Mechel Ruling is Good News, Contrary to Recent Headlines

Aug.17.08 | About: Mechel OAO (MTL)

If you have read the headlines of articles that many major market sites are putting out, you would probably think that the Russian Anti-Monopoly Service’s ruling was a negative thing for steelmaker Mechel (NYSE:MTL). To name a few, here's Bloomberg's: “Mechel Told to Cut Prices Considerably After Probe”; Reuters': “Russia Punishes Mechel with Enforced Coal Price Cuts”;  and MSN Money's: “Russian Miner Found Guilty of Price Fixing".

Now these headlines are accurate, just very misleading. Yes Mechel was told to cut the prices on the coking coal it sold domestically (coking coal accounts for 8% of Mechel’s revenue), and yes Mechel was punished for its actions (about a 300 million dollar fine) – but the ruling was still very positive news for Mechel and anyone long the stock.

The ruling means that Mechel will definitely not become the next YUKOS; the company is not going to be split up and sold off to various state owned enterprises. It does, however, now appear that Mechel will be pressured to sell some of its specialized steel assets to Rostechnologie, the state-controlled holding company that controls all major producers of supplies for the Russian Army.

But, more importantly, the market had already priced in a much worse outcome for the steelmaker. Mechel’s market capitalization is still down 12.31 billion dollars from its highs in the beginning of June on a 300 million dollar fine and a price reduction on a product that makes up less than 8% of Mechel’s revenue.

I don’t care, nor should any investor care, what type of news (good or bad) comes out about a given stock. All that matters is what the market’s expectations were and if the reported news was better or worse than those expectations. In this case, the market was pricing in an Enron like ruling for Mechel. Instead, Mechel got an expensive slap on the wrist, but not the 30 plus billion in back taxes that bankrupted YUKOS.

Basically I’m saying the news is good; don’t be scared by the media’s dark diction. Bad news is still good news if the market was expecting worse news. I like that line.

If you have any questions/comments/just want to tell me to go to hell – feel free to e-mail me at

Disclosure: Author holds a long position in MTL