Russia and Ukraine: Mine blasts hit industry

Saturday, 22 May 2010

Mine blasts hit industry

The deadly Raspadskaya mine accident in the Kemerovo region and the measures required to tighten safety could hit the Russian coal and steel industries hard, analysts said.

The damage could spread to other coal producers such as Mechel and Belon, said Scott Semet, chief strategist at IFD Kapital.
“The uncertainty surrounding Raspadskaya remains high, but judging by the development of events there, we believe that in addition to operating risks, its shares now bear some political and administrative risks,” said Semet.
The disaster has prompted the state industrial safety watchdog, Rostekhnadzor, to launch unscheduled inspections at all Russian collieries, in the wake of tough statements by Prime Minister Vladimir Putin and Kemerovo Governor Aman Tuleyev.
Analysts said the company’s likely commitment to pay salaries in full to idled miners would seriously hit its profitability, as salaries represent around 40 per cent of operating costs.
Raspadskaya’s stock has already fallen 13 per cent since the accident took place last week.
“If the mine remains flooded, a fair price would be around $5, or just 3 per cent above the current price,” said Oleg Petropavlovsky, an analyst at Broker Credit Service, who said he had visited the mine before the explosion.
“But if it is restored within two years, as planned, it might increase its value twofold,” he said.

Russian industries dependent on domestic coal for fuel could have to import more coal to maintain output, analysts said. Imports of 4 million tons a year of coking coal are already required, and further falls in output could push up Russian steel prices by as much as 30 per cent.
“Steel companies that have their own coal production are currently doing well,” said Semet, of IFD. But companies such as NLMK, which lack their own coal production, will be in a more vulnerable position, he said.
In a move seen as related, NLMK on Monday announced a drastic hike in rolled steel prices for automakers.
“One of the main reasons for such a situation is that Mechel, the second-largest coal producer, switched from domestic markets to exports last year and still has not come back,” said Petropavlovsky.
Analysts said that if the situation did not change, the deficit of coking coal on the Russian market by the end of the year could be as much as 10 million tons.