Russian steel major claims Chinese coup

Posted in Russia , Asia | 03-Nov-04 | Author: John Helmer| Source: Asia Times

MOSCOW - Despite an explicit warning from a Chinese official last month, Alexander Abramov, controlling shareholder of Evraz Holding, Russia's largest steelmaker, claims to be planning a major steel-plant acquisition in Shanghai.

The owners of Russia's metal companies, lured by the offshore profit and security of converting their wealth, generally avoid Asia despite the fact that Asian markets - principally China, Japan, South Korea and Taiwan - take the lion's share of Russian exports of steel, aluminum, nickel and copper. Russian steelmakers have been eyeing ailing steel plants in Taiwan, the Philippines and South Korea for possible purchase. But so far they have been beaten to the punch by local buyers.

In China a decade ago, Russian metal exporters began by dealing through international traders - with large warehouses, credit lines and collection schemes - to enable them to deal with Chinese payment risks. The Russians themselves are still fearful of being outfoxed by the locals, and have avoided capital transactions for fear of losing their money. The Sino-Russian strategic relationship, renewed rhetorically by President Vladimir Putin in Beijing this month, is viewed by Russian metals exporters as providing no protection from trade retaliation from Chinese steelmakers and no commercial advantage compared with other international suppliers.

The announcement this week by Evraz that it has opened a "dialogue" with Baosteel of Shanghai thus appears to be a new development. The heads of the two steelmakers, Abramov and Xie Quihua, met on the sidelines of Putin's China visit. Shanghai-based Baosteel is China's largest steel producer, and the third-largest in the world. With sales revenues of US$14.6 billion last year and output of 19.5 million tons of flat steel products, Baosteel dwarfs Abramov's holding of three mills that specialize in long steel such as rails, reinforcement bars, wire, wheels and rod. Last year, according to Evraz financial statements, its revenues were almost $3 billion and output about 13 million tons.

A leak attributed to an Evraz executive, and appearing in a US newsletter, claims that Evraz and Baosteel had agreed on a deal that "will probably end with the takeover of the Chinese company by EvrazHolding". But Evraz subsequently issued a clarification in Moscow saying: "The two leaders discussed possible cooperation between the two companies in developing iron-ore and coal deposits in Russia as well as joint projects between EvrazHolding and Shanghai Baosteel for metal production."

Evraz and Baosteel are both short of the raw material required for steelmaking. Evraz produces part of its coking-coal and iron-ore needs at Russian mines controlled by other companies in the Evraz group. But compared with his Russian rivals, Abramov is more dependent on supplies from mines he does not own, and whose prices he cannot control.

Baosteel is already a heavy importer of iron ore and coking coal from Australia, Brazil and, most recently, the United States. Evraz is looking to import both from either Canada or Australia to supplement domestic supplies. Thus a joint venture between the two for development of unmined deposits in Russia would be logical. However, as these resources are considered strategic by the Kremlin and in view of the intense rivalry among domestic steelmakers that is likely to prevent the duo from drawing on the deposits, it is highly unlikely that Baosteel will be permitted to buy into an existing Russian deposit. However, if Baosteel finances a joint greenfield mineral search project, exports may be allowed. But the Kremlin has been reluctant to agree to proposals from China to develop Russian sources of copper, electricity, oil and gas for export.

In recent months, Abramov has drawn media attention with ambitious claims in pursuit of foreign steel assets. But he has repeatedly exaggerated Evraz's intentions and capabilities; they include earlier bids he reported for Ukraine's Krivorozhstal and South Korea's Hanbo. Both plants went to domestic steelmakers - Evraz was not even considered seriously.

A recent industry study forecast that if it does buy a steelmaking plant in Asia, Evraz will focus on acquiring re-rolling mills in Southeast Asia to ensure a reliable source of demand for its billet, and re-roll it into reinforcement bar for trade in the wider Asian market. When Chinese Vice Premier Wu Yi was in Moscow last month, Abramov leaked details of his remarks at a meeting, when he reportedly asked for permission to put money into a steel-rolling combine in China. He was told with geographical precision that a project earmarked for northern China could, and should be, negotiated with China's Commerce Ministry.

Given the difficulties of developing Asian partnerships, Russians have often looked to markets in Europe and the United States for opportunities to convert their wealth. But those who have entered the US market have recently begun to discover that US regulations can be as troublesome as Asian alliances. For example, Moscow-based Mechel Steel Group, one of Russia's largest producers of coking coal, iron ore and steel, was forced to warn US investors a few days ago that it may face "significant losses" if Russian tax authorities "challenge our prices and propose adjustments".

The statement is part of a prospectus accompanying Mechel's offer to sell 13.9 million American Depositary Shares (ADSs), representing 41.6 million common shares, or about 10% of the company's issued stock. The small print of the 180-page prospectus, drafted by two well-known US law firms, Latham & Watkins and Cleary, Gottlieb, Steen & Hamilton, in fact provides an encyclopedic guide to the current risks of doing business in Russia, and with Russian corporations.

Publicly flagging tax risk by a major Russian corporate in the international investment market is unusual. But it indicates the wider impact on Russian financial practice and disclosure standards that has resulted from the criminal prosecutions since last July of the Yukos oil company and its principal shareholders. Problems such as these in the Western markets may make more sense for Russian steelmakers to look east.

John Helmer is the doyen of the foreign press corps in Russia. He first set up his Moscow bureau in 1989, and he specializes in the coverage of Russian business. US reviews of Western reporting from Russia have rated him at the top of the profession.