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. Last Updated: 07/27/2016

Price Pinch Puts Squeeze On Mechel

Steelmaker Mechel suffered a squeeze in profitability due to weak steel prices in the first half of the year, but its strong mining operations helped soften the blow, results showed on Monday.

Net profit declined by 4.3 percent year on year to $243.6 million despite a rise of 33.2 percent in revenues to $2.14 billion, New York-listed Mechel said in results to U.S. GAAP.

Earnings before interest, taxation, depreciation and amortization amounted to $422.7 million, barely up from $420.6 million in the first half of 2004.

But the EBITDA margin slumped to 19.7 percent in the first half from 26.1 percent, surprising analysts who had expected margins to hold up.

"It is a really weak performance," said Kirill Chuiko, steel analyst at UralSib brokerage in Moscow. "The market had expected much better results."

The company, whose net profit more than tripled in the first quarter of 2005 on strong demand, had warned of a market slowdown.

"In the second quarter 2005, we saw negative pricing trends for both our mining and steel products," chief executive Vladimir Iorich said.

He said Mechel's vertical integration, which enables it to supply inputs such as coking coal and iron ore concentrate to its smelters, had helped it to cope with weaker steel prices in the spring quarter.

"Although this was a challenging time for us, we believe that it also confirms that our dual strategy of seeking to continue to increase our mining segment through organic growth and acquisitions, while working to improve the bottom line through a comprehensive efficiency program, is exactly the right focus for us," Iorich said.

Mechel's first-half steel sales grew 24.3 percent to $1.55 billion, but steel segment net income slumped by 89.6 percent to $9.5 million.

"We expected that steel sector profitability would be lower, but it came up even lower than our forecast," said UralSib's Chuiko. "Mechel appears to be paying more attention to its mining business and no longer wants to subsidize steel with transfer prices.

Mechel floated in New York in October 2004, raising $300 million.