One of Russia’s leading mining and metal companies, Mechel OAO (MTL) is starting a new production line for cold-deformed reinforcement wire at its Beloretsk Metallurgical plant (BMP) subsidiary. Total investment in the project exceeded 55 million rubles ($1.79 million).

Mechel intends to increase the share of high-margin products manufactured under its Steel division. The company will process the cold-deformed reinforcement wire at its production unit in Moscow into quality wire rod highly demanded in construction. Mechel foresees an increase in demand for this new class of steel products. The company has already received an order for reinforcing wire of BMP production. 

Due to low carbon content and mechanical strengthening, the cold-deformed reinforcement wire has several advantages compared to hot-rolled reinforcement wire such as improved welding characteristics, increased toughness and durability, and lack of scale. Additionally, cold-deformed reinforcement wire has higher design resistance to expansion and compression allowing reduction of its expenditure at 10% to 15%.

Demand for steel in Russia is expected to be high in the coming years. Mechel and its subsidiaries have implemented a $5.2 billion investment program for 2008–2012, focusing on the development of its Mining and Steel businesses. About $3 billion would go to the Mining business, $2.2 billion to the Steel business, and $42 million to energy projects. Of this, $1.3 billion will be invested in the development of the Chelyabinsk metallurgical plant (Mechel’s primary steel production facility) until 2011.

The investments should increase total steel capacity by 35% to 6.5 million tons, besides cutting costs through a complete changeover to concasting. Chelyabinsk will increase its flat stainless sheet production by seven times to 300,000 tons and expand its range of construction and engineering steel. As a result, steel production should rise 12% and rolled products output should grow 26%.

Mechel is looking to invest $1.2 billion in the Mining segment. Part of the spending will be used to increase coal production at Southern Kuzbass by 47% to 21 million tons by 2011. Mechel recently obtained controlling stakes in the coal companies Elgaugol and Yakutugol (68.86% and 100%, respectively), paying $2.34 billion. The companies produce coal in the East Siberian region of Yakutia and had been the largest remaining standalone coal producers in Russia prior to their acquisition by Mechel. Their output is mainly high quality coking coal. Yakutugol produces 10 million tons of coal per year, most of which it has been selling to customers in Japan and Korea. The company plans to increase this output to 15 million tons and redirect it to the domestic market.

We maintain our Neutral recommendation on the stock.

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