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Russian company Mechel OAO (MTL - Analyst Report) announced that it has temporarily stalled production at Donetsk Electrometallurgical Plant (DEMZ), a part of Mechel's steel division, and at its steel manufacturing unit in Romania, which forms a part of its Eastern European Steel Division. The company’s decision to shut down the plants came in the wake of unfavorable steel prices in Europe, arising from rising ferrous scrap prices and weak demand for finished products.

Despite the temporary halt in production in these facilities, Mechel believes that sales will not be affected as the contractual supplies will be made from the warehouses. These measures are taken by the company to make optimum usage of the financial resources and minimize financial risks.

Apart from stalling production, Mechel will take other requisite measures to maintain the facilities' operational capability and conduct maintenance works in winter. The company will also compensate the employees by paying their full salary while those who are not involved in the scheduled work will be either paid for idle time or placed on leave, as per labor law.

The company is closely reviewing the market conditions and expects to resume production at the facilities once the conditions stabilize.

Last month, Mechel released its second quarter 2012 results. The company posted consolidated net loss of $823 million in the quarter, compared with a profit of $191.9 million in the year-ago quarter. Revenues for the quarter came in at $3.09 billion, down 11.1% from $3.47 billion in the year-ago period.

The company registered an operating loss of $470.6 million in the quarter compared with an operating income of $476.3 million a year ago, leading to a contraction in operating margin. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 37.1% year over year to $385.4 million in the quarter.

Mechel has the largest coal reserve base in Russia and is currently focusing on growth and cost reduction measures. The company’s primary competitors include ArcelorMittal (MT - Analyst Report). It retains a Zacks #4 Rank that translates to a short-term (1 to 3 months) Sell rating and we currently have a long-term (more than 6 months) Neutral recommendation on the stock.
 

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