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ISD Trade has been established as the exclusive sales agent for Industrial Union of Donbass (IUD) by Carbofer-owner and IUD shareholder Alexander Katunin, supplanting Duferco, sources with knowledge of the situation told MB.
Katunin led a consortium of investors to take a majority stake in IUD in early January. Soon afterwards, on January 26, ISD Trade was entered into the commercial registry of Ticino.
ISD Trade shares its Lugano, Switzerland address with Carbofer, MB confirmed.
But, following a joint-venture agreement signed in 2003, which also saw IUD take an equity stake in Duferco International Trade Holdings (DITH), Duferco has exclusive rights to export sales from IUD, sources said.
This includes production from the company’s operations in Ukraine — Alchevsk Metallurgical Plant (AMK) and Dneproskiy Dzerzhinsky Metallurgical Plant (DMKD) — as well as ISD-Huta Czestochowa in Poland and ISD- Dunaferr in Hungary.
AMK
Duferco and IUD launched a bid for Dunaferr in December 2003, and IUD later asked Duferco to join a consortium bid for Huta Czestochowa at the end of 2004.
Duferco has since allowed the steelmaker to sell directly to the merchant market because it was forced to ask for prepayments. Duferco has received payment of a percentage of these sales, a source close to the situation said.
ISD Trade is yet to begin operating, but will take over IUD sales soon, in contravention of the existing agreement, sources told MB.
“IUD is abandoning [its agreement] with Duferco and will go to Carbofer — it’s already happening,” a source with in-depth knowledge of the situation said. “There is a new owner [Alexander Katunin] and he decides what to do.”
“The political landscape is really changing in the CIS,” a trader with experience in the region said. “It was well known that [IUD] wanted to sell a stake to someone who could market the material — they wanted to get someone else in who could market the material [instead of Duferco].”
“The reality is that [IUD] is going to give some allocation to Carbofer and the rest will be sold to mills and traders,” another trader agreed. “They’ve been trying to do this since August last year.”
Any action taken by Duferco to defend its existing deal, however, is likely to fall short of a legal battle, most market participants agreed.
“It is clear that not everybody is pleased with Duferco — they are very large and very powerful,” another trader told MB. “But times are changing — this is the very early stages of the situation, but I don’t think that there will be [legal action] — they will negotiate.”
But the breakdown in relations between Duferco and IUD has wider-ranging implications.
“The Russian [consortium] bought 50 plus 0.2% of IUD, which includes participation in one important trading company,” a source at Carbofer said.
Following the joint-venture agreement in 2003, IUD later announced it would boost its share in DITH to 50% in February 2006. Not only does DITH include Duferco’s global trading operations, which last year traded 21 million tonnes of material, but it also comprises the company’s steelmaking assets in Denmark and Macedonia.
Duferco has an option to reacquire this stake, a source close to the company told MB, but it as yet remains unclear how, when and at what cost this will occur.
For however long IUD retains this stake, Duferco will be in the excrutiatingly uncomfortable position of having a competitor have control of a 50% stake in DITH.
Interestingly, Luxembourg-headquartered Carbofer’s management staff and traders include a fair few who have transferred from Duferco, which is also based in Lugano.
Carbofer commercial director Darko Bozanovski is one — he left Duferco to head the new Russian-backed Carbofer with Marco Galimberti in April 2005.
“This is all about control,” another source close to the situation said. “It’s no accident that Carbofer has had its eyes on Duferco assets.”
With official spokesmen for all parties involved declining to comment, it is still unclear how the situation evolved, and how much in advance this move was planned.
Katunin’s accession to control at IUD, however, appears to have been extremely well planned.
Speaking to MB hard on the heels of the consortium’s successful bid, a high-level source at IUD was at pains to point out that no member of the consortium would hold more than 25% of the company.
But it has since emerged that the deal, which was financed by Russia’s state-controlled Vnesheconombank, effectively left Katunin at the helm.
All of the rights to the majority share are held by either Katunin or Carbofer ‘from a legal perspective’, a source close to the deal said.
IUD board chairman Sergei Taruta and general director Oleg Mkrtchan have retained 49.99% in the steelmaking group and will retain their positions — how extensively they were involved in Katunin’s apparent takeover is unkown.
IUD shareholders: Mkrtchan (left) and Taruta
Katunin is a former shareholder in Russian steelmaking group Evraz, which bought Carbofer Metall, the Russian distribution arm of Carbofer Group, in October last year. Evraz sold around 25% of its construction products produced in Russia through Carbofer Metall in 2008.
Rumours in the marketplace that Evraz was a member of the consortium persist, although MB’s source at IUD did claim the other members were not metallurgical in nature.
And the involvement of Vnesheconombank has even triggered talk of Russian state backing to the deal.
“It is in the interests of the Russian government for businesses to expand in the CIS,” a local analyst told MB.
Indeed, some believe the inauguration of Viktor Yanukovych as Ukraine’s president on February 25 may herald an era of increased stability in the former Soviet republic, market observers told MB.
Russian investors have identified this as an opportunity to gain a foothold there, they said.
Evraz acquired the Dnepropetrovsk Iron & Steel Works in April last year, while Mechel is said to be manoeuvring to take control of Donetsk Electrometallurgical Plant, formerly known as Istil.
“Russian capital [in Ukraine] is growing,” one observer said.
Analysts disagree whether this is actually the case.
“Yanukovych, who recently won the presidential elections against Yulia Timoshenko, has been historically seen as supporter of the pro-Russian community,” said Control Risks senior analyst for Russia Carlo Gallo.
“[But] his most important supporters are the Ukrainian metals oligarchs and when it came to protecting their commercial interests against their Russian counterparties he did,” he told MB. “Whatever party takes control it will make little difference in Ukraine’s policy towards Russia.”
“Russia has strongly invested into Ukraine especially in petrol refining, banking and mobile telecommunications,” Gallo continued. “The metals sector, however, which is a very strong asset for Ukraine, has resisted this wave better than other sectors.”
Katunin’s taking control of IUD could mark a reversal in this trend, however.
“The Ukrainian metals industry has been hard hit by the crises and IUD’s sale is a consequence of that,” he said.
To view a timeline of the events leading up to this story please click here