Conquering continents

Severstal is interested in Chinese assets

The Severstal Group, which has assets in North America and Europe, continues to diversify its presence abroad. According to the Interfax-China agency, Severstal entered into negotiations with the Chinese state-owned company Tonghua Steel Group on the possibility of acquiring a stake in this company and on joint development of iron ore deposits in Russia. Severstal representatives have already visited Tonghua Steel enterprises in Jilin province. However, negotiations are only at the initial stage. It is also reported that Tonghua Steel is not the only company in China whose enterprises were visited by the Severstal delegation. Severstal refrains from commenting on negotiations with Tonghua Steel.

As the news agency reports, citing a Chinese official, Severstal is interesting as a partner for the Chinese company primarily because it has its own technologies and capital. But what looks most attractive is that the Russian group has its own iron ore assets, from which Tonghua expects to benefit.

Tonghua Steel does not have its own iron ore assets. It imports a significant portion of its ore. Some are purchased on the domestic market. Tonghua Steel's capacity is 2.52 million tons of steel per year. The State Development and Reform Committee of the People's Republic of China approved the company's plans, according to which its production capacity will increase to 5.5 million tons in 2007, and to 10 million by 2010. At the end of this year or early next year, the government plans to register Tonghua Steel on one of the PRC exchanges and begin trading in yuan-denominated shares.

If Tonghua Steel agrees with Severstal on the sale of the stake, then most likely a closed bilateral agreement will be signed between the Chinese government and the Russian company, analysts suggest. However, experts do not exclude the possibility of selling part of the state stake at a tender or auction. Everyone is interested in what its price will be in this case. “In general, negotiating with Chinese companies is an art,” noted one of the analysts, “it’s difficult to make definite forecasts here. If Severstal succeeds in something, it will most likely announce it at the final stage of the deal.”

Analysts have not yet undertaken to predict what form the transaction will take. “Since the Chinese company has problems with raw materials,” says analyst Irina Lozhkina from Prospekt Investment Group, “it cannot be ruled out that the government will cede the stake to Severstal under guarantees of some kind of ore supply. It is unlikely that in this case we will be talking about a controlling stake, but everything depends on the situation in this company.” Moreover, the analyst reminds that with Severstal’s announced ambitious plans to expand production, it is interested in gaining control over the asset.

“Taking into account the growth potential of China, and in the future also of its regional neighbor, India, Severstal’s desire to enter this region is understandable. This generally corresponds to its development plans,” says Ms. Lozhkina. It is not entirely clear why Severstal needs a small Chinese asset that is not backed by ore, but the attractiveness for it of entering this market is quite obvious. When reaching the stated target - 100 million tons of products per year - Severstal will need new markets and the ability to maneuver, which a share in the Chinese company could well contribute to, the expert notes.

Anna LANDER