Raw material danger for exposed MMK
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Russia's largest steel mill, the city of Magnitogorsk and its iconic Magnitogorsk Metallurgical Combine (
MMK) stare into an uncertain future as the prices for raw materials –
iron ore and
coking coal– continue their meteoric rise.
The ever increasing cost of raw material puts a particular strain on
MMK because, unlike its domestic competitors, it does not have a significant supply of
iron ore it can call its own.
MMK exhausted the bulk of its once rich supply of ore over 30 years ago, and the steel maker now relies upon the Sokolovsko-Sarbaysky ore-processing combine in
Kazakhstan to supply nearly 70% of its annual
iron ore needs.
Already in a vulnerable position due to its reliance on outsiders to supply its raw material needs,
MMK's future became even murkier in February when a key rival, Alisher Usmanov, hinted that he would try to acquire the Sokolovsko
iron ore mine. The purchase of Sokolovsko would further consolidate the position of Usmanov's Gazmetall group as
Russia's dominant
iron ore producer. Gazmetall already accounts for nearly 40% of
Russia's 100 million ton annual
iron ore production. The threat to
MMK's main source of
iron ore has already prompted the company to begin assessing alternatives aimed at ensuring the mill's long-term sustainability.
MMK's CEO, Victor Rashnikov, announced that he would step down in April so that he could concentrate on the company's strategic development, i.e. securing raw material sources. In 2004
MMK had been exploring the feasibility of the Kiryabinskoye deposit in the Bashkirian Republic of central Siberia, but determined that the deposit's 20 million tons of estimated reserves were not economically viable. To be viable for
MMK, a deposit would need to have at least 30, preferably 40, million tons of
iron ore.
MMK holds a license for the development of the Techenskoe deposit in central
Russia's Chelyabinsk region. Techenskoe holds estimated reserves of 50 million tons. Beginning in 2007,
MMK hopes to extract 2 million tons per annum from this source, and thus boost yearly steel
production by a like amount to 12 million tons.
Another option that Rashnikov and his development team might consider is to import
iron ore from
Brazil or
Australia. The transportation costs to import ore to Magnitogorsk, which lies 1400 km from Moscow, are prohibitively expensive at present. In addition,
MMK would need to upgrade its ports at Vladivostok since they are not really equipped to handle a large amount of
iron ore. However, if Usmanov or another rival were to swoop for
Kazakhstan's Sokolovsko mine, it is thought that domestic prices of
iron ore would rise above the global standard, thus making Australian and Brazilian ore seem like a bargain.