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Metals and Mining Giant Mechel: Bankruptcy Imminent

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This post first appeared on Russia Insider

Mechel shares collapsed another 30% after Russia's chief economic minister Ulyukayev said that bankruptcy was the only option for the struggling coal producer. The news followed the announcement that Mechel was rejecting the creditors' offer of a debt for equity swap. 

The company has been plagued with losses in recent years as it wrote down the value of its assets; It made a 2.9 billion dollar loss in 2013, following a 1.7 billion dollar loss in 2012. Analysts forecast a further 600 million dollars in losses for 2014.

<figcaption>Mechel Charred by Shale Gas and Debt Woes</figcaption>
Mechel Charred by Shale Gas and Debt Woes

Mechel has almost 9 billion dollars-worth of debt due for repayment over the next seven years and given the continued losses and enormous debt to equity ratio refinancing has been taken off the table.

The bankruptcy is symptomatic of the 2008-2009 crisis and the general collapse in commodity prices (most particularly coal) since. Mechel should have really been a victim during the financial crisis but was given some lifelines both by international and domestic banks. However, over-time banks became more reluctant to prop up a sinking ship as coal prices globally have continued to collapse.

The banks were hoping that coal prices would recover, however, coal became the major victim of booming shale gas production in the United States. Natural gas is very difficult and expense to ship (through Liquefied Natural Gas) this means that prices are very varied around the world. Coal, however, can be transported easily and relatively cost free. Thus, when US Natural Gas prices collapsed and consumption spiked, coal demand and thus prices collapsed all around the world. 

Zyuzin Pushed For Debt Restructuring, Banks Refused

The bankruptcy will complete the fall of once high-flying Igor Zyuzin who owing to his majority shareholding in Mechel used to be worth around 9 billion dollars. 




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