While Russian and Ukrainian politicians are still locked in various negotiations over gas transportation networks, private sector players from the two countries are finding increasing areas of agreement.
News broke recently that Russia's Gazmetall and the Ukraine's Industrial Union of Donbass (IUD) have concluded a landmark merger deal to create quite possibly the largest steel-making company in the CIS, with an annual output of around 20 million tonnes.
According to industry insiders, the merger of the two companies is likely to bring substantial synergetic benefits for the shareholders of both companies.
IUD secures raw material supply
Gazmetall, controlled by Alisher Usmanov - who has close ties to the Kremlin and is one of Russia's richest businessmen - accounts for some 40% of the country's iron ore production. Its portfolio of mining and metal assets includes Lebedinsky and Mikhaliovsky mining and processing plants - two of the largest iron ore producers in the country.
The Donetsk-based IUD, owned by Serhey Taruta and Vitalyi Haiduk, did not get any iron ore mines during its amicable separation from System Capital Management (SCM). SCM, also Donetsk-based, now controls a number of iron ore mines and, unlike IUD, is a fully vertically integrated company.
That left IUD with a major weakness in an industry where vertical integration from upstream to downstream gives steel-makers a significant competitive edge. Thus a union with Gazmetall would help IUD to secure a supply of raw material and thereby reduce its risk-exposure to volatility in iron ore prices.
As for Gazmetall, the merger with IUD should allow it to increase its size and regional clout, while at the same time enabling it to gain access to new markets. IUD produces some 9 million tonnes of steel per annum, compared to Gazmetall's 6 million tonnes, and is already well established in Europe, the US and the Far East.
Opportunity for further expansion
IUD has also acquired strategic assets in the relatively new EU accession countries of Poland and Hungary having bought Poland's Huta Czestochowa mills and Hungary's Dunaferr and thereby bypassing the EU's restrictive steel quotas.
The Ukrainian steel firm provides a good opportunity for further capacity expansion, and there are ambitious plans for its key steel-making plant in Alchevsk in the Donbass region. IUD's steel-mills also offer an advantage in terms of low transport costs, due to their proximity to Black Sea ports.
Above all, both firms have come to realise that size really does matter in the globalised steel industry, which has seen a recent wave of consolidation driven by such giants as Mittal, which expanded its foothold in Ukraine last year through its Kryvoryzhstal acquisition.
Like other leading Russian steel-makers such as Severstal and Evraz Holding, IUD and Gazmetall are looking to reap the benefits of joining the global shift towards steel consolidation. However, while the former two have gone on a shopping spree in the US and Europe, IUD and Gazmetall seem to have found a third route: regional consolidation.
Many analysts believe such regional consolidation among Russian and Ukrainian producers could become the prevailing trend among East European steel-makers. Instead of selling out to global giants like Mittal, regional players prefer to find equal partners in the former soviet areas - partners with whom they share a similar mentality and business culture.
Although exact details are not yet clear as to what share IUD is likely to get in the newly merged company, industry experts think it will not be more than 45%, with the controlling stake going to Usmanov of Gazmetall.
Plan to list in London
Speaking to the foreign press, Usmanov said he wants the new company to list its shares on the London Stock Exchange. This follows an earlier announcement by Gazs-metall's domestic rival Severstal, stating its plans to list in London this year.
While some analyst are sceptical about the new merged company's immediate listing prospects - because they feel it could take some time for the two companies to organise their books - they say the market value of the business could be anywhere between USD 10 billion and USD 20 billion.
Whatever the outcome on this front, these latest developments represent a positive move for both Ukrainian and Russian steel makers as they rationalise their business approach and take steps to maximise their value in the global steel market.
