Mechel in Media

Oleg Korzhov: We aim for the world's top 3 coking coal exporters

25.11.2014

SNL Financial

Russian miner Mechel OAO is a company caught in the midst of the commodity crisis, with assets in the coal, iron ore, and steel sectors. CEO Oleg Korzhov spoke to SNL Metals & Mining to discuss his company's strategy, debt restructuring, and forecast for the markets.

SNL Metals & Mining: What is your outlook for Mechel over the next year, the next five years?

Oleg Korzhov: If we are talking about our key business segment, mining, which brings in over 60% of Mechel's EBITDA, we expect that coal prices will start to gradually recover in 2015 and continue to grow starting in 2016. Today dozens of coal producers in the U.S. and Canada, Australia and China are operating on the edge of loss. Various estimates show that 30% to 50% of all coking coal exporters work at a loss.

Considering that prices are at record lows [over the past six to seven years] and the glut of coal, weak players will inevitably leave the market. Meanwhile, global demand for steel remains stable and even demonstrates slow growth by 2% to 3%. Major steelmakers increase steel production levels every year. For Mechel, this is an opportunity to consolidate our position — once the Elga Coal Complex reaches its project capacity, we expect to become one of the world's top three coking coal exporters.

In 2014 we expect to maintain coal sales at last year's level. In the mid-term, the Elga coal deposit in Russia's Far East with 2.2 billion tonnes of JORC-proved reserves will become the key driver of Mechel's growth. Since the third quarter of this year, we have reached a monthly production level of 200,000 tonnes. In 2015-2016, we plan to mine and process at the deposit some 3 million tonnes to 3.5 million tonnes of raw coal annually, with medium-term potential ramp up to as much as 12 million tonnes of coal annually.

How have slumping commodity prices affected your company?

The slump in global commodity prices proves a pressure on Mechel's financial results. We are currently in talks with our lenders on restructuring our debt. Early this year we halted our U.S.-based coal producer, Bluestone. Meanwhile, our Russian coal mining facilities are among the best in the world on the revenue they make. Even in these trying times, they all operate at a profit, and we are among 25% of the most profit-making producers.

Our second key segment is steelmaking. Here our strategic priority is in increasing our share of the market for high-margin products — rails and structural shapes. In 2013 we launched a universal rolling mill at Chelyabinsk Metallurgical Plant, with an annual capacity of 1.1 million tonnes. Russian Railways OAO will be our chief customer. We are currently negotiating with other potential customers of Mechel's rails both in Russia and abroad.

How are you planning to operate with the glut in the iron ore market? What is your forecast for this market?

We see that today that there is excessive supply of iron ore concentrate on the global market. This means that most likely, prices in the medium term will be going down. With this unfavorable trend in mind, we redirected our supply of the Korshunovsky mining plant's iron ore that used to be exported to China, to the domestic market, particularly Mechel's Chelyabinsk metallurgical plant. This will help compensate our losses in the mining segment by increasing revenue in the steel segment.

Could you please elaborate on the debt restructuring process? How are the negotiations with the creditors going, when do you think a resolution might be reached? What progress has been made to date?

With the dollar exchange rate being what it is right now, Mechel's debt totals US$7 billion, with state banks — Gazprombank, VTB and Sberbank — accounting for US$4.5 billion. We continue active talks with lenders on restructuring our debt. We have worked out a detailed plan based on a financial model with a conservative forecast on coal prices. If adopted, this plan will enable us to repay the full amount of debt to the banks and retain the holding's integrity. We hope to reach consensus on restructuring very shortly.

How do you see the Russian mining sector developing? How will it be in five years?

The development strategy for Russia's coal industry until 2030 includes shifting the focus of coal production east into less developed regions, closer to our Asian customers. Our Elga project is a good example of bringing this strategy into reality. The major coal markets are located in Asia, with their consumption totaling 67% of the seaborne coal market. Elga has a unique geographical advantage on the coal markets of Asia Pacific, due to a comparatively short transport shoulder to the ports.

According to analysts' data, China's import of metallurgical coal went up by 40% in 2013 year over year, reaching 75 million tonnes, and is due to double within 10 years. Russia will join Australia and Canada as a key metallurgical coal supplier for Asia Pacific, in many ways thanks to the Elga project.

How have Western sanctions affected Mechel? Are you expecting sanctions to include the mining sector in the future?

Mechel is a privately owned company. We can affirm that sanctions, which have impacted several Russian economic sectors, have had no influence on our operations. We are not engaged in politics, our business is coal, steel and ore. Troubling trends on global commodity markets are of much greater concern to us.

How has the devaluation of the ruble affected your business? Have you raised your employees' salaries to compensate for the inflation?

The ruble's devaluation has had a positive effect for us. It makes our products more competitive on the global market, as our costs are mostly ruble-nominated. A major part of our debt is also ruble-nominated, which gives us some advantage when using our export revenue to service it.

Our employees' salaries are indexed quarterly depending on the growth of consumer prices for products and services. This is included in the legal agreements between our enterprises' administration and trade unions.

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