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. Last Updated: 07/27/2016

Steel Asset Shortage Hits Russia

bloombergMost developed mining assets have already been split among key firms.
A shortage of raw material assets left up for grabs is causing a run on remaining iron ore plants and deposits, and may force steel producers to expand their quest beyond Russia.

Russian steelmakers, unlike many global rivals, are unique in having their own iron ore or coking coal supplies. Yet soaring raw material prices and rising production costs are a big headache.

"It's really only now that it has caught people's interest because of the rising price of iron ore and coking coal," Aton analyst Timothy McCutcheon said. The only problem was that there was not that much left to buy in Russia, he added.

Russia, the world's No. 2 steel exporter, is also one of the world's biggest iron ore producers and has some of the world's largest unexplored iron ore reserves.

Most developed mining assets have already been divided among key market players, while notable greenfield projects are only beginning to emerge.

That leaves producers with two options: either start buying assets in Ukraine, Kazakhstan or other ex-Soviet states, or focus on existing or greenfield projects in Russia.

"Most companies are now concentrating on gaining licenses or buying companies already holding licenses to mine raw materials because not that many big developed assets are left there in Russia for sale," said Maxim Matveyev of Alfa Bank.

Iron ore in Russia mainly comes from three key ore enrichment plants, or GOKs — Kachkanar, owned by No. 1 steelmaker Yevrazholding; and Lebedinsky and Mikhailovsky, separately controlled by metals tycoon Alisher Usmanov.

Recent big deals on the upstream side include Yevraz's takeover of the Kachkanar GOK last year in an acquisition that helped it sharply raise the proportion of iron ore supplies sourced from within the company.

Another steel major, Mechel, sees sales of coking coal as part of its core business, has been aggressively expanding its coal base and plans to take part in a number of coal mining tenders in Russia's Kuzbass coal field.

As for greenfield projects, Severstal plans to start developing its Korpanga iron ore deposit in northwestern Russia some time next year, according to Russian media.

But greenfield projects, although attractive to producers, may take years until they start bringing solid returns — and offer no short-term solution to market shortages.

Some companies, aware of these problems, are beginning to look across the border. Kazakhstan's Sokolov-Sarbai GOK has long been the subject of speculation over possible takeover talks with a foreign producer.

Russia's Magnitogorsk Iron and Steel Works, or MMK, which has no solid raw materials base of its own, is Sokolov's main client.

"[MMK's] quest for raw materials is a major news driver for this year," McCutcheon said. "And you are going to see companies starting to look at things in Ukraine."

Ukraine has about 10 GOKs, but the market seems to have no room for Russian firms: All are largely controlled by domestic steelmakers and influential business figures.

But analysts say a possible review of last year's privatization of the giant Kryvorizhstal steel plant may spark fresh interest in Ukrainian upstream assets.