Auto industry consolidation continues in Russia: metals group OAO Severstal reportedly has accumulated a key stake of 26% in AO Zavolzhsky Motorny Zavod (ZMZ), a big engine supplier there.

Severstal, Russia's biggest integrated steel producer, may have paid roughly $10m for the shares, according to an estimate by Troika Dialog, a brokerage in Moscow.

ZMZ delivers motors to AOOT Ulyanovsky Avtomobilny Zavod (UAZ), a maker of off-road vehicles and vans, based in Ulyanovsk, southeast of Moscow. Severstal bought over 20% of UAZ in October 2000.

The engine maker's biggest customers are OAO Gorkovsky Avtomobilny Zavod (GAZ) and AO Pavlovskiy Avtobus (PAZ), automakers acquired last year by another metals group OAO Sibirsky Alyuminiy (SibAl).

SibAl already may control ZMZ through the engine maker's management, suspected of owning over 50% of ZMZ's equity, Troika Dialog said, noting Severstal may have taken the stake to protect motor supplies to UAZ.

"Severstal was potentially exposed to the risk that SibAl would force ZMZ to concentrate mainly on engines for GAZ and PAZ at the expense of UAZ supplies," Andrei Ivanov, an auto analyst at the brokerage, said. "ZMZ is strategically important for… Severstal… and SibAl."

GAZ, PAZ and ZMZ are based in Nizhny Novgorod, an industrial region in the centre of European Russia. SibAl has been expected to consolidate them into a mini-empire. In the ex-USSR, PAZ is the biggest busmaker, while GAZ is the largest truckmaker and second-biggest carmaker.

Severstal and SibAl, flush with cash from a boom in metals prices, have been diversifying their profiles. Auto companies in Russia have seemed obvious targets, being attractive (poor and undervalued) plus convenient (key buyers of aluminium and steel).

Severstal is GAZ's main steel supplier, while SibAl delivers aluminium to ZMZ, according to Julia Zhdanova, auto analyst at United Financial Group, a brokerage in Moscow.

"The new balance of power in the GAZ/SibAl-ZMZ-UAZ/Severstal triangle appears to be optimal now for all parties to negotiate fair supply-delivery terms," Zhdanova said.

ZMZ needs $15m-$20m to launch a pair of new engines (one diesel, one petrol), and Severstal could provide support, she said.

"If Severstal decides to become a strategic shareholder in ZMZ, it would be very positive for the engine producer," she added. "But only time will tell whether the new owner has long-term… goals or whether it has acquired the engine producer simply to guarantee supplies to UAZ."

If Severstal owns over 25% of ZMZ, it would control enough stock to veto strategic votes at the engine maker's shareholder meetings.

Troika Dialog downgraded its recommendation on ZMZ shares from "speculative outperform" to "neutral," Ivanov said.

Contact Ryan James Tutak, associate editor of just-auto.com for Eastern Europe:
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