Russian billionaire Alexey Mordashov, driving a $2 billion-a-year expansion program at steelmaker OAO Severstal, is investing in new U.S. output just as largest rival ArcelorMittal shutters plants to weather a slump in demand.
Severstal, Russia’s second-biggest steelmaker, will double capacity at its Columbus plant in Mississippi when it starts a $505 million mill this month, according to a company presentation. It also plans to bring $756 million of new output online at its Dearborn, Michigan, plant by the end of 2011, and complete a $600 million mini-mill in Balakovo, Russia, in 2013.
“We don’t see any indication of the problem in the steel market,” Mordashov, the 46-year-old chief executive officer of Cherepovets-based Severstal, said in an interview in London. “Our order book is full, we even managed to increase prices slightly recently, we have a good view for October.”
As Severstal adds production, ArcelorMittal, the world’s biggest steelmaker, is cutting back to counter surplus capacity in Europe. The company idled plants in Luxembourg, France and Germany last month as orders from the European construction industry dropped amid economic stagnation.
ArcelorMittal’s stock has lagged behind peers this year, tumbling 57 percent in Amsterdam. Severstal has lost 39 percent in Moscow, while Nippon Steel Corp. and South Korea’s Posco each slid 28 percent. Severstal’s potential return this year is estimated at 103 percent, ranking it eighth among global peers, Bloomberg consensus estimates show. Russian companies occupy the top three places, while ArcelorMittal ranks 14th.
While ArcelorMittal and Severstal both sell steel in Europe and the U.S., Severstal benefits from lower expenses at its Russian mills, where the average cost of steel-slab output is about $400 a metric ton, compared with as much as $600 a ton in Europe, said Dmitry Smolin, an analyst at UralSib Capital.
“Severstal has a different strategy from ArcelorMittal” and benefits from operating in Russia, the most profitable emerging market, the Moscow-based analyst said by telephone. “ArcelorMittal has large exposure in Europe.”
ArcelorMittal said Sept. 27 it will idle a furnace and two rolling mills at Rodange and Schifflange, Luxembourg, following an earlier decision to suspend furnaces at Eisenhuttenstadt, Germany, and Florange, France. The company confirmed today it will also take furnaces off line in Spain, citing “continuing weakness” in demand. It plans to save $1 billion next year by shuttering plants and moving production to cheaper sites.
ArcelorMittal dropped 3.8 percent to 11.685 euros at the 5:30 p.m. close in Amsterdam, a one-week low. Severstal fell 5.3 percent to 314.50 rubles in Moscow.
Both steelmakers plan to boost investment in mining as they seek to avert rising raw-material costs. Severstal, which has snapped up iron-ore mines in Brazil and Liberia, seeks to almost triple ore output by 2020. Coking-coal volumes will more than double over the period, helping boost steel production by a third to 19.6 million tons, the company said last week.
ArcelorMittal has also acquired mining assets in Brazil and Liberia, and said in July it would increase capital spending this year to $5.5 billion, from a previous target of $5 billion.
“China steel demand growth is expected to continue to absorb new supply of iron ore, keeping global supply/demand tight,” the company said last month in a presentation. “We expect continued growth in steel consumption in the developing world,” it said, adding that margins need to improve before new capacity is justified outside China.
European hot-rolled steel coil, used in cars and buildings, has slumped 17 percent from its February peak to 527.50 euros ($699.60) a metric ton. Coil exported from the Black Sea has dropped to $717.50 from $790 in the period, Metal Bulletin data show. Input costs have more than doubled since 2005, with an almost threefold jump in iron-ore and coking-coal fees.
Steel companies in Europe and North America have struggled to pass on higher raw-material costs to customers as slower economic growth erodes demand. In the U.S., Severstal sold three unprofitable steel mills in March, after separating its Italian Lucchini SpA unit last year.
Severstal, the biggest Russian steelmaker after Evraz Group SA, has followed competitors in tapping emerging markets, where demand growth has outpaced expansion elsewhere. The company agreed in December to form a joint steel venture with NMDC Ltd. in India. It also plans to spend as much as $3.5 billion at the Putu Range in Liberia and as much as $2 billion at the Amapa iron-ore project in Brazil, it said last week.
“Mining is an essential part of our company, a very strong generator of revenues and earnings,” Mordashov said Sept. 29. “Our strategy is about upstream integration into raw materials and presence on the markets with good opportunities to grow, first of all emerging markets.”
Severstal and Hyderabad-based NMDC have agreed to invest 150 billion rupees ($3.1 billion) to build a steel plant in the southern Indian state of Karnataka, NMDC Chairman Rana Som said Sept. 28 in New Delhi. ArcelorMittal and Posco have already unveiled plans for steel projects in the state.
“Asia is very, very attractive,” Mordashov said. “Countries like Indonesia, Vietnam could be interesting for us just because of the fundamentals. Latin America as well could give us good opportunities, especially taking into account access to raw materials.”
In May, Severstal agreed to buy 25 percent of SPG Mineracao, which owns iron-ore exploration licenses in northern Brazil, and has an option to buy a further 50 percent. The company, which also mines gold in Guinea and Burkina Faso, has scaled back in developed markets such as the U.S., where it sold plants to Renco Group Inc. in March, retaining the Dearborn and Columbus sites.
“It’s good to be in mature markets as long as you can have a sound business model, like we have in the U.S. now after the reshuffle of our portfolio,” Mordashov said. “Because of very clear fundamentals, we believe we should follow the trend of the market and be more focused on Asia.”
Severstal may not be as resilient to market volatility as Mordashov’s comments suggest, UralSib’s Smolin said, citing decisions to backtrack on bullish investments in the past.
“I have a strong ‘deja vu’ with September 2008 when Severstal last presented its strategy,” Smolin said. “The company was then convincing investors of great prospects in the developed markets in Europe and the U.S. Afterwards, Severstal had to reshuffle its asset portfolio and is now presenting plans which may again be based on more bullish market fundamentals than the ones shared by its global rivals.”
In 2015 or 2016, Severstal aims to be among the world’s top 5 steelmakers by earnings before interest, tax, depreciation and amortization. “Of course we can’t predict the future,” Mordashov said. “Investment activities could be significantly undermined in case of a negative development in the economic situation. But we don’t see it yet.”
Commodities, down 21 percent in six months, will resume gains in the long term, according to the CEO. “All commodities will be in good demand because this demand is based on strong fundamentals.”