. For example Alrosa-Polius combination looks very attractive to analysts: a seeming misalliance would enable to get hold of all important gold mines in Russia, Sukhoi Log in the first place.

Chief consolidator

Global consolidation of the world metallurgy sector leaves Russian companies with less choice for expanding their business abroad. Our players made quite a smooth appearance at the North American markets, while in Europe they managed to purchase only small assets. Healthy political protectionism and the world increased prices for the sector assets — in the first place — make processes of acquiring foreign business more complicated.

What about the consolidation inside Russia? In order to get a mandate to consolidate the Russian metallurgy sector you have to be ready to cover lion’s share of the infrastructural investments — and do it immediately. Today all the metallurgy companies blame the state for the absence of infrastructure, which might help them to develop new gigantic fields. The government has completely and relatively long ago agreed to the formula "infrastructure means projects, absence of infrastructure means absence of projects". But government officials feel indifferent to appeals to allocate budget funds and build infrastructural elements at the expense of the state. People in the Kremlin presume: the burden of the private-state partnership should be borne by the both sides. Ironically enough, the two most probable consolidators in black and non-ferrous metallurgy — Oleg Deripaska and Alisher Usmanov - still have not placed their companies at the stock markets — the main source of large-scale investments. It is obvious enough, that mining Metalloinvest and aluminum Rusal would make their stock market appearance with the idea for the world leadership through consolidation of the industry. As to the companies already present at the stock market, the amount of their shares in free float is quite limited (see diagram 2). The listed metallurgy companies may obviously attract funds from other industries by issuing additional shares without being afraid of losing control of their companies. Besides, metallurgy, as no other sector, may engage the debt market (see diagram 3). The most attractive option for the Russian metallurgy sector is to integrate three processes: consolidation, large scale private-state partnership to build infrastructure to develop new mines and allow companies to make full-scale appearance at the stock market, including its debt component. The processes are intertwined, since you can not finance infrastructure without stock markets, consolidation is highly improbable without new mines as a stimulus, and lack of consolidation makes your profile less attractive for the global stock market. Presence of three Russian transnational metallurgy companies in the FT Global 500 list will be a good indicator of the sector success.

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