Metallurgy according to Putin

Mechel will pay a fine

Prime Minister Vladimir Putin's public criticism of the pricing policy of the Mechel group cost one of the country's largest mining and metallurgical companies much less than the damage that the prime minister's speech caused to Mechel shareholders and the entire Russian stock market. The Federal Antimonopoly Service will impose a fine on the company of 5% of its annual turnover (according to the Code of Administrative Offences, the fine could range from 1 to 15%), or 790 million rubles. The head of the FAS, Igor Artemyev, explained yesterday that such a small fine was imposed on the company due to its active cooperation with the antimonopoly authority. According to Mr. Artemyev, the company also voluntarily agreed to reduce product prices by 15%. “Today we received a pleasant signal from Mechel and other companies involved in the sale of coking coal that they are voluntarily ready to lower their prices by 15%,” the head of the FAS told reporters, adding that this coincides with the regulations of the antimonopoly agency.

Quotes of Mechel's American depositary receipts (ADR) at trading in New York on Tuesday after the FAS statements rose by 4.3%, and later adjusted to 2.3%. As you know, the FAS is currently also investigating the case against Evrazholding and the Raspadsky Coal company. And, as Mr. Artemyev told reporters, they will face the same penalties as Mechel - 5% of turnover. The FAS intends to finish the case against these companies within the next two weeks. At least now investors should have more confidence that Mechel is not Yukos No. 2 and that the group's competitors will not take advantage of the situation to take over it.

It seems that this development of events pleases Vladimir Putin himself, who has become convinced in practice that one of his words can greatly reduce the capitalization of the entire stock market . Opening a meeting yesterday on the development of competition, he noted the positive changes in the Russian metallurgical industry that occurred after the June discussion of the pricing policy of the Mechel group. “I am pleased to note that our discussions have produced positive movement,” he said. “Producers of raw materials reached an agreement with metallurgists and entered into long-term contracts.” According to the prime minister, it is now necessary to reduce prices throughout the entire production chain, “so that the metallurgists themselves reach agreements with consumers.” Meanwhile, the prime minister called the situation with the discussion of Mechel’s pricing and the subsequent reaction to it “manual control,” while “we must create a system that would regulate the competition situation fairly and rationally.” Putin also called for consideration of the FAS' work on developing competition in order to improve legislation in this area and eliminate identified gaps and loopholes. “These must be systemic solutions to create more transparent, flexible and fair rules of competition, and thereby help maintain sustainable economic growth, reduce inflation dynamics, and reduce the level of corruption,” Mr. Putin said.

Referring to FAS data, the prime minister said that last year 1,590 cases of abuse of a dominant position in the market, 226 prohibited cartel agreements, 2,970 acts of state authorities and local self-government that unlawfully restrict competition were identified. “So far, the level of development of competition in the Russian economy is clearly insufficient, which, of course, causes concern among government agencies and complaints among market participants,” Mr. Putin noted.

Let us recall that on July 24, Vladimir Putin, at a meeting on metallurgy, sharply criticized the pricing policy of the Mechel group, which occupies a dominant position in the coking coal market in Russia, and asked the FAS to pay close attention to its activities. The main shareholder of Mechel, Igor Zyuzin, went to the hospital on the eve of that meeting, and Putin spoke rather harshly about his absence. The Prime Minister accused Mechel of inflating coal prices fourfold on the domestic market and understating them on the foreign market, as well as tax evasion through offshore companies. This led to the collapse of the company’s shares on both Russian and Western stock exchanges, as a result of which the capitalization halved from almost $15 billion. Moreover, actually a week before Mr. Putin’s accusatory speech, the FAS had already launched an investigation into this company for statement received from a number of metallurgists - Novolipetsk Iron and Steel Works, Magnitogorsk Iron and Steel Works and Altai-Koks, who accused Mechel of refusing, for some unknown reason, to supply its coal. An investigation began, and already in mid-August the press service of the antimonopoly agency published a message that the company was found guilty of abusing its dominant position in the market.

Mechel's management, in response, promised to prevent differences in coke prices, to cooperate with government agencies on pricing of raw materials, and subsequently was almost one of the first to conclude long-term contracts with consumers. This behavior was appreciated: the FAS, when deciding on fines, gave the company a significant discount, experts said yesterday. “The sanctions are small. It is not yet clear what will happen next year, but we estimate prices positively for this year,” said Marat Gabitov from Unicredit Aton. The expert was also pleased with Mr. Putin’s speech: “I liked that the words spoken by Vladimir Putin were spoken in a working tone, so I got the impression that nothing bad would happen to the company again.”

At the same time, it is worth noting that this is the first time such a situation has occurred in the industry. Previously, the FAS has repeatedly recorded overpricing on the metals market, but it never came to the point of imposing sanctions. The fundamental change in the situation, according to some market participants, was influenced by the Prime Minister's hints on possible personnel decisions regarding the FAS. “Complaints from companies have become more frequent, and the head of government, apparently, himself decided to familiarize himself with the problem in this way,” a representative of one of the metal companies noted to Vremya Novostey. However, Vladimir Zhukov from Lehman Brothers is still not inclined to call the current situation political. “Coal prices have never risen so much before. Therefore, the task of the FAS is precisely to ensure that companies comply with pricing policies,” he noted.

Irina TSYRULEVA