Salzgitter's Europipe Nears Landmark Deal to Share Cost Risks With Clients

Europipe GmbH, a supplier of steel pipes to the 7.4 billion-euro ($9 billion) Nord Stream natural- gas line linking Europe to Russia, is near a landmark accord to share the risk of swings in raw-material costs with customers.

“We can’t take all the risk,” Chief Executive Officer Michael Graef said at Europipe’s base in Muelheim an der Ruhr, Germany. “We’re close to concluding an agreement with a large pipeline operator on a price-adjustment clause.”

Costs may be increasingly volatile after Vale SA, Rio Tinto Group and BHP Billiton Ltd., the biggest iron ore exporters, ended a 40-year custom of agreeing on annual deals with steel producers. ArcelorMittal, the world’s largest steelmaker, is among producers passing on higher iron ore and coal costs to clients, according to CEO Lakshmi Mittal.

“We’re in talks with several gas companies,” Graef said. Their “readiness” to consider sharing the risks “has changed dramatically over the last six months,” he said.

Salzgitter AG, the German steelmaker that owns 50 percent of Europipe, told its shareholders on June 8 that it won’t make any money on the second of two tenders for the Nord Stream link under the Baltic Sea because of higher input costs.

Shares Gain

Salzgitter fell 0.4 percent to 52.20 euros in Frankfurt, valuing the company at about 3.1 billion euros. The Stoxx Europe 600 Basic Resources Index dropped 1 percent.

Iron ore prices rose about 90 percent for the quarter from April 1, and coking coal, another steelmaking ingredient, jumped 55 percent in March, according to the German Steel Federation.

OAO Gazprom, the biggest gas producer and lead investor in Nord Stream, is building pipelines bypassing countries such as Ukraine, where price disputes have disrupted flows of the fuel to Europe. Declining output within Europe means the region will raise imports from 2015, with about 70 percent of its needs coming from such supplies by 2030, industry group Eurogas said.

Under Europipe’s proposals, the company would set a cap, to which the price for clients could rise should raw-material costs increase. The customer would get money back if costs fell, Graef said, without giving specific figures or identifying companies.

“We’ve never booked an order with a price-adjustment clause but it will happen,” Graef said. “We’re talking with several companies. It will happen for the next large projects.”

Steel Hedging

The system would allow pipeline companies to calculate potential budgets before starting work on projects, he said. The alternative, with steelmakers hedging against commodity price swings, may fail to fully protect the business, Graef said.

Voestalpine AG, Austria’s largest steelmaker, said today that its heavy-plate unit is demanding raw-material price indexation for projects with “longer” time spans.

While that’s new for the energy industry and has met resistance, there is increasing comprehension among clients that quarterly prices for iron ore will affect the supply of products, Voestalpine spokesman Claus Geiger wrote in an e- mailed response to questions. He declined to comment further.

The steelmaker said in December 2007 that its Voestalpine Grobblech GmbH unit won an order to deliver as much as 200,000 tons of heavy plate to Russian pipemaker United Metallurgical Co. for the Nord Stream project.

ThyssenKrupp AG, Germany’s largest steelmaker, said in April that it’s considering using derivatives to fix future iron-ore costs after the collapse of annual pricing.

“I can’t imagine that it would all go via hedging,” Graef said. “The steelmakers won’t be able to do it all. For this transition period, we’ll work with price-adjustment clauses.”

German steel company AG der Dillinger Huettenwerke owns the other half of Europipe, which buys steel plates from its parents and makes as many as 400 12-meter (39-foot) pipes a day for Nord Stream at its Muelheim plant.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

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