Irina Tsyruleva
Mechel to pay penalties
This August, Prime Minister Vladimir Putin publicly attacked the pricing policy pursued by the Mechel Group, one of Russia's largest mining and metals companies. However, his criticism cost the company much less than to Mechel shareholders and the Russian stock market.
The Federal Anti-Monopoly Service (FAS) will make the company pay 790 million roubles, or 5% of the company's yearly turnover, in penalties (Russia's Code of Administrative Offences provides for penalties between 1% and 15% in such cases).
Igor Artemyev, the FAS's head, explained on August 19 that the penalties imposed on Mechel were so small because of its active cooperation with the anti-monopoly body. He also said that the company itself agreed to cut its prices by 15%.
"Today, we have received a positive signal from Mechel and other companies trading in coking coal that they will voluntarily cut their prices by 15%," said the FAS head to journalists adding that this complies with the anti-monopoly agency's instructions.
On Tuesday, Mechel's ADRs (American Depository Receipts) traded in New York rose by 4.3%, but later the figure was revised downwards to 2.3%. At present, the FAS is also investigating the case against Evraz Holding and the Raspadsky Ugol company. Artemyev told journalists that these companies were facing the same penalties as those imposed on Mechel (5% of their turnover). The FAS intends to close the case against them within the next two weeks. Now investors can have confidence that Mechel's case is not that of Yukos and that the group's rivals will not take advantage of the situation in order to seize the group.
Vladimir Putin also seemed to be pleased with the developments. He saw for himself that his word could tangibly sink the capitalisation of the entire stock market. On August 18, when opening a session on the development of competition, he pointed to positive changes that had evolved in the Russian metallurgical sector after the discussion of Mechel's pricing policy.
"I am pleased to see that our discussions have given a positive impulse. Raw material producers have come to terms with metals producers and signed long-term contracts," he said.
According to Vladimir Putin, the prices need to be cut throughout the entire production chain "to allow metals producers themselves to enter into agreements with consumers." At the same time, the Prime Minister called the discussion of Mechel's pricing and the reaction that followed "manual control."
"We must create a system that can regulate competition justly and rationally," he said. Mr Putin also called [on the Government] to examine the FAS's proposals on ways to develop competition in order to improve legislation in this sphere and remove the revealed gaps and loopholes. "These should be system-based decisions aimed at forming more transparent, flexible and fair rules for the competitive struggle, promoting sustainable economic growth, lowering inflation and reducing corruption," Mr Putin said.
Citing the FAS's data, the Prime Minister said that last year the agency uncovered 1,590 cases involving companies abusing their dominant position in the market, 226 illegal cartel agreements, and 2,970 instances of state authorities and local governments unlawfully restricting competition with new legal acts adopted.
"The level of competition in the Russian economy is still insufficient, which causes concern in government bodies and complaints from business," Putin said.
Note that at a [Government] meeting on metallurgy held on July 24 Vladimir Putin subjected the pricing policy of the Mechel Group dominating the coking coal market in Russia to harsh criticism and asked the FAS to look closer at its activities. Shortly before the meeting, Igor Zyuzin, Mechel's main beneficiary, was taken to hospital and Putin expressed his strong dissatisfaction over his absence. The Prime Minister accused Mechel of overpricing coal on the domestic market (up fourfold) and undercutting it on foreign markets, and also of tax evasion via its offshore subsidiaries. All this led to a fall of Mechel shares on both Russian and western trading floors, thus reducing the company's capitalisation to nearly half form $15 billion.
Actually, the FAS launched an investigation into Mechel a week before Mr Putin gave his accusatory speech following complaints by Novolipetsk Steel, the Magnitogorsk Iron & Steel Works (MMK) and Altai Koks, which accused Mechel of refusing to supply coal to them for unknown reasons. An investigation was launched and in mid-August the press service of the anti-monopoly agency reported that the company was found guilty of abusing its dominant position on the market.
In response to these charges, Mechel promised to level coke prices and to cooperate with state agencies on raw materials prices. Later, it became one of the first companies to sign long-term contracts with consumers. The company's moves were appreciated and the FAS decided on smaller penalties, experts said.
"The sanctions are small. It is not yet clear what will happen next year but we look positively at this year's pricing trend," said Marat Gabitov of Unicredit Aton.
The expert was quite satisfied with Mr Putin's statement. "I liked Vladimir Putin's businesslike approach: the impression is that the company will face no more trouble in future."
Note that such affairs have never happened in this sector before. Previously, the FAS repeatedly registered overpricing on the metals market, but it never led to sanctions. Some investors believe the situation changed radically after the Prime Minister dropped hints at possible personnel reshuffles in the FAS.
"More complaints have been coming from companies of late, so the Prime Minister has decided to look into the problem by examining them," a metals company's spokesman told Vremya Novostei.
However, Vladimir Zhukov of Lehman Brothers is not inclined to regard the situation that has evolved as political. "Coal prices have never risen so fast before. The FAS's task is to make the companies maintain their pricing policy," he said.