Металлургия

According to an official filing by Khartsyzk Pipes & Tubes [HRTR UZ, N/R], as of November 18, Metinvest B.V. of the Netherlands owns 76.78% of shares outstanding in the company, having just increased its stake by 10.49%. On the other hand, MetalUkr Holding Limited has just decreased its stake by 10.49% and now owns 16.22%.

As we reported earlier, on November 12 a block of 272.57 mln of shares in Khartsyzk Pipes & Tubes changed hands on the PFTS exchange. The shares were sold at UAH 2.12 (USD 0.367) per share, for the total amount of USD 100.15 mln.

According to our calculations, Metinvest Holding LLC of Ukraine continues to own 5% of Khartsyzk Pipes & Tubes’ shares. The free float amounts to 2%.

Khartsyzk Pipes & Tubes, MetalUkr Holding Limited, and Metinvest Holding LLC are members of the MetInvest Group, an assembly of the metallurgical and mining assets belonging to Rinat Akhmetov, which is strategically directed by Metinvest Holding LLC. Vadim Novinskiy and his Smart Holding have a 25%+1 stake in Metinvest Group business.

Our view: Some sources cited SCM (the main holding of Rinat Akhmetov) and Metinvest in reporting that the deal was an internal restructuring within the Metinvest Group. The official November 18 filing supports this claim.

However, it is still not clear why the Metinvest Group chose to transfer the block via the PFTS exchange. Previously, similar consolidating steps bypassed local exchanges: for instance, in November 2007, Metinvest B.V. acquired a 60.97% stake without any observable PFTS trade.

Recently, we proposed an explanation of Metinvest having pawned the stake. Apparently, this was not the case. Nevertheless, it is possible that Metinvest may need money for acquisitions and has established the price for large stakes in Khartsyzk Pipes & Tubes for pawning (or, less likely, selling) up to 21.22% of shares in the future.

We will continue to monitor the situation.

Daniel Valk, the CEO of Dniprospetsstal [DNSS UZ, U/R], revealed that the company plans to produce 15 thsd mt of rolled products in November. This volume will be 39% down MoM (24.5 thsd mt in October) and 48% below the 10M08 average of 29.0 thsd mt per month.

Valk also revealed that margins have recently dropped to almost zero due to more than a 50% QoQ drop in products’ prices. According to Valk, costs increased threefold, although it is not clear what his reference base was.

Dniprospetsstal is the only Ukrainian producer of a wide variety of specialty steel products. The Privat Group used to own 34.2%, and, as of May 2008, VS Energy likely controlled 60%. In August 2008, a 13% block changed hands, and it is possible that the Privat Group and VS Energy now control 47%. The VS Energy group is widely expected to sell its stake to a long-term strategic owner.

Our view: NEGATIVE. After the bust of the speculative bubbles on the nickel and stainless steel products markets, the prospects of Dniprospetsstal are unclear and gloomy.

We continue to keep the company under review until the plans of its next strategic owner(s) become known.

According to Kommersant-Ukraine, Zaporizhstal [ZPST UZ, U/R] has negotiated a decrease in iron ore concentrate fine from USD 120 to USD 70 per mt. The newspaper cited Aleksandr Vilkul, the Honorary President of both Central and Pivnichnyy GOK, in reporting this development.

The Delo newspaper cited Vadim Novinskiy, one of the main beneficiaries of the Metinvest Holding, in reporting that prices for Zaporizhstal will be revised once a month. Novinskiy also said that negotiations with the owner and CEO of Mariupol Illich ISW [MMKI UZ, U/R], Vladimir Boyko, have been difficult because Boyko insists on prices being even lower than USD 70 per mt. Metinvest is also conducting negotiations with the Industrial Union of Donbas, which owns Alchevsk ISW [ALMK UZ, U/R] and Dzerzhynka [DMKD UZ, U/R].

Zaporizhstal is the fifth-largest Ukrainian steelmaker (4.46 mln mt of crude steel in 2007). The company is not vertically integrated. Zaporizhstal shares have been traded on the PFTS since May 20, 2008 after almost two years of being delisted due to a rough 3.13x minority dilution. The Midland Group owns a significant stake in Zaporizhstal - 47.70% according to our recent tally.

The MetInvest Group is an assembly of the metallurgical and mining assets belonging to Rinat Akhmetov, which is strategically directed by Metinvest Holding LLC. Vadim Novinskiy and his Smart Holding have a 25%+1 stake in Metinvest Group business.

Our view: Very POSITIVE, if true. Recently, the coke price has dropped substantially in Ukraine, and a decrease in iron ore source materials was the last barrier towards getting costs under control. We think that re-negotiations of the yearly contracts under the current very difficult conditions on world steel markets are fully justified, and commend Metinvest for showing flexibility.

Of course, we expect the Metinvest steelmakers, Azovstal [AZST UZ, U/R] and the Enakievo ISW group [ENMZ UZ, U/R], to also negotiate with the Metinvest partners regarding iron ore prices and to get a break as well.

According to Interfax-Ukraine, which has reported coke production numbers for October, the total 6% water content gross coke output of Ukrainian coke makers amounted to 1.19 mln mt last month. This is 34% down from the 9M08 average of 1.80 mln mt, and 18% down MoM from September’s 1.46 mln mt.

Our view:

According to Interfax-Ukraine, which has reported coke production numbers for October, the total 6% water content gross coke output of Ukrainian coke makers amounted to 1.19 mln mt last month. This is 34% down from the 9M08 average of 1.80 mln mt, and 18% down MoM from September’s 1.46 mln mt.

In October, Avdiivka Coke [AVDK UZ, U/R] decreased output of 6% water content gross coke by 9% MoM to 229 thsd mt, according to Interfax-Ukraine. In comparison with the average 9M08 output, at 373 thsd mt, the October volume was down 39%. For comparison, the overall sector output volume dropped 18% MoM in October.

Avdiivka Coke is Europe’s largest coke plant, with a capacity of over 5 mln metric tons of coke, as well as a member of the MetInvest Group, the assembly of metallurgical and mining assets belonging to Mr. Rinat Akhmetov, which is strategically directed by Metinvest Holding LLC. Vadim Novinskiy and his Smart Holding have a 25%+1 stake in the Metinvest Group business. In 2007, Avdiivka Coke’s total coke output was 3.6 mln mt, including 3.03 mln mt of metallurgical coke.

Our view: Because the company’s main customers, the Metinvest Group steelmakers, introduced the smallest production cuts amongst Ukrainian peers, it is not surprising that Avdiivka Coke has also been relatively resilient. Nevertheless, we expect even the Metinvest steelmakers to cut further, and will not be surprised if Avdiivka Coke drops output further to 150-200 thsd mt per month in the upcoming difficult 4Q08 and 1Q09 periods. The October drop in itself is, for the most part, NEUTRAL.