MMK Ready to Repay Mechel

Magnitogorsk Iron and Steel Works, or MMK, said Monday that it was ready to pay its 801 million ruble ($22 million) debt to Mechel, signaling an end to a major dispute that has helped cripple the economy.

A senior MMK executive said the steelmaker would make good on the debt as early as this week if penalty fees were scrapped. If not, the full cash payment will be made by the end of the month, he said on condition of anonymity, citing company policy.

The executive also said MMK would produce 800,000 tons of steel in March, nearly double 421,000 tons in December, and that February sales to former Soviet Union members would surpass exports to other countries for the first time since the crisis broke out last fall.

"We think the hardest period of the crisis has passed," the executive said.

He said MMK, Russia's third-largest steelmaker, expected to post a profit this year.

Mechel, the country's biggest coking coal producer, declined to comment Monday on the debt negotiations. It sued MMK in Chelyabinsk's Arbitration Court last month after the steelmaker refused to pay for 2008 coal deliveries. Mechel once supplied 20 percent of MMK's needs.

The next court hearing is scheduled for Feb. 19.

The MMK executive said he believed that Mechel would drop its lawsuit before the hearing.

"We are ready to pay the whole sum today," the executive said.

He said MMK would repay the 801 million ruble debt in full by the end of the week if Mechel dropped its claim for penalty fees estimated at 39 million rubles; otherwise, the company will pay off the debt in tranches by the end of the month. MMK paid 200 million rubles of the debt Thursday.

MMK previously said it could not pay its debts because Gazprom had delayed payments to pipe makers, which in turn postponed payments to MMK and other steelmakers. Completing the vicious circle, Mechel then refused to supply coal to MMK.

In the latest sign that bartering is making a comeback during the crisis, the MMK executive said Mechel had rejected his company's initial offer to settle the debt under a deal in which MMK would send steel to Uralvagonzavod, which supplies train cars to the Russian Railways, and Russian Railways would in turn provide transportation services to Mechel.

The executive also revealed that MMK had managed to secure a loan worth 416.5 million euros ($532 million) to build a new steel mill from a group of foreign banks at the end of last year. He refused to identify the banks.

Separately, the executive said MMK was planning to raise its production to 800,000 tons a month, or 90 percent of its capacity, in March. Domestic demand for steel has revived as metal traders' stockpiles have sold out, he said.

"We want to keep the output level at 700,000 to 750,000 tons through the year," he said, adding that his company was planning to produce at least 7 million tons of steel in 2009.

Steel prices have risen since December but still remain below last summer's peaks. Domestic rebar is sold for $377 per ton, 71 percent down from a high in July, UralSib said. Metal traders interviewed by The Moscow Times said they expected prices to weaken again once warehouses are refilled.

MMK has received orders for more steel than its plant can produce at its current output levels, the executive said.

"We have gotten orders for 800,000 tons, while we are currently working at a capacity of only 720,000 tons per month," he said. "We have used high prices to brush off clients for whom we didn't have enough steel."

Among those clients was Metallservice Group, Russia's biggest metal trader, said its chief executive, Oleg Tyurpenko.

"Our manager agreed on steel deliveries at a certain price, and the next morning they called us to say prices were 10 percent higher," Tyurpenko said by telephone. "It was too high for us, and we declined delivery."

The MMK executive said February orders showed that the company would sell 52 percent of its output in Russia and other former Soviet republics. MMK sold up to 65 percent of its output outside the former Soviet Union late last year. "That was the market where we could actually collect the money," the executive said.

Tyurpenko criticized MMK's pricing policy. "They rush from one extreme to another, first selling abroad as much as possible and leaving the domestic market hungry, and now when export opportunities are fading they want to fill the domestic market with steel, which will send prices down again," he said.

MMK has big plans for the domestic market and is planning to soon start negotiations for supplies for Olympic projects for the 2014 Sochi Games, the executive said.

Michael Kavanagh, a metals analyst with UralSib, said in a note to investors Monday that he expected average steel sales volumes in Russia to be down 20 percent year on year in 2009 and average prices to be down 50 percent year on year for 2009.

The executive predicted that prices would continue to grow through the spring and summer.