Although Russian steelmaking is booming, so too is iron-ore mining. As the only one of Russia’s steel mills without a significant supply of iron-ore of its own, Magnitogorsk Metallurgical Combine, Russia’s largest steelmill, is unhappy to have discovered this week that a domestic rival may take control of most of its iron-ore supply.
In the short history of commercial steelmaking in Russia, grabbing control over raw material supplies –iron-ore or coking coal — has been the shortest route for a raider to take control of the steelmill itself. In December, after the management of Magnitogorsk beat off one hostile takeover bid by the Mechel steel and coal group, and won a rigged privatization of the last state shareholding in the plant,Magnitogorsk had seemed impregnable
This week, Alisher Usmanov, a controversial Moscow entrepreneur, who recently abandoned a raid on Anglo-Dutch steelmaker Corus, announced that he is looking to buy the Sokolovsko-Sarbaysky ore-processing combine (GOK), known as Sokolovka for short. The mine, which is located in Kazakhstan, supplies about 70% of the iron-ore which Magnitogorsk needs annually. In all, Magnitogorsk needs 16 million tons of iron-ore to turn out 10 million tons of steel products per year.
Although Usmanov, who is short of cash, may be bluffing, Magnitogorsk, which has been negotiating itself with Sokolovka before, is not concealing fresh concern. A Moscow press report on Wednesday, claiming that Usmanov’s Gazmetall group is negotiating with Magnitogorsk over the future ownership of Sokolovka has been rebuffed by Magnitogorsk sources as a hostile signal. Still, acknowledging the extent of its dependency in an announcement last week, Magnitogorsk’s CEO, Victor Rashnikov said he will step down from his post in April, and will concentrate on developing new sources of iron-ore and coking coal for the mill.
Six months ago, Rashnikov and his colleagues announced that they were exploring for iron-ore from the Kiryabinskoye deposit in the Bashkirian republic of central Siberia. But rated at just 20 million tons in reserves, this is too small to satisfy the steelmaker’s long-term requirements. According to Rob Edwards, metal analyst for Renaissance Capital in Moscow, “the critical mass needed for Magnitogorsk to develop a greenfield iron-ore mine is 30-40 million tonnes of reserves.” The mill also has a licence for the development of the Techenskoe deposit in the Chelyabinsk region of central Russia, with estimated reserves of 50 million tons. In another two years, Magnitogorsk says it is hoping to produce 2 million tons of iron-ore from this source in order to boost steel a output to 12 million tons in the same period.
This week, a Magnitogorsk source said: “we have heard that Gazmetall has had negotiations with Sokolovka. Knowing the ambitions of Mr. Usmanov I think the meaning of the term negotiations is acquisition.” The source did not say that Usmanov has been negotiating this deal with Magnitogorsk.
Usmanov and his associates now control the Lebedinsky and Mikhailovsky GOKs with a total yearly output of almost 40 million tons, making them the dominant iron-ore producer in Russia; a quarter of that volume is exported. The other major domestic iron-ore mines are each controlled by top-10 Russian steelmakers –Severstal (Karelsky Okatysh, OlenegorskyiGOK); Novolipetsk (Stoilensky GOK); Evraz (Kachkanarsky GOK); and Mechel (Korshunovsky GOK). In all, Russia produces about 100 million tons of iron-ore per year.
Until recently, the steelmakers used their control of the mines to hold prices down, and depress the profitability of the GOKs. But the global shortage of iron-ore has set Russian iron-ore prices free to rise, and as they have done so, they have threatened unprotected mills like Magnitogorsk with serious cost pressure. Usmanov’s group also controls two top-10 steelmills, Oskol and Nosta.
Usmanov and partner Vasily Anisimov, a former aluminium smelter owner, are currently in the process of buying Mikhailovsky GOK from the Metalloinvest group of Boris Ivanishvili. A 29.9-percent stake Ivanishvili owns in the pig-iron producer Tulachermet is also included in the deal. Usmanov and Anisimov have said they will contribute $1 billion in cash, and borrow another $1 billion from a state-controlled Russian bank. Usmanov has disclosed that he has raised about $614 million in recent sales Of his shares in Corns; he is estimated to have bought them for about $295 million.
To fund another major purchase like Sokolovka, Usmanov and Anisimov may view Magnitogorsk as a necessary partner. However, the Magnitogorsk source says the plant is not in favour of joining this bid.
The source implied that, should Usmanov take over Sokolovka, iron-ore prices inside Russia would rise above the level currently offered by Australian and Brazilian exporters to Russia. In that event, the source said, Magnitogorsk is likely to upgrade port facilities it already controls at Vladivostok, in the Russian Fareast, so as to facilitate importation of iron-ore from Australia or elsewhere. “The problem with iron-ore delivery is Russian ports,” the source said. “They are not designed tor the unloading of such cargo. But that problem could be solved if need be. And I think that time will come soon, because if Usmanov will accumulate all iron-ore mine shares, and lift the prices, we will have nothing to do besides searching for alternatives.”
BHP Billiton and Rio Tinto have been assessing the Russian market for sales for some time, while local steelmakers acknowledge that the cost of rail transportation across Siberia has been a deterrent for as long as local iron-ore prices remaned constrained.
Usmanov confirms through his spokesman that there have been negotiations relating to the iron-ore mine, and that Usmanov is interested in acquisition.” He did not say that Usmanov has discussed the deal with Magnitogorsk.
Alfa-Bank metal analyst Maxim Matveyey said he believes Rashnikov may try to outbid Usmanov for Sokolovka. “While almost all major ferrous metal companies in Russia have ensured their raw materials supplies, Magnitogorsk controls only 10% of its iron ore and entirely lacks its own coM. We estimate that Magnitogorsk currently buys 15% and 10% of its iron ore from Mikhailovsky and Lebedinsky GOKs. Any news about a possible solution to Magnitogorsk’s raw materials problems would be a strong catalyst for the company, but we do not expect such news anv time soon.”