All major steel producing countries like China, Japan, Germany, the U.S., Brazil, Turkey, Russia and Ukraine showed peak monthly figures so far this year. Production in the Middle East, where demand was buoyant last year due to booming infrastructure spending, edged up by 2.5% in July. Monthly steel output in China, the world’s biggest producer and consumer of steel, climbed 12.6% to 50.7 million tons. Steel production in India also increased, but only by a modest 4.3% to 4.7 million tons during the month.

However, global steel production was down 19.9% to 652.9 million tons for the first 7 months of 2009 compared with the same period a year ago. North America posted a 41.6% fall in year-to-date steel production while Europe saw a drop of 42.1% during the same period. Steel output in Asia was down 6.1%, with Japan posting a production decline of 38.5%.

Key steel consuming industries like auto, shipbuilding and construction experienced weak demand in the last quarter, forcing global steel makers to cut production levels. U.S. Steel Corp. (X) had slashed production by almost 62% during the second quarter, while Korean steel maker POSCO (PKX) cut production by about 15% during the period. The operating environment deteriorated so sharply that POSCO was forced to lower production for the first time in its history in December last year.

Given our expectations for weak steel demand through the rest of 2009, we believe that global steel production will continue to be lower compared to last year. On the other hand, given the declining inventory levels, we believe the rate of deterioration in steel production will moderate in the coming months.

The company reported quarterly net income of RUR22.6 billion ($701.5 million), more than double the net income of RUR11.1 ($345 million) reported in the year-ago period. This significant year-over-year growth was largely attributable to the RUR10.6 billion ($329 million) in foreign exchange gains from a strong ruble versus the US dollar.

VimpelCom’s net operating revenue in the quarter was RUR69.0 billion ($2.1 billion), reflecting 12% and 3.3% increase over the year-ago and the previous quarter, respectively. While sales from its wireless operation came in at RUR58.2 billion ($1.8 billion), the fixed-line business generated revenue of RUR14.6 billion ($453 million). The reported OIBDA of RUR35 billion ($1.1 billion) reflects a year-over-year growth of 8.7%, yielding an OIBDA margin of 50.6%.

The company’s total active cellular subscriber base grew by about 10 million year over year and by 1 million sequentially to 63.7 million at the end of the second quarter. Its broadband subscriber base increased 11.3% sequentially to approximately 1.7 million.

Reviewing operations by territory, revenue from Russia tallied RUR59.1 billion ($1.8 billion), up 11.8% year over year, accounting for more than 85% of VimpelCom’s total sales. Total mobile subscriber base reached 49.97 million (up 17.6% year over year) from 49.35 million in the previous quarter. Broadband subscriber base grew to 1.66 million from 1.5 million sequentially. Russian ARPU (average revenue per user) fell 7.2% year over year but rose 5.2% sequentially to RUR322.5 ($10).

Total operating revenue of RUR10.7 billion ($332 million) in the CIS markets reflects a 16.3% year-over-year growth. Revenue from Kazakhstan (the largest CIS market) registered sales of RUR5.1 billion ($158 million), up 15.6% year over year. Revenue from the other key CIS markets were: RUR1.6 billion ($50 million) in Ukraine (down 2.3% year over year), RUR1.6 billion ($50 million) in Armenia (up 3.7%) and RUR1.7 billion ($53 million) in Uzbekistan (up 37.8%).

During the quarter, VimpelCom had RUR5 billion ($155 million) in capital expenditures. It plans to raise this level in the second half of the year for expanding business operations.

Last month, the company successfully placed ruble bonds worth RUR10 billion ($303 million). Net proceeds from this issue will be used to refinance existing foreign currency denominated debt and finance the ongoing business-expansion initiatives. VimpelCom repaid debt worth $456 million during the second quarter.

VimpelCom remains the second-largest wireless operator in Russia with over 25% market share. Nevertheless, the company has a higher projected growth rate than its Russian peer Mobile Telesystems (MBT) as it continues to demonstrate the ability to succeed in emerging markets on the strength of sustained subscriber growth.

Besides maintaining its strong market position in the rapidly maturing Moscow metropolitan area, VimpleCom has started expanding into incipient markets like Vietnam and Cambodia. The company completed the commercial launch of its cellular operation in Cambodia in May under the Beeline brand and plans to cover more than two-third of the country’s population by the end of 2009.

Recently, VimpelCom launched commercial mobile operation in Vietnam in three major provinces of the country. It plans to reach over 40 provinces and 41 million people by the end of 2009, translating into a 48% penetration of the country’s population. The relatively lower mobile penetration rates in these markets offer attractive growth opportunity for the company.

We expect acquisitions and expansions in emerging markets to enhance prospects in the wireless space and foster much of the company’s growth going forward.

TiklaKazan, MyScreen's technology-based solution, was made available to a select group of Turkcell customers, allowing them to participate in the trial for a period of four weeks in exchange for free airtime. Results of the trial were positive, with 82% of subscribers confirming they would recommend MyScreen to a friend. Subscribers also confirmed that they would prefer to see a full-screen advertisement at the end of the call, as opposed to receiving an SMS or MMS.
 
MyScreen's mobile advertising solution helps brand advertisers deliver targeted full-screen advertisements to subscribers at the end of every call, based on their demographic and interest profile. In return, subscribers accumulate rewards for every advertisement viewed on their phone, which can be redeemed for free airtime, downloadable content or value-added services from the telecom provider.
 
Turkcell’s seeks to grow in the Turkish wireless market (which is at least another year away from saturation) through high-quality, valued-added services. Turkcell has a stake in numerous subsidiaries, giving it access to markets such as Cyprus, Kazakhstan, Georgia, Azerbaijan, Northern Cyprus and Ukraine. It acquired an 80% stake (through its subsidiaries) in Belarusian Telecommunication Network.

Despite increasing competition, Turkcell has been able to meet price wars with competitors, which has enabled the company to generate healthy profit margins and cash flow in excess of capital spending needs.

Turkcell Iletisim Hizmetleri A.S. is the dominant provider of Global System for Mobile Communications (GSM) and General Packet Radio Service (GPRS) mobile communications services in Turkey with 37 million subscribers. The company was formed in 1994 and has been operating under a 25-year license since 1998. Its major competitor is Vodafone Group Plc. (VOD).

On a geographic basis, revenue rose 7% year over year in Russia, 4% in Uzbekistan, 35% in Turkmenistan and 3% in Armenia, while sales declined 8% in Ukraine.

Mobile TeleSystems added approximately 2.8 million customers in the quarter (up sequentially), primarily driven by a 2.3 million net subscriber growth in Russia. This was marginally offset by 155,000 subscriber losses in Ukraine. At the end of the second quarter, the company served approximately 99.5 million subscribers (67.4 million in Russia), up 9.4% year over year.

In Russia, quarterly churn (customer switch) fell to 6.9% sequentially, while increasing on a year-over-year basis. Russian ARPU (average revenue per user) climbed sequentially while decreasing from the year-ago quarter. Churn in Ukraine declined both sequentially and on a year-over-year basis but rose in Uzbekistan. ARPU in Ukraine grew sequentially despite falling from the year-earlier period.

Mobile TeleSystems maintained its leadership in most markets during the quarter. On a sequential basis, its market share in Russia and Armenia remained stable at 34% and 81%, respectively. The company gained market share in Ukraine (up 1% to 33%) while losing in Uzbekistan (down 1% to 45%) and Turkmenistan (down 2% to 85%).

During the first half of 2009, the company generated free cash flow of $109.2 million, down significantly from the $1 billion registered a year ago, due to higher capital expenditure. Mobile TeleSystems exited the quarter with approximately $1.6 billion in cash and cash equivalents and $4.6 billion in total debt.

Mobile TeleSystems is expanding its 3G network footprint through commercial service launches in selected cities of Russia and surrounding countries. It has launched 3G services in the three biggest Armenian cities and recently deployed the first phase of its 3G network in Moscow.

The company plans to spend up to $1.6 billion for upgrading 3G networks in Russia through 2011 to provide high-speed data transfer services to its customers. In order to meet the financing requirements associated with its aggressive network rollout plan, Mobile TeleSystems has secured a loan of €413 million ($578.2 million) from three international lenders. It expects to earn an additional $2.5 billion in sales from 3G services by 2011, including $2 billion from Russia alone.

Moreover, the company is aggressively pursuing acquisitions and strategic partnerships to strengthen its “mono-brand" mobile retail network while implementing cost optimization programs to lower operating expenses. To strengthen its retail distribution network, Mobile TeleSystems bought Russia-based retail chains Eldorado and Telefon.Ru. The mono-brand retail initiative is expected to provide the company with a competitive edge over rival VimpelCom (VIP), which has acquired approximately 50% of the multi-brand mobile retailer Euroset.

While we see expansion of the 3G network as a key growth driver, related costs to support network deployments and promotional initiatives may tighten free cash flow and margins in 2009. Moreover, increasing competition, foreign exchange exposure, regulatory challenges and market risk in Russia warrant a cautious view on the stock.