UPDATE 1-Mechel halts steel mills in Ukraine, Romania

Fri Nov 23, 2012 11:25am EST

* Ukraine's DEMZ shut down due to rising production costs

* Romanian plants halted amid high ferrous scrap prices, weak demand

* Ukrainian plant problems reflect Ukraine's wider economic woes (Updates with company confirmation, adds details)

By Lina Kushch and Alexei Anishchuk

DONETSK, Ukraine/MOSCOW, Nov 23 (Reuters) - Debt-laden Russian group Mechel has closed a steel plant in Ukrainian President Viktor Yanukovich's home town, weeks after he made the country's overall stability a key issue in an election.

Mechel said production had been temporarily suspended due to higher costs and reduced profitability following a steady rise in prices for the plant's key raw material - ferrous scrap.

Russian steelmakers invested heavily to expand until the 2008 global financial crisis hit steel demand and forced them to borrow to support their operations and are struggling to service debts they piled up for acquisitions and growth projects.

An industry source told Reuters earlier on Friday the Donetsk Electrometallurgical steelmaking plant (DEMZ), whose annual capacity is 1 million tonnes, had no orders and would shut down until April.

Analysts said production halts were delayed ahead of the parliamentary election as Yanukovich's ruling Party of the Regions sought to rally support in its eastern Ukraine heartland. Ukraine's economy relies heavily on steel exports.

DEMZ has been idle for a week with 2,000 out of 2,700 workers sent home with reduced pay, said Nikolai Yushkin, deputy head of a local trade union committee.

Ukrainian steelmakers, whose output fell 7 percent in the first 10 months of the year, have an extra disadvantage in an oversupplied global market, say economists who consider the hryvnia overvalued.

Mechel, battling net debt of $9.4 billion, bought DEMZ from Estar in 2011 for $537 million.

Mechel put it up for sale earlier this year as part of a bid to raise around $4 billion through the disposal of non-core assets. It has yet to make any major sales.

"The shutdown will unlikely affect Mechel's financial results, which are largely driven by its key coal segment and its Chelyabinsk metallurgical mill," Nomos Bank analyst Yuri Volov said.

The company said the temporary suspension of production facilities will not affect sales volumes as all contractual supplies will be made from warehouses.

It also said that it temporarily halted Romanian steelmaking facilities due to unfavourable prices in European steel markets linked to rising ferrous scrap prices and weak demand for finished products.

"The company is closely monitoring market conditions, so that once they normalise, production could promptly resume," Mechel said in a statement.

Mechel posted a second-quarter net loss of $823 million, compared with a $192 million profit in the same period in 2011. (Writing by Olzhas Auyezov and Maria Kiselyova; Additional reporting by Natalia Zinets in Kiev; Editing by Douglas Busvine and David Cowell)

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