AKHMETOV EXPANDS STEEL AND IRON HOLDINGS ON THE EVE OF UKRAINE’S ELECTIONS

Ukrainian steel manufacturer Renat Akhmetov and Russian businessman Vadim Novinsky, principal owner of Smart Group in Ukraine, have announced a merger agreement amounting to a takeover of Smart by Akhmetov. This move should position Akhmetov clearly as the dominant force from now on among Ukraine’s steel producers. Final political and regulatory approval of the deal may hinge on the outcome of the September 30 parliamentary elections.

Economic and political competition among the main steel producers in Ukraine has long been a contest among peers, with Akhmetov slowly, but not decisively, pulling ahead. With the absorption of Smart, however, Akhmetov should no longer have peer competitors in Ukraine. Through this move his Systems Capital Management (SCM) gains not only additional production capacities but, crucially, direct access to greater iron ore resources, as well as a steel plant in Bulgaria on European Union territory.

Signed and made public on September 25, this agreement overtakes and supersedes earlier intentions to merge Smart’s most attractive Ukrainian assets with Russian magnate Alisher Usmanov’s Metalloinvest holding. Ukraine’s State Property Fund (SPF) had prepared this transaction with a view to completing the construction of the Kryvyy Rih ore enrichment complex. Usmanov has close financial links with Gazprom and political links with the Kremlin.

The SPF announced as late as September 21 that the formation of a Smart-Metalloinvest joint venture was still on track and the signing was only being postponed due to illness of the Socialist-appointed SPF chief Valentyna Semenyuk. As it turned out, this rearguard action fell flat against Akhmetov’s move. The Socialist Party has had a strong influence on the SPF since 2005, but that influence is now vanishing along with the party’s electoral fortunes.

Under the September 25 agreement, Smart is being merged into Akhmetov’s Metinvest (not to be confused with Usmanov’s Metalloinvest) holding. Akhmetov’s SCM is the principal stakeholder in Metinvest. The Metinvest and Smart combined market value is estimated at $16 billion. Akhmetov and Novinsky hope that the merger could raise that value to $20 billion. It is unofficially reported that Akhmetov shall hold 75% and Novinsky 25% of Metinvest following the absorption of Smart.

The Smart group brings the Makiivka steel making plant, the Inhulets iron ore enrichment complex, and the Bulgarian Promet rolled goods plant to the Metinvest holding. The acquisition of Promet should give SCM a foothold from which to export its production within the EU market.

Inhulets, situated in the Kryvyy Rih iron ore basin, is the most attractive asset passing from Smart to Metinvest and thus in practice to SCM control. Thus far, the breakdown of enriched iron ore production in Ukraine was as follows: Akhmetov’s Metinvest 36.1%, Novinsky’s Smart group 33.5%, Kostyantyn Zhevago’s Ferrexpo company 12.5%, Mittal-Arcelor’s Kryvyy Rih plant 10%, and Ihor Kolomoyski’s Pryvat conglomerate 7.5%, according to the statistics for 2006.

The absorption of Smart gives Akhmetov control of 70% of the existing production of enriched iron ore in Ukraine. This means that Akhmetov’s SCM steel making plants will enjoy privileged or exclusive access to larger iron ore resources and that his competitors will have to buy a large portion of the iron ore for their steel plants from Akhmetov. He should thus be able to shape the pricing of iron ore used by his competitors and also to undercut the sale prices of his competitors’ steel on the market.

Akhmetov is a key factor in the Party of Regions. The tycoons Zhevago and Kolomoyski are connected politically in one way or another with Yulia Tymoshenko and her BYuT bloc. Another significant steel-making competitor is Volodymyr Boyko, owner of the Maryupol “Ilich” (still so named) combined steel plant. Boyko as well as representatives of the Industrial Union of Donbas (IUD) are complaining publicly against Akhmetov’s absorption of Smart and expansion in the iron ore production base.

IUD, the steel-making conglomerate owned by Vytalyi Hayduk and Serhyi Taruta on a parity basis, is the main competitor to SCM. The IUD is affected by the competitive disadvantage of lacking iron ore mining and enrichment assets of its own.

Last year, IUD aligned itself politically with President Viktor Yushchenko and delegated some key figures to fill top posts in the presidential administration. That alignment was intended to counterbalance the powerful combination of Akhmetov and Prime Minister Viktor Yanukovych’s Party of Regions. At that stage, IUD negotiated toward a merger with Usmanov’s Metallinvest in hopes of gaining direct access to the latter’s iron ore resources in Russia (see EDM, February 23). That agreement did not materialize, but the attempt seemed to demonstrate that business interests in Russia could possibly trump some businessmen’s political alignment with Yushchenko.

The timing of Akhmetov’s acquisition of Inhulets is especially significant. Iron ore prices are projected to grow worldwide dramatically by the end of this year and next year due to global shortfalls in equipment, port capacities for export, and personnel in the iron-mining branch. Thus, Akhmetov’s Ukrainian rivals would have to pay more for imported iron ore and to buy some ore from Akhmetov at his prices, as SCM expands its own base of enriched iron ore.

While those rivals complain of “monopolism,” the consolidation process driven by Akhmetov corresponds with similar processes in Europe — e.g., the Mittal-Arcelor merger, following Mittal’s acquisition of Ukraine’s Kryvyy Rih steel plant. The SCM-driven consolidation should enable the Ukrainian steel industry, which generates nearly 40% of the country’s hard currency revenue, to hold its own in international competition, particularly after investing in energy-saving equipment.

(Interfax-Ukraine, September 21, 25-27; Delo [Kyiv], September 26)