Evraz Sees Europe Steel Market Stalled Even as U.S. Recovers

Evraz Plc, Russia’s largest steel producer by output, expects the European market to stall for at least two to three years even as U.S. demand recovers.

“Europe didn’t solve fundamental problems with its economy during the current crisis,” Pavel Tatyanin, its international business chief, said in an interview. “The U.S. deleveraged its companies, allowed the dollar to drop against major currencies, reduced labor costs and took measures to boost labor mobility.”

Evraz is cutting European operations, including the sale of its Czech Vitkovice Steel unit bought in 2005, while completing an expansion of its North American rail-manufacturing capacity. European steel demand declined 9 percent last year and may drop 3 percent this year, while North America grew 8 percent in 2012 and may gain 1.5 percent this year, according to Morgan Stanley.

Evraz, controlled by Chelsea soccer club owner Roman Abramovich along with billionaires Alexander Abramov and Alexander Frolov, got as much as 9 percent of its sales from Europe last year and 18 percent from the Americas.

“We currently produce more than 50,000 tons of rails per month, while we should have reached that level after expansion in the fourth quarter only,” Tatyanin said of U.S. operations.

The expansion of Evraz Pueblo mill in Colorado to 500,000 metric tons of rails a year was unveiled in 2011 to meet rising demand in North America, where Evraz is the largest supplier. “2013 sales will be approximately the same as 2012, when the market consumed record volumes of rails,” Tatyanin said.

Consumption Recovered

“The U.S. is going through reindustrialization and steel consumption has recovered, the car industry is working at the highest utilization rate,” the senior vice-president said.

Steel demand in the U.S. is seen growing by 0.7 percent this year and by 3 percent in 2014, the World Steel Association said yesterday during its annual meeting in Sao Paulo.

In contrast, excess capacity in some steel products in Europe is reaching 30 percent to 45 percent, Tatyanin said. The price of hot-rolled coil in Europe, a benchmark, fell to as low as $437.59 a ton in July, the weakest level in three years, according to Metal Bulletin data on the Bloomberg terminal. Demand in European Union countries is seen falling 3.8 percent this year, and may gain by 2.1 percent in 2014, the World Steel Association said.

“The car industry in Europe is the weakest since World War II, although it’s picking up recently, while investment activity is at a very low level,” Tatyanin said. “The construction boom ended with a bubble. All southern Europe countries have a lot of unsold residences and until this inventory at the users’ end clears itself out, the steel market won’t recover.”

Northern Italy

While Evraz is nearing a deal to sell Vitkovice, it is in talks with the labor union at the Palini mill in northern Italy after the company temporarily closed operations. Evraz isn’t considering a sale “as fundamentally the asset is good quality and has synergies with the rest of the group.”

Evraz will also keep its mill in Dnipropetrovsk, Ukraine.

“We’ve developed a proper program, which assumes spending less than $200 million over three to four years to upgrade selected elements of our facilities,” Tatyanin said in Moscow.

In the long term, the whole Ukrainian business is targeted to generate earnings before interest, taxes, depreciation, amortization of at least $170 million a year, he said.

One common problem for Europe and the Americas is imports.

Ukrainian mills may boost European shipments as the pursuit of customs integration with the European Union will cut off its market in Russia, Tatyanin said. “Ukraine lost the market in North Africa due to the political instability in the region, so Europe will be a natural destination,” he said.

There’s also a knock-on effect from European troubles in North America as producers seek a “bright spot” for demand, with import prices below production costs in some cases.

Imports in some pipe markets account for as much as half of demand, with some offering pipes at $950 a ton, “definitely below the cost of production and transportation,” compared with the market average of about $1,100 to $1,300, Tatyanin said.