One of the biggest Russian metals companies is in talks with a Ukrainian rival to form an iron and steel giant worth up to $20 billion (£10.3 billion).

Gazmetall, which is half-owned by Alisher Usmanov, one of the wealthiest men in Russia, is negotiating a merger with the Industrial Union of Donbass (IUD) to create a company capable of producing 20 million tonnes of steel a year.

The new company could overtake SeverStal, which is controlled by the billionaire Alexei Mordashov and is the biggest Russian steelmaker, producing 17.6 million tonnes annually.

Officials at Metalloinvest, the company that manages Gazmetall’s assets, confirmed that discussions with IUD were taking place.

The newspaper Kommersant, which is owned by Mr Usmanov, reported that a letter of intent had been signed and that Gazmetall would control the merged company. Maxim Basov, the chief executive of Gazmetall, said that the companies had agreed to “tighter commercial, financial, investment and strategic cooperation”. Merger proposals are being examined and will be put to shareholders within months.

Mr Usmanov has long advocated the creation of an iron and steel conglomerate combining assets in several republics of the former Soviet Union to compete worldwide. Metalloinvest company strategy holds that a Eurasian mining and metals company with facilities in Russia, Ukraine and Kazakhstan would “not only enhance the effectiveness of the industry and attract large investments, but also enable it to become a world leader”.

Gazmetall already controls 40 per cent of Russian iron ore production and its plants turn out more than six million tonnes of steel a year. Mr Usmanov and his partner, Vasili Anisimov, tried to add Magnitogorsk Metallurgical Complex, the largest ferrous metals producer in Russia, to the group in 2005 but were rebuffed, despite blocking supplies of raw materials to the plant for a time.

IUD produces more than nine million tonnes of steel at three plants and is the second-largest corporation in Ukraine, with net profits of $390 million in 2005. The merged company would produce 15 million tonnes of steel annually and 38.1 million tonnes of iron-ore concentrate. IUD also owns steel plants in Hungary and Poland.

The business newspaper Vedomosti reported that the company had set out plans to invest $3 billion to raise output to 18 million tonnes by 2010. Mr Usmanov also heads Gazprominvestholding, the investment arm of the state-con-trolled Gazprom, the world’s biggest natural gas company.

Last week Gazprom announced plans for a joint venture with the Siberian Coal Energy Company to merge electricity and coal assets. That firm is Russia’s biggest producer of coal, a key fuel in steel production, and analysts estimate that the merged company will control at least 25 per cent of Russia’s power capacity.

Giants show consolidation mettle

July 2006 Mittal Steel ends a long-running hostile battle to acquire Arcelor, the European steelmaker, for $39.5 billion October Rusal, the Russian aluminium giant, agrees a merger deal under which it will combine with Sual, a local rival, and Glencore, the Swiss aluminium group
November SeverStal, the Russian steel group, lists 10 per cent of its shares on the London Stock Exchange, raising $1 billion January 2007 Tata Steel, of India, sees off CSN, of Brazil, to win control of Corus, the Anglo-Dutch steelmaker, with a £6.7 billion deal

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