Mechel Takes Over Failing Steel Factory

Mechel will take over management of Zlatoust steel mill, the Chelyabinsk region said Monday, in a deal many say was driven more by political than economic considerations.

A three-way strategic partnership was agreed on by Estar Group, former owner of the plant, Mechel and the Chelyabinsk region, which has been managing the mill since workers staged a hunger strike over unpaid wages. The nature of the partnership was not disclosed. The Chelyabinsk-based Zlatoust plant, one of the oldest steel producers in Russia, suspended its production from late April until mid-June because of a lack of orders. The plant filed for bankruptcy on May 27, but the case was rejected by the court.

The plant’s ownership was uncertain until the local prosecutor’s office found in late June that it was owned by State Duma Deputy Vadim Varshavsky, who had previously denied ownership.

Mechel agreed to the deal because it has had success in similar projects, namely the Beloretsk and Izhevsk steel mills, chief executive Andrei Deineko was quoted as saying in a statement. The mills were nearing bankruptcy when Mechel bought them.

Deineko also cited a “longtime positive relationship with the regional government” as a reason for the deal.

The regional government said the decision was not an easy one for Mechel.

“We understand that Mechel doesn’t have any spare money,” said Vladimir Yelistratov, a Chelyabinsk region deputy industry and natural resources minister who has been charged with supervising the Zlatoust plant.

“Yes, the choice of Mechel was a political decision, and it was the regional government’s — not Mechel’s — initiative to create the strategic partnership with the Zlatoust plant. But we want the partnership to be mutually profitable,” he said. “The synergy is possible, as Mechel’s [Chelyabinsk Steel Mill] and Estar’s plants are located only around 120 kilometers from each other.”

Mechel spokesman Ilya Zhitomirsky and Ilya Ananyev, the governor’s spokesman, declined to comment. Nobody answered the phone at Estar’s press office on Monday.

Regional governments have been quick to head off problems after protests in June forced Prime Minister Vladimir Putin to visit Pikalyovo, where he reopened a closed plant and rebuked its owner. President Dmitry Medvedev later threatened to fire governors who failed to cope with unemployment and wage arrears.

Analysts say the deal could spell financial trouble for the steel giant.

“Mechel’s own steel facilities are the least efficient among Russian majors, and this would further erode the firm’s cost competitiveness in steelmaking,” Alfa Bank said in a note Monday. “This acquisition may be part of the quid pro quo for state support in financing Mechel’s long-dated projects.”

“There is no huge economic benefit in taking control of a nearly bankrupt enterprise with last century’s equipment and technologies,” Alfa Bank analyst Sergei Krivokhizhin said.