Alexey Mordashov, who has lost about $1.4 billion of his fortune in a year from a slump in steelmaker OAO Severstal’s shares, says countries need to agree on global cuts in output to save the industry from itself.
Intervention coordinated at forums such as the World Trade Organization or Organization for Economic Cooperation and Development would rein in excess production that’s kept prices low, according to Mordashov. Producers are caught in a bind as they can’t afford to give up on investments in capacity planned before the economic crisis, even as weak prices lead to losses.
“Even quite healthy 3 to 4 percent annual consumption growth can’t compensate for excessive and inefficient capacity that’s barely closing,” said Mordashov, 48, whose worth is estimated at $11 billion by the Bloomberg Billionaires Index.
World steel output is expected to exceed consumption for at least a third year, hurting prices and profit, the Russian Steel lobby says. While cost cuts at Severstal, about 79 percent held by Mordashov, helped a return to profit last quarter, its market value is down almost a fifth in London in a year. ArcelorMittal, the biggest steelmaker, had a fifth straight quarterly net loss.
“Should the situation remain like it is now, the global utilization rate may reach a more or less appropriate 83 percent to 85 percent only in 2018,” Mordashov said in an interview. “The industry is suffering from super excess capacity, with an average utilization rate of 75 percent across the globe.”
The only way to shutter capacity is for governments and steelmakers to agree to a deal or for producers to consolidate, said Mordashov, who is Severstal’s chief executive officer and was chairman of the World Steel Association until October.
A deal could be discussed in the WTO or at the OECD, and Severstal may take part in those discussions, he said in the Dec. 16 interview. Mergers are harder to achieve as most companies are private and it’s tough for owners to agree on the terms of any acquisition, he said.
The industry slump, with about 60 percent of companies operating with negative cash flows, is a concern that may yet cause “the deepest crisis” among world economies, with steel the most important material for construction, Mordashov said.
Severstal, like peers including OAO Novolipetsk Steel, has no choice except to keep opening some new capacity such as its mini-mill in Balakovo planned for next year because the projects were planned before the crisis and are mostly complete, he said.
China is also adding steel capacity, and while its government acknowledges a need to slow down, nothing is happening yet, he said.
A Buy Russian program for steelmakers, proposed this month by the Federal Anti-Monopoly Service’s Igor Artemyev, “deserves proper consideration,” Mordashov said.
Large imports of steel for use in the infrastructure for February’s Olympic Games in Sochi “is not very fair,” he said.
Severstal, which lost 18 percent of its market value in London in the past year, has improved efficiency and cut costs. “I had 10 deputies a year ago, now I have only six,” Mordashov said. The main Cherepovets site is working at above 90 percent capacity and he hopes it will stay at least the same in 2014.
Severstal shares were little changed at 318 rubles at 2:07 p.m. in Moscow trading.
The billionaire expects better demand in Russia and the U.S., where the company operates two plants, than in Europe.
“We’ve lower costs and are well positioned geographically, thus very competitive over our peers,” Mordashov said.
That hasn’t stopped the father of six seeking to diversify his business by investing in telecommunications and technology. Mordashov joined a group led by billionaire Yury Kovalchuk’s Bank Rossiya to buy half of Tele2 Russia Holding AB in October from VTB Group for 40.4 billion rubles ($1.2 billion).
The decision was “based on the belief that demand for mobile technologies in the country, which is going through a demographic boom, should be rising,” he said.
He has also looked at agricultural technology, without yet finding a suitable investment target. Mordashov said he stayed away from bidding for billionaire Suleiman Kerimov’s stake in OAO Uralkali, the largest potash producer, on sale since August, partly because of political involvement in the industry.
“Not only is it difficult to get access to a strategic stake, but it’s also a very expensive investment,” he said.
Mordashov, unlike billionaire-colleague Vladimir Potanin, doesn’t plan to commit to the Buffett-Gates Giving Pledge initiative that encourages the world’s richest people to give most of their wealth away to philanthropic causes.
“The companies I have are not just abstract capital, huge numbers of employees are behind them,” he said. “I see it is important to prepare my children to be responsible for those people and to manage the fortune in a way that would be beneficial not only for them but for other people too.”