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25 Jul, 2008 08:21

Mechel slumps on Putin criticisms

One of Russia’s leading metallurgical firms, Mechel, lost almost one third of its market value on Thursday after Prime minister Vladimir Putin criticised the miner’s pricing policy. Putin accused Mechel of selling its raw materials domestically at dou

Russian metals stocks traded at fire-sale prices on Friday. Norilsk Nickel lost almost 5%, Severstal shares tumbled 6 percent and Novolipetsk steel fell 7 percent. That follows Mechel's drastic slump of nearly 40% on Thursday after Vladimir Putin made clear his dissatisfaction with the coal and steel giant.

In the first quarter of this year, the company sold its raw materials abroad at half the domestic price, which means lower than world prices. Where is the state's export tax margin?

The Russian government has been trying to curb skyrocketing metal prices for some time. Steel prices in Russia have risen by up to 50% over the past year, as the cost of its main components  iron ore and coking coal shot up. 

Russia's antimonopoly regulator has already launched an investigation into the mining market, with Mechel in its sights as a leading player, with Prime Minister Putin suggesting further investigations may come.

I'm asking the federal anti-monopoly service to pay special attention to this problem. It may even be a case for the investigative committee of the Prosecutor General's office.

Sources claimed that the firm has cut supplies to some domestic steel producers, while exporting coal more cheaply than it sells it at home.  Some think Mechel may be justified in doing so, as it's been exporting coal at earlier agreed prices. Analysts say the market has over-reacted to the Prime Minister's remarks and Mechel's future is not all black. Vladimir Zhukov, Chief Analyst with Lehman Brothers says it will increase the company’s pricing discipline.

What we heard from the industry is that even though Mechel is entering into one year contracts, but the pricing of those contracts is not effectively fixed. I think it will all result eventually in Mechel entering long term contracts with its largest consumers in Russia, and basically it will also probably result in increasing the pricing discipline in these contracts.

Experts say the company might not  be able to sell its preferred shares on 11th of August as it planned.  Currently some local investment houses have suspended coverage of its  stock.

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