Steel Beats the Odds

How an Old World steelmaker is adapting to the New Economy

With sky-high labor costs, a 35-hour workweek, and a surging currency, France hardly seems the kind of place where an export-focused manufacturer might prosper. Yet specialty steelmaker Vallourec, based just outside Paris, is not only beating the odds, it's performing so well that it landed the top spot on this year's European BW50 list.

Vallourec, which traces its roots to 19th century mill towns in Burgundy and northern France, illustrates how some of Europe's quintessentially Old Economy companies are learning to compete in the new, globalized world. Until the 1990s, Vallourec was a hodgepodge of businesses ranging from construction and engineering to metallurgy and steelmaking, and its growth was anemic. Since then, it has shed peripheral operations to focus on its most profitable products: steel pipes used in oil drilling and electric power plants. "We have oriented ourselves to the high end of the market," says Pierre Verluca, chairman of Vallourec's management board.

Vallourec has also gone global. Until 2000, all its factories were in Europe. But it now makes some 35% of its pipes in Texas and in Brazil and is expanding operations in China and India. That offers it a crucial hedge against the strong euro, since about 60% of its sales are outside of Europe.

The result: Earnings last year rose 58%, to $1.36 billion, on sales that were up 29%, to $7.5 billion. That has helped boost shares more than sixfold over the past two years, to 280 from 38. Recent rumors that Vallourec could be a takeover target for newly merged Arcelor Mittal (MT) have added bounce to its share price, though neither company has confirmed talks.

Of course, Vallourec has profited from high oil prices that fueled a boom in oil exploration. But it is also offering new services such as pipe installation and maintenance. Innovation is another key to Vallourec's success. The company has invested millions to develop high-pressure piping for the next generation of power plants. Expanding this business, which now accounts for 16% of sales, hedges against the possibility of an oil and gas slump.

Still, Vallourec can't afford to rest. It is keeping a close eye on China, where a quickly modernizing steel industry could provide a low-cost challenge. For now, though, oil companies are willing to pay extra for Vallourec's quality and reliability. "The cost of the pipe, even though it's expensive, is a fraction of the cost of a failure" in the oil field, says Dalton G. Dwyer, an investment banker with Industry Corporate Finance Ltd. in London.

An Old World company that makes steel pipes. It may not sound that exciting--unless, that is, you're a Vallourec investor who has ridden its success to riches.

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