Oct. 24 (Bloomberg) -- Alexey Mordashov, the Russian steel billionaire who lost more than $2 billion on the sale of U.S. plants, is defying economic forecasts with a spending plan set to boost capacity at Severstal North America by 45 percent.
The company plans to start new units at its remaining plants in Columbus, Mississippi, and Dearborn, Michigan, by the end of the year, Mordashov said in an interview in Moscow. The expansions, costing $1.3 billion, will raise its output capacity in the U.S. to 5.2 million metric tons a year, narrowing the gap with top producers U.S. Steel Corp., ArcelorMittal, Nucor Corp. and Steel Dynamics Inc.
“Steel is a long-term business and we believe that the U.S. economy has many reasons to prosper,” said Mordashov, who controls more than 82 percent of Cherepovets, Russia-based Severstal and is its chief executive officer. The size of the U.S. and its population will ensure a “very strong economy” regardless of the current debt crisis, he said.
The company sold mills in Maryland, Ohio and West Virginia to Renco Group Inc. this year after idling capacity as slowing demand dragged down prices. Severstal got $85 million in cash and a $100 million secured note for the plants, which it bought three years earlier for about $2.2 billion. It expects to receive a further $36 million for the deal in March.
New units at the company’s remaining sites in Columbus and Dearborn will increase output of higher-value steel products, widening profit margins, Mordashov said Oct. 19.
“We’re targeting a margin of 10 percent on earnings before interest, tax, depreciation and amortization by 2015 through 2016 in the U.S.,” he said. Columbus will become more competitive following the expansion and benefit from higher demand as automakers build plants in the area, he said.
At Dearborn, Severstal will start a cold-rolled steel mill and galvanizing line after becoming the first Russian company to win funding from the U.S. government’s Advanced Technology Vehicles Manufacturing program. The Department of Energy agreed in July to loan Severstal $730 million over 18 years.
The money will go toward building high-strength, lighter auto steel designed to make cars more fuel-efficient. Most of Dearborn’s production is sold to General Motors Co., Ford Motor Co. and Chrysler Group LLC, the company said in a Sept. 29 presentation to investors.
The strategy of divesting unprofitable, older plants in favor of newer technology may enable Severstal to meet its 10 percent Ebitda margin target, George Buzhenitsa, a Moscow-based-analyst at Deutsche Bank AG, said by phone. “That will bring them in line with our profit-margin estimates for the majority of their American rivals, including U.S. Steel,” he said.
Producers including U.S. Steel missed earnings estimates in the second quarter as prices retreated amid weakening growth in the U.S. and Europe. On Aug. 5, the U.S. had its AAA credit rating cut for the first time by Standard & Poor’s, which said lawmakers failed to curb spending enough to reduce the deficit.
The plants sold by Severstal relied on imported iron ore and coking coal, which soared in price over the past year. Output costs at Dearborn’s new cold-rolled steel mill will be lower, Mordashov said.
In 2008, Severstal bought Friedens, Pennsylvania-based PBS Coal to reduce its purchases of the steelmaking ingredient. PBS supplies coal to Dearborn and sells to other buyers. Severstal is seeking to double output at PBS Coal by 2015.
“Coking coal has become a self-sufficient business, and we want to make money out of it,” Mordashov said. The U.S. unit is well located for exports and may even supply the company’s Karnataka steel project in India, he said. Severstal and Indian iron-ore producer NMDC Ltd. said last year they plan to build a mill in Karnataka state. The plant will use local iron ore.
Severstal already has an iron ore project in Brazil, and is studying a Canadian venture to produce a refined form of the ore from ore waste, a process it’s testing with Iron Mineral Beneficiation Services, a South African business it part-owns. Pilot units will be installed in Quebec and may subsequently be replicated in the U.S., Mordashov said.
Steelmakers are seeking to counter the cost of raw materials as declining prices for the alloy squeeze margins. Benchmark hot-rolled coil in the U.S. has dropped to about $665 a ton from $875 in March, Steel Business Briefing data show.
Mordashov, Russia’s second-richest man with an estimated fortune of $18.5 billion, started buying U.S. steel plants in 2004, fending off U.S. Steel to acquire Dearborn-based Rouge Industries. The Dearborn and Columbus plants are now at the lowest end of the cost curve among U.S. producers, an advantage he says will help them resist economic stagnation, while strong fundamentals will buoy earnings in the years ahead.
While slowing economic growth prompts “uncertainty” among clients, Mordashov sees no “industry-specific reasons for the decline in demand and for the crisis,” he said.
To contact the editor responsible for this story: John Viljoen at firstname.lastname@example.org.