Mechel, Baosteel Sign Coking Coal Supply Deal - Analyst Blog

Russian miner Mechel OAO MTL has signed a memorandum of understanding with Baosteel Resources Int. Co. wherein Mechel's subsidiary – Mechel Carbon Singapore – will supply the Baosteel with up to 1.2 million tons of coking coal, thereby increasing its coal supplies.

The one-year contract will be valid from Apr 2014 to Mar 2015 and it may be extended further. Prices will be adjusted on a monthly basis. With this new contract, Baosteel will account for up to 10% of Mechel's coal exports to Asia Pacific.

The newly signed agreement follows the successful delegation of its previous agreement inked on Mar 21, 2013, wherein Mechel Carbon Singapore was obliged to supply a total of 960,000 tons of coking coal annually to Baosteel enterprises in China's eastern and southern provinces. Mechel Carbon Singapore also made test shipments of PCI coals along with steam coal from the Elga deposit per its last year's contract.

Baosteel has been a strategic fit for Mechel and this deal testifies their long-term cooperation based on mutual profit and transparency. This agreement is in sync with Russia's new program of developing its coal industry until 2030 by increasing exports to promising Asian markets.

Mechel is a leading domestic steel and coal producer with a strong position in key businesses, including production of specialty steel and alloys. The company has the largest coal reserve base in Russia and is presently focused on growth and cost-cutting measures.

Mechel owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to export markets. However, Mechel could be hindered because of its high debt and interest burden, and might not be able to keep up with its huge capital spending program. Moreover, the company is facing weak demand in Europe.

Mechel currently retains a Zacks Rank #4 (Sell).

Other companies in the steel and related industries with a favorable Zacks Rank are NN Inc. NNBR, Century Aluminum Co. CENX and Norsk Hydro ASA (NHYDY). While NN retains a Zacks Rank #1 (Strong Buy), both Century Aluminum and Norsk Hydro carry a Zacks Rank #2 (Buy).