Russian steel major claims Chinese
coup By John Helmer
MOSCOW -
Despite an explicit warning from a Chinese official last
month, Alexander Abramov, controlling shareholder of
Evraz Holding, Russia's largest steelmaker, claims to be
planning a major steel-plant acquisition in Shanghai.
The owners of Russia's metal companies, lured by
the offshore profit and security of converting their
wealth, generally avoid Asia despite the fact that Asian
markets - principally China, Japan, South Korea and
Taiwan - take the lion's share of Russian exports of
steel, aluminum, nickel and copper. Russian steelmakers
have been eyeing ailing steel plants in Taiwan, the
Philippines and South Korea for possible purchase. But
so far they have been beaten to the punch by local
buyers.
In China a decade ago, Russian metal
exporters began by dealing through international traders
- with large warehouses, credit lines and collection
schemes - to enable them to deal with Chinese payment
risks. The Russians themselves are still fearful of
being outfoxed by the locals, and have avoided capital
transactions for fear of losing their money. The
Sino-Russian strategic relationship, renewed
rhetorically by President Vladimir Putin in Beijing this
month, is viewed by Russian metals exporters as
providing no protection from trade retaliation from
Chinese steelmakers and no commercial advantage compared
with other international suppliers.
The
announcement this week by Evraz that it has opened a
"dialogue" with Baosteel of Shanghai thus appears to be
a new development. The heads of the two steelmakers,
Abramov and Xie Quihua, met on the sidelines of Putin's
China visit. Shanghai-based Baosteel is China's largest
steel producer, and the third-largest in the world. With
sales revenues of US$14.6 billion last year and output
of 19.5 million tons of flat steel products, Baosteel
dwarfs Abramov's holding of three mills that specialize
in long steel such as rails, reinforcement bars, wire,
wheels and rod. Last year, according to Evraz financial
statements, its revenues were almost $3 billion and
output about 13 million tons.
A leak attributed
to an Evraz executive, and appearing in a US newsletter,
claims that Evraz and Baosteel had agreed on a deal that
"will probably end with the takeover of the Chinese
company by EvrazHolding". But Evraz subsequently issued
a clarification in Moscow saying: "The two leaders
discussed possible cooperation between the two companies
in developing iron-ore and coal deposits in Russia as
well as joint projects between EvrazHolding and Shanghai
Baosteel for metal production."
Evraz and
Baosteel are both short of the raw material required for
steelmaking. Evraz produces part of its coking-coal and
iron-ore needs at Russian mines controlled by other
companies in the Evraz group. But compared with his
Russian rivals, Abramov is more dependent on supplies
from mines he does not own, and whose prices he cannot
control.
Baosteel is already a heavy importer of
iron ore and coking coal from Australia, Brazil and,
most recently, the United States. Evraz is looking to
import both from either Canada or Australia to
supplement domestic supplies. Thus a joint venture
between the two for development of unmined deposits in
Russia would be logical. However, as these resources are
considered strategic by the Kremlin and in view of the
intense rivalry among domestic steelmakers that is
likely to prevent the duo from drawing on the deposits,
it is highly unlikely that Baosteel will be permitted to
buy into an existing Russian deposit. However, if
Baosteel finances a joint greenfield mineral search
project, exports may be allowed. But the Kremlin has
been reluctant to agree to proposals from China to
develop Russian sources of copper, electricity, oil and
gas for export.
In recent months, Abramov has
drawn media attention with ambitious claims in pursuit
of foreign steel assets. But he has repeatedly
exaggerated Evraz's intentions and capabilities; they
include earlier bids he reported for Ukraine's
Krivorozhstal and South Korea's Hanbo. Both plants went
to domestic steelmakers - Evraz was not even considered
seriously.
A recent industry study forecast that
if it does buy a steelmaking plant in Asia, Evraz will
focus on acquiring re-rolling mills in Southeast Asia to
ensure a reliable source of demand for its billet, and
re-roll it into reinforcement bar for trade in the wider
Asian market. When Chinese Vice Premier Wu Yi was in
Moscow last month, Abramov leaked details of his remarks
at a meeting, when he reportedly asked for permission to
put money into a steel-rolling combine in China. He was
told with geographical precision that a project
earmarked for northern China could, and should be,
negotiated with China's Commerce Ministry.
Given
the difficulties of developing Asian partnerships,
Russians have often looked to markets in Europe and the
United States for opportunities to convert their wealth.
But those who have entered the US market have recently
begun to discover that US regulations can be as
troublesome as Asian alliances. For example,
Moscow-based Mechel Steel Group, one of Russia's largest
producers of coking coal, iron ore and steel, was forced
to warn US investors a few days ago that it may face
"significant losses" if Russian tax authorities
"challenge our prices and propose adjustments".
The statement is part of a prospectus
accompanying Mechel's offer to sell 13.9 million
American Depositary Shares (ADSs), representing 41.6
million common shares, or about 10% of the company's
issued stock. The small print of the 180-page
prospectus, drafted by two well-known US law firms,
Latham & Watkins and Cleary, Gottlieb, Steen &
Hamilton, in fact provides an encyclopedic guide to the
current risks of doing business in Russia, and with
Russian corporations.
Publicly flagging tax risk
by a major Russian corporate in the international
investment market is unusual. But it indicates the wider
impact on Russian financial practice and disclosure
standards that has resulted from the criminal
prosecutions since last July of the Yukos oil company
and its principal shareholders. Problems such as these
in the Western markets may make more sense for Russian
steelmakers to look east.
John Helmer
is the doyen of the foreign press corps in Russia. He
first set up his Moscow bureau in 1989, and he
specializes in the coverage of Russian business. US
reviews of Western reporting from Russia have rated him
at the top of the profession.
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