Mechel sees stable coal, steel output; demand slump, tariffs hit sales

Strong prices and ongoing modernization of its mining fleet helped Russian mining and steel company Mechel’s coal division to complete the July-September quarter with results equal to the previous quarter, although steel sales declined, affected by a slump in end-user demand and temporary export tariffs.

Aided by the mining equipment renovation – representing Rb3.3 billion ($45 million) investment this year – Mechel continued gradually restoring operational results in its coal division, it said.

In July-September, the company mined 2.9 million mt of run-of-mine coal, metallurgical and steam, largely the same amount Mechel delivered in the prior quarter.

“This year’s third quarter will be written into the history of international commodity markets…it saw a price rally both unprecedented in scale and unexpected for industry players,” said Mechel CEO Oleg Korzhov.

The price of premium coking coal FOB Australia more than doubled in Q3 to $400/mt. The price for premium coking coal CFR China set a new record in the last week of September, topping $600/mt. The signs of price adjustment appeared only in the fourth quarter, after Chinese authorities took measures to slash steel production.

In January-September though, the crude coal output fell 35% from the same nine-month period of last year to 8.5 million mt. The steep year-on-year drop in crude coal production over January-September was a result of decreased contractor mining at Neryungrinsky and Krasnogorsky open pits, as well as face relocations at Lenina and Sibirginskaya mines, said Mechel.

Q3 coking coal concentrate sales went down by 30% on quarter to 1.05 million mt as mining Neryungrinsky pit declined on difficult geological conditions, and also because Q2 sales included accumulated stockpiles. Of the Q3 total, 600,000 mt was sold to third parties, a drop of 44% from Q2.

Q3 PCI and anthracite supplies to third parties amounted to 616,000 mt, down 3% from Q2.

Iron ore concentrate supplies went down 12% to 367,000 mt (over 95% of these were absorbed within the group with a tiny amount sold to third parties) due to repairs at the Korshunovsky iron ore mining and beneficiation plant, in the Irkutsk region.

Coke supplies in 3Q went down 8% from Q2 to 690,000 mt – sales to third parties fell 19% to 293,000 mt – due to higher Q2 volumes supported by sales of inventories.

Steel sales

Pig iron and steel output in July-September remained largely stable quarter on quarter, at 790,000 mt and 891,000 mt, respectively, but sales volumes declined.

In July-September, Mechel sold 555,000 mt of long rolled steel products, 19% less than in Q2; flat rolled steel sales, at 106,000 mt, fell 12% on quarter, and hardware sales fell 8% to 130,000 mt.

The third quarter saw a slump in demand from the construction industry, steel fabricators, metalwork and machine manufacturers slumped.

“We think this logically followed the spike in [end-user] demand seen in the second quarter, when consumers were building up reserves,” said Korzhov

The temporary steel export tariffs, introduced in August 2021, also negatively impacted Mechel’s Q3 steel sales.

Before they came in force, exports accounted for over 30% of sales of its Russian mills, but after, this share contracted by 10 percentage points. The temporary tariffs are likely to cost the company Rb1.1 billion or 1% of its steel division’s revenues, Mechel estimates.

Looking at the nine-month 2021 results, the company emphasized the increased share of high-margin products in its portfolio, but the overall volumes were year-on-year lower. Long and flat rolled steel sales in the period decreased by 7% and 3% to 1.8 million mt and 332,000 mt, respectively. Hardware sales went down 6% to 389,000 mt.

Mechel also produces and sells forgings, stampings, ferrosilicon, thermal coal and electricity.

— Ekaterina Bouckley