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. Last Updated: 07/27/2016

Giuliani's Mystery Tour Spotlights Steel Town

He was just your average former U.S. mayor touring an average Russian steel plant near the Kazakh border -- or so the media handlers would have you believe.

The metals industry, however, is awash with speculation as to the real reason why former New York Mayor Rudolph Giuliani paid an unexpected visit to the gigantic Magnitogorsk Iron and Steel Works, or MMK, last week.

Observers suggest that Giuliani, who runs his own consulting firm, may be the middleman in a bid to boost the global profile of the country's single largest steel mill.

MMK is flush with cash and may be eyeing an acquisition in the United States, analysts said. Or, conversely, a U.S. buyer may be considering to buy up the government's 24 percent stake in MMK, due to go on sale next year.

"The fact is, Magnitogorsk has too much cash and too much clout to be sitting around on the sidelines as it has been," said Timothy McCutcheon, an industrial analyst at Aton. "Its weight will be felt. And I think we're getting closer to that day."

MMK's cash on hand has leaped from $77 million in 2001 to $824 million at the end of 2003, and will reach an estimated $1.6 billion at the end of 2004, according to Alfa Bank's Equity Guide 2004.

Net profits have ballooned from $144 million in 2001 to $630 million in 2003. The company reported $516 million profit in the first half of this year. Standard & Poor's on Monday raised the company's rating from "B+" to "BB-," citing strong profitability and a stable outlook.

MMK has been inching its way toward a listing on a Western stock exchange for months. The company said in a statement that it had invited Giuliani in its effort to help get listed on "an American stock exchange."

With its impressive numbers, MMK is likely to be attracting more international attention in the coming months, analysts said, making Giuliani's surprise visit to the steelmaker in the Urals all the more interesting.

A spokeswoman for Giuliani Partners, Giuliani's consulting firm, insisted that the former mayor traveled to Magnitogorsk "to see how business is done in Russia."

The MMK statement, in Russian, quoted Giuliani as saying, "I think there is enough output here for not just one but several countries."

Back in Moscow, the former mayor later told a group of businessmen that the sprawling steel mill resembles "Pittsburgh in Wyoming."

Giuliani was accompanied by representatives from New York investment bank Rodman & Renshaw and Global Strategic Ventures, a U.S.-Russian business group that promotes bilateral cooperation. Both declined to comment.

The declared reason for Giuliani's four-day visit was to foster commercial ties and show support for the victims of the Beslan school massacre. Giuliani also met Foreign Minister Sergei Lavrov, Moscow Mayor Yury Luzhkov and a number of business figures.

An MMK spokesman declined to expand on the company's previous statements. "We've already distributed all of the official information connected with the visit. So think this one out yourself," he said.

"The trip would be unlikely unless [Giuliani] had a specific interest," said Chris Weafer, chief strategist and head of research at Alfa Bank. "Magnitogorsk is too specific, too remote to buy that."

Steel might just be the next industry to create major international players to follow in the footsteps or Russian oil companies, said Anton Khmelnitsky, head of equities at Brunswick Asset Management.

"The Russian steel sector has a truly global competitive advantage," Khmelnitsky said, citing low production costs and strong domestic demand.

"Steel prices have adjusted to international prices for the first time in many years, and construction is absolutely booming."

MMK may eventually lead the drive to consolidate the domestic market, he said, "but really it's too early to say."

The outcome of the government's auction of its share in MMK will determine the leader of the consolidation process, Khmelnitsky said.

"There's huge interest being generated by this auction," said Eric Kraus, chief strategist at Sovlink. "The recent numbers are excellent. Steel prices have defied predictions by remaining historically high."

Analysts suggested that a U.S. player could be looking to bid for the government stake and that Giuliani may have been brought in to seek the blessing of Russian politicians for a foreign bid.

U.S. Steel, for example, already owns a mill in Slovakia and placed an unsuccessful bid for Ukrainian steelmaker Kryvorizhstal this summer.

On the other hand, MMK might be looking to enter the lucrative U.S. market, Kraus said.

"The economic interest for Magnitogorsk to have an ability to sell to the United States is substantial," Kraus said. "They are pressed for markets, and the U.S. is a very hard place to sell into. You'd want to be assured of having favorable treatment of your imports of crude steel. There you would definitely need a political fixer -- but this is hypothetical."

Looking to skirt stiff import quotas to the United States, No. 3 steelmaker Severstal acquired Michigan-based Rouge Industries for $286 million earlier this year.