Mechel Posts Record Profits for 9 Months

Mechel, the country's largest coking coal producer, had record profits in the first three quarters of the year but will have to cut production and working hours to navigate through a period of sinking commodities prices, chief executive Igor Zyuzin said Thursday.

Net income soared 131.9 percent to $1.64 billion, and earnings before interest, tax, depreciation and amortization rose 137.7 percent to $2.86 billion on record coal and steel prices, Mechel said in a statement. Sales grew 85 percent to $8.6 billion.

The company's American Depositary Receipts were down 2.6 percent at 2:12 p.m. in New York, outperforming Russian stock indexes. The RTS Index fell 4.5 percent Thursday.

Speaking during a conference call after the company announced its results, majority owner Zyuzin said Mechel had hedged itself to protect against crisis related risks. But the company, which faced a stinging attack in July from Prime Minister Vladimir Putin on its pricing policies, faces worse results for the fourth quarter as demand for coking coal and steel sinks.

As a result, Zyuzin said, Mechel will cut its overall production by 20 to 25 percent in the fourth quarter of 2008 and the first quarter next year. To keep its profits high, he said, Mechel is increasing its sales of thermal coal and reducing coking coal production as well as looking to ferroalloys instead of nickel.

"We are adjusting production to a bigger share of steam coal, as its market has improved," Zyuzin said, adding the demand for the coking coal had halved.

Zyuzin said he was expecting the reduction of the coking and thermal coal prices by 20 to 30 percent in the first half of the next year.

Mechel also had a 50 percent hedge against rising electricity prices, Zyuzin said, and a number of other measures should help the company get through the down market.

"Our drivers are: selling metals through our own broad sales network, sales of metals for different industries, and exposure to different world markets," he said. The company exports to South Korea, Japan, as well as to Europe.

Putin criticized the company for selling coking coal, one of the materials used in steelmaking, to domestic customers at double the price it was selling it abroad.

Zyuzin said that while he expected an overall slowdown on the Russian construction market of 10 to 20 percent in 2009, Mechel's sales structure would enable the company to increase its market share.

Zyuzin said Mechel had reduced work hours instead of cutting jobs, and had already saved $30 million with the measure this year.

Mechel had frozen almost all of its investment programs until January 2010, prioritizing the construction of a rolling mill at the Chelyabinsk Steel Plant and construction of a rail link to its Elga coal deposit and the open pit at the site.

"We hope that in 2009 the company will continue its mergers and acquisitions activity, partially offsetting negative consequences of the world economic crisis," Zyuzin said.