By Samantha Shields

Oct. 6 (Bloomberg) -- Russian billionaire Alisher Usmanov's Metalloinvest Holding will spend $3 billion to upgrade its steel mills with Germany's SMS Demag AG to produce pipes for the oil and gas industry.

Demag, a unit of closely held SMS GmbH, will modernize Oskol Metallurgical Plant, known as OEMK, and Ural Steel, Metalloinvest's general director, Maxim Gubiyev, said today at a
press conference in Moscow.

"World metallurgy is developing fast, and without continuous investment into the latest technology we won't be able to compete successfully in international markets or in Russia,'' Gubiyev said.

Usmanov, Russia's 25th-richest man with a fortune of $2.6 billion according to Forbes magazine, owns iron-ore producers through Metalloinvest as well. He's also chief executive officer of Gazprominvestholding, the investment arm of state-controlled OAO Gazprom, the world's largest natural-gas company.

Metalloinvest will provide 15 percent to 20 percent of the total investment itself, and the rest will come from a group of German banks, possibly including Deutsche Bank AG and Commerzbank AG, Metalloinvest's deputy general director, Nazim Efendiyev, said at the press conference.

Furnace, Plate Mill

Demag will replace the old open-hearth furnace at Ural Steel with a cleaner, more efficient oxygen-converter furnace with the capacity to produce 3.5 million metric tons of steel a year, and supply a 1.2 million-tons-per-year plate mill.

It will also build a plant at Ural to make 600,000 tons of large diameter pipes a year. Russian pipemakers are increasing production to supply oil and gas companies as output expands for
an eighth consecutive year.

Demag will build a complex to make 1.2 million tons a year of flat strip steel, used in the car and consumer goods, at OEMK. The mill now produces only long steel for the construction industry.

The investments will be made and the work completed within five years, Efendiyev said. The steel will be sold in Russia and Central Asia, he added.

Metalloinvest intends to sell shares to the public eventually, Gubiyev said, declining to name a date for any sale.

Usmanov owns Mikhailovsky GOK and Lebedinsky GOK, Russia's second- and third-biggest iron ore producers. He sold his stake in Corus Group Plc, the U.K.'s biggest steelmaker, in December 2004 after it had gained about 80 percent in value in a year. He bought Kommersant publishing house for $300 million in August in the country's biggest publishing deal.