Mechel Punished With Coal Price Cuts

MTArtemyev saying that Mechel would have to cut prices at a briefing Thursday.
Mechel must slash domestic coking coal prices and pay a "below average" fine for abusing its market position, anti-monopoly authorities said Thursday, as fears of a state attack on the company subsided.

Mechel, the country's largest producer of coal for steelmakers, lost half its market value in three trading days last month after Prime Minister Vladimir Putin twice attacked its pricing policy and sparked fears of a Kremlin-backed drive to punish the firm.

Analysts said potential lost revenues of $600 million in the second half of the year, plus a fine of up to $200 million, was a small price to pay for escaping the fate of Yukos, the once-mighty oil company destroyed by massive back tax claims.

"The chances of this most radical of outcomes has been reduced to near zero," Alfa Bank analysts said in a note.

Mechel's case has drawn special attention after Putin's public attacks erased $8 billion off the company's value and triggered a wider sell-off that dragged Russian shares to their lowest levels in nearly two years when the war in Georgia also erupted.

The Federal Anti-Monopoly Service found Mechel guilty of abusing its dominant market position and demanded that the company, owned by billionaire Igor Zyuzin, switch to long-term contracts for its coking coal supplies from 2009.

"Our demand will be for a significant reduction," anti-monopoly service head Igor Artemyev told reporters, referring to Mechel's coal prices. He did not specify the level of the reduction, which Russian media have reported could be in the region of 30 percent.

In return, Mechel would receive a below average fine, Artemyev said. Its violation carries a fine of 1 percent to 15 percent of annual revenues from sales of the commodity concerned.

The anti-monopoly service said it would rule within 10 to 20 days on the fate of Raspadskaya, Mechel's closest competitor in coking coal, and a trading unit of steelmaker Evraz Group, which are also under investigation for alleged market abuses.

The watchdog said Mechel had been penalized because it had set discriminatory conditions for some market players and refused without justification to trade with other participants.

A Mechel spokesman said the company would refrain from commenting until it received official notification of the anti-monopoly service's ruling. The service not publicly disclosed the size of the fine.

Mechel, also the country's sixth-largest steelmaker, posted 2007 revenues of $6.7 billion. Its mining segment contributed $1.8 billion, although it has not disclosed the contribution of its coking coal mines, the amount on which any fine would be based.

UralSib estimated that Mechel might face a fine of between $15 million and $220 million, while Deutsche Bank forecast a fine between $20 million and $200 million.

More damaging, said analysts, would be the loss of potential revenues incurred as a result of a reduction in coal prices.

Dmitry Smolin, mining analyst at UralSib, said Mechel could miss out on $600 million in second-half revenues.

Another analyst, UniCredit Aton's Marat Gabitov, said losses in revenue could amount to $950 million for the whole of 2008.

The ruling could have knock-on effects for the entire coking coal mining sector, which has enjoyed booming prices in the last year as a global shortage combines with runaway demand.

"Mechel is the largest coking coal miner in Russia, so all other producers will be required to follow suit," Smolin said.

"The sector will become regulated by the state, and this could lead to a negative reevaluation of the entire sector."

Mechel shares rose over 3 percent when the New York market opened, before retreating to $26.62, down 1.1 percent on the day, by 1600 GMT.

This is 27 percent below the closing price on July 23, the day before Putin launched his first public attack, but 65 percent above the low of $16.12 to which the stock plunged after his second attack July 28.