On August 19, the Federal Antimonopoly Service (FAS) announced its decision as regards Mechel and fined the company for 5% of its coking coal segment annual turnover. Additionally, FAS head, Igor Artemiev said that the state authority would recommend Mechel reduce its prices by 15% by the end of the year, starting from September 1, and expressed his hope that not only coal companies would follow Mechel’s example, but also steelmaking companies. In our opinion, this news is positive for Mechel stock valuations, but neutral for the ferrous metals sector.
It is still unclear how the FAS will oblige all commodity and steelmaking companies to reduce their prices. As for commodity companies, the FAS may exercise control over them quite successfully, since goods produced by commodity companies usually have standard characteristics. This implies greater controllability as compared to steel makers and finished goods manufacturers, where the huge number of product variations makes efficient correction of prices by the state almost impossible. However, even with commodity companies, the pricing process is largely affected by transportation expenses, so the sales price depends on the geographic location of a goods seller or purchaser. This means that any price cap is only a guideline and that the actual conditions in any individual contract vary, and are dependent upon who pays transportation expenditures.
It is fair to say that the FAS have taken active measures in response to Vladimir Putin’s criticism, when he accused the authority of inertness. Given the non-market character of the measures that the FAS has tried to implement, verbally for the time being, we believe that the sector’s additional margin will be regained by use of other economic policy means.
We recommend that investors Buy Mechel shares with the target price of USD 49 per share.
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