Severstal steels itself to challenge global giants

Monday, 28 February 2005 14:24:00 (GMT+3)   |  
       

Severstal steels itself to challenge global giants

A little over a year ago, Russia’s second-largest steel maker, OAO Severstal, confirmed its intention to become a major player in the global steel industry by putting the finishing touches on the company’s first foreign acquisition, Michigan-based Rouge Industries Inc. Among the major assets of Rouge Industries -now Severstal North America- is Rouge Steel, the fifth-largest steel producer in the US. Rouge Steel’s UAW-represented production and maintenance employees’ ratification of the Asset Purchase Agreement on January 29, 2004, marked an “important milestone in the global consolidation of the steel industry,” according to Severstal Holding Group CEO Alexey Mordashov. The US$285.5 million purchase of bankrupt Rouge Industries was just the first step in Severstal’s quest to become one of the world’s top five steel makers. Over the course of the next year the company would look to establish a coke joint venture with Wheeling-Pittsburgh Steel, sign a definitive agreement to acquire Italian steel maker Lucchini S.p.A., and appoint Gregory Mason as Technical Director. Severstal North America Seeks Coke Joint Venture On December 23, 2004, Severstal’s wholly owned subsidiary Severstal North America inked a non-binding letter of intent with Wheeling-Pittsburgh Steel Corporation to create a joint venture involving Wheeling-Pitt’s coke plant in Follansbee, West Virginia. The letter of intent calls on both parties to enter into a definitive joint venture on or before March 31, 2005. A definitive joint venture agreement would see Wheeling-Pitt contribute the assets of its Follansbee Coke Plant, while Severstal would contribute nearly US$140 million over the next four years to make capital improvements to the plant. In addition, Severstal would make a US$20 million payment directly to Wheeling-Pitt at the closing of the joint venture. Both companies would assume 50% ownership of the joint venture, which would entitle each party to 50% of the plant’s coke production for the duration of the venture. The annual capacity of the plant after the capital improvements is expected to be in excess of one million tons. The deal would go a long way towards ensuring that Severstal, which does not currently produce any coke in North America, has a constant supply of fuel for its plant in Dearborn, Michigan, which consumes nearly 1.1 million tons of coke per annum. Steel Companies Bask in Record Profits 2004 was a banner year for steel makers the world over. Soaring steel prices provided a much needed turn around for an industry that had been hurting for the previous few years. Preliminary financial results show that Severstal posted net sales revenues of US$6.415 billion in 2004, double the company’s $3.202 billion revenues from the 2003 fiscal year. Severstal’s 2004 profits rose 127% year-on-year to US$1.344 billion. Severstal produced 12.8 million tons of steel in 2004. The company’s Cherepovets mill in Russia accounted for 10.4 million of the total, while Severstal North America contributed 2.4 million tons. Severstal Sets Sights on EU Market On February 9, 2005, Severstal signaled its intention to establish a foothold in the European Union (EU) by entering into a definitive agreement for the acquisition of Italy’s second-largest steel making group, Lucchini S.p.A. The transaction will take the form of a €450 million capital increase that will see 62% of Lucchini’s shares transferred to Severstal. The Russian steel maker will contribute €430 million of the capital increase, while existing Lucchini shareholders will contribute the remaining €20 million. The acquisition, subject to European Antitrust clearance, is expected to be completed by mid April. The €450 million capital increase will be used to service Lucchini’s debt, which had been reduced from €1.8 billion in June 2003 to €1.18 billion by the end of 2004. The debt reduction will provide Lucchini with the necessary financial flexibility to compete efficiently in the European engineering steels market. From Severstal’s point of view, the deal will provide the Russian steel producer with an established presence with the EU, thus allowing the company a means by which it can work around EU-imposed steel export quotas. For its part, Lucchini gains a strong financial backing that will allow the group, which was founded after World War II and which played a significant role in the rebuilding of postwar Europe, to maintain its integrity. “We are very pleased with this agreement,” said Vadim Makhov, Severstal’s Deputy Director General of Strategy and Business Development. “[It] is an important step forward in our international strategy, and a milestone with respect to our European growth.” Commenting on the proposed deal, Lucchini Chairman Giuseppe Lucchini said, “I am very proud that our company and the Lucchini name will now be associated with a dynamic player in the global steel market such as SeverstalMason Appointment Exemplifies Severstal’s Ambition Severstal reaffirmed its strategic vision to continue acquiring foreign assets by appointing Gregory Mason, a US citizen born in Odessa of present-day Ukraine, as Technical Director on February 21, 2005. "We are glad to have such a well-known expert working at our company,” said Vadim Mahov. “Gregory Mason's key advantage is his long-term experience of successful work in the biggest Western industrial corporations and, what is important, good knowledge of peculiarities of the Russian market.” Mason served as vice-president of Detroit Steel Company, technical director of Caparo Steel, director of metallurgic production technologies in Davy International and chief engineer of KRUPP Industries before establishing the Metal Strategies consulting firm with a partner. The new Technical Director’s relationship with Severstal began towards the end of 2003, when he acted as a consultant for Severstal while the company was in the process of acquiring Rouge Industries. After Severstal’s successful takeover of Rouge Industries, Mason continued to consult with the company on various other projects. He then joined the company in an official capacity on November 1, 2004.