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Russian miner Mechel OAO (MTL - Analyst Report) declared that hot testing of rail rolls production has started at Chelyabinsk Metallurgical Plant’s universal rolling mill. With the launch of hot testing, the company has commenced the second stage of preparation for the launch of universal rolling mill.

The first rolling of R-65 100-meter rails was successfully executed at the universal rolling mill during the hot testing. It represented the maiden sample of rail rolls that universal rolling mill produced. Hereafter, mastering production of rail steel products, both structural shapes and high-quality rails, is expected to go on as scheduled.

Mechel expects the mill to annually supply up to 400,000 tons of high resistance to wear and contact endurance rails for high-speed running and also rails for use in low temperatures. Mechel further expects annual production capacity to be over 1 million tons of structural shapes and rails products from the mill.

The universal rolling mill’s new production is expected to build economies of scale for steel related industries in Russia. The mill is anticipated to supply high-quality steel products for Russian Railways and construction companies. This will also aid the mill in reducing its dependency on imports and resolve various social issues on regional level by creating more than 1,000 employment opportunities.  

Mechel, on May 6, produced the first batch of structural shaped steel products (25SH1-type bar) at the universal rolling mill during its hot testing. The total chain of structural shape production process was hot tested consecutively starting from billet heating and hot rolling to correcting, cutting into measured sizes and packaging. Mechel’s prime focus lies on the construction of Chelyabinsk Metallurgical Plant's universal rolling mill, as it features as the priority investment project for its steel division.

Mechel tuned to a loss in the fourth quarter of 2012, hurt by weak demand. Revenues fell by double digits due to sustained weakness in the core mining segment. The company saw weak pricing for mining products in the quarter due to challenging economic conditions.

Mechel’s high debt and substantial interest burden are matters of concern. The company is also faced with weak demand from Europe. However, we are encouraged by the incremental opportunities stemming from the Elga mine, which is expected to reinforce the company’s position as a metallurgical coal producer through capacity expansion.  

Mechel, which currently retains a short-term Zacks Rank #3 (Hold), will release its first-quarter 2013 results on Jun 18.

Other companies in the steel industry with favorable Zacks Rank are Kobe Steel Ltd. , Shiloh Industries Inc. and Angang Steel Company Ltd (ANGGY). While both Kobe Steel and Shiloh Industries hold a Zacks Rank #1 (Strong Buy), Angang Steel retains a Zacks Rank #2 (Buy).

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