Severstal plans $1bn investment in US
Severstal plans $1bn investment in US
By ByPeter Marsh in London
Financial Times
Mon., Dec. 31, 2007
Severstal, Russia’s biggest steelmaker, aims to increase profit from its US operations almost threefold by 2010 with the help of a $1bn investment plan to increase output and improve quality.
The plan comes nearly four years after Severstal gained its first foothold in the US by buying Detroit-based Rouge Industries, then in bankruptcy, for $285m.
The project is based on boosting the earnings before interest, tax, depreciation and amortisation of the former Rouge plant from $144m in 2006 to $400m in 2010.
It is part of a plan by Alexey Mordashov, Severstal chief executive and main owner, to make the company more global following the example of ArcelorMittal, the world’s biggest steel producer.
Severstal, which is listed on the London Stock Exchange, has most of its steel output in Russia but has some operations in France and Italy as well as the US and is studying options for other acquisitions elsewhere.
The US profit targets have come from Ron Nock, chief executive of Severstal’s US operations, which are due to increase shipments from the Detroit plant from an expected 2.4m tonnes in 2007 to about 4m tonnes in 2010-11.
Mr Nock said he was confident that the plan was realistic, in spite of the poor prognosis for the US economy in 2008 after the subprime lending crisis.
“We feel fairly comfortable about trading conditions in 2008,” Mr Nock said.
“We’ve been on a rising trend [in terms of finding new customers] for the past couple of years. This is offsetting any reduction in demand due to economic weakness.”
Mr Nock also said he had been reassured by “indications from the president and the Federal Reserve that they will take extreme measures [such as loan stabilisation plans and cuts in interest rates] to keep the sub-prime crisis from having a deeper economic impact”. The confidence of Severstal in its US operations is also mirrored at Evraz, Russia’s second-biggest steelmaker, which a year ago took a similar step to its larger rival by buying Oregon Steel in the US for $2.3bn.
Oregon, based in Portland, Oregon, in 2007 is expected to have made about 2m tonnes of steel, mostly in fairly specialised areas such as pipes for the energy industry.
Jim Declusin, chief executive of Oregon, said an economic slowdown in the US would have “limited impact” on Evraz’s US activities since these were focused on high-value areas of steel that were likely to stay in relatively high demand.
“In our pipes business, for instance, we are virtually sold out for 2008,” he said.
Bill Peluchiwiski, a steel specialist at Houlihan Lokey Howard & Lukin, a Chicago investment firm, said the optimistic noises from Severstal and Evraz about the US steel market were understandable.
“Steel is not going to be too negatively affected by the weaknesses in the US in the housing and banking industries,” Mr Peluchiwiski said.
“Industrial output in the US in 2008 is going to be pretty good. I am fairly upbeat about the steel sector in the US in the coming year.”
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