Yury Adno

T

he Mechel Steel Group is the youngest vertically integrated company of Russia’s steel industry. It was founded in May 2003 and already proved to be one of the most dynamic structures possessing a rather effective system of corporate governance.
Last year the Group achieved exceptional results in developing production and sales (Pic. 1). By estimates from the Chermet corporation, the growth of producing pig iron amounted to about 17% (it is 3.1% in Russia on average), of steel to 20.1% (4.5%), of rolled stock over 30% (6.2%), of coke to about 12% (2%). The company’s net profit increased 3.8 times in one year. The specific weight of Mechel in Russia’s steel making exceeded 10% (Pic. 2). Sales of the Mechel Group’s products also grew up significantly. For example, the company’s leading enterprise, Chelyabinsk Iron & Steel, raised the volume of sales by 73%.
The company’s leaders are consistently conducting the strategy, main objectives of which are formulated the following way:
- expanding positions in making section steel;
- strengthening positions of being the leading maker of special steels;
- developing the raw material business;
- setting an advanced corporate infrastructure;
-raising competitiveness of products through reducing production costs and extending the range of products.
The most important competitive advantage of the Mechel Steel Group is the equilibrium between raw material and processing capacities. The Group is provided with resources of basic kinds of raw materials to make steel and it keeps building up its raw material potential. The ability to control expenses on resources being used certainly protects the Group from the "price fever" on markets of iron ore and coal.
The Mechel Steel Group is seeking to expand business through acquiring new assets both in Russia and abroad. It was getting ready to join the fight for owning a state stake in Magnitogorsk Iron & Steel, the largest Russian steel-making enterprise. However, on the eve of the tender the owners of Mechel radically revised their plans. They not only refused to acquire the stake put up for sale. They did sell Mechel’s stake in MMK. This decision did not have any impact on dynamics of the company’s development. What is more, many experts regarded it as a proof of a special policy "aimed at accumulating assets".
This January the safe financial state allowed the Mechel Group to acquire at a tender the blocking stake in the Yakutskugol JSC, the coal-mining enterprise. Before that Mechel already increased its balance reserves of coking coal by more than 120 million tons. As the company’s general director Vladimir Iorikh said, "production of coking coal is an important component of Mechel’s activity and we are following our strategy, which makes this direction a priority". The company’s planned investments in developing coal-mining enterprises of the Kuznetsk Basin, Yakutia, Kazakhstan will amount to about $360 million in 2005.
The company’s vigor in the raw material direction is quite explicable. Mechel started integrating large raw material assets later than other Russian holdings (Severstal, EvrazHolding, NLMK and others) and it barely managed "to catch the train" called "consolidation". The company’s resolve not to be left without its own raw material base is clearly demonstrated by its tough fight with EvrazHolding for owning the Korshunovsky ore-mining and processing enterprise, which was accompanied by court investigations and meetings organized by the labor union. This one of the large iron ore mining enterprises is located much closer to those of EvrazHolding in Siberia than to Chelyabinsk Iron & Steel in the Urals, which is still owned by Mechel. According to its program, the company intends to modernize and expand production at the Korshunovsky enterprise increasing the investment volume almost as much as 10 times. Production volumes there are already on the rise: the mining volume of iron ore has gone up over 20%, the volume of concentrate is up by 10%. At the same time the content of iron in concentrate has been raised to 62.8%.
By the company’s data, the steel production is provided with its own iron ore for 92%. Needs for coking coal are completely met: the Group is ranked second in Russia by putting out this product. It controls 24% of coal improvement capacities and over 12% of the coke market. In order to develop export of coking coal and coke the Mechel Steel Group acquired a controlling stake in the port of Pohsiet on the coast of the Sea of Japan.
Anyway, the Group’s basic business is connected with making steel rolled stock. A year ago Chelyabinsk Iron & Steel got a new billet continuous casting machine with the annual capacity of 1 million tons. This made it possible to raise production of section steel by 11% and the company was placed second in Russia by making this product. For the second year in a row the company has been a leader on the Russian market of reinforcement accounting for a third of this market.
The Mechel Steel Group retains leading positions in making special steels and alloys: its share accounts for over a half of Russia’s production of stainless and special steels. The Group intends to further expand this production. To this end the holding integrated the Yuzhuralnickel mill that accounts for 55 % of nickel shipments. Besides, Moscow’s plant Serp i Molot was taken over under its management.
The system of selling Mechel’s products is relying on the flexible price policy (systems of benefits and discounts). Precisely this helped the company maintain its market positions at a time, when the jump of prices for steel products put the domestic market on the brink of overproduction crisis.
To a considerable extent, the company’s successful operations are related to the effective business management. By results for 2004 the Mechel Steel Group was awarded a special diploma in the "Company with the biggest progress in developing corporate governance" nomination at the contest held by the Association for protecting investors’ rights. Its prestige on the international financial market has significantly grown as well thanks to the successful placing of Mechel’s shares for about $335 million on the New York Stock Exchange in October last year.

Reference:
The Mechel Steel Group includes:
in Russia Chelyabinsk Iron & Steel, coal-mining company Yuzhny Kuzbass, Beloretsk Metallurgical Works, Yuzhuralnickel enterprise, Vyartsylsky hardware plant, Uralskaya kuznitsa machine-building plant, Kaslynsky cast-iron plant, Izhstal Works, Korshunovsky ore-mining and processing enterprise Moscow’s Serp i Molot plant (being managed), Mechel Trading House, the Far Eastern port Pohsiet;
in other countries S.C. Industria Sarmei and COST (Romania), Mechel Zeljezara Sisak (Croatia), Mechel Nemuno (Lithuania), Mechelugleresurs (Kazakhstan).


Pic. 1

Dynamics of steel making at Chelyabinsk Iron & Steel, tons

January February March April May June July August September October November December

Pic. 2

Share of Chelyabinsk Iron & Steel in Russia’s steel making


Sources: Chermet corporation, Russian statistics agency