Severstal Still Showing a Loss but Improving in 2010

Severstal, Russia’s biggest steelmaker, has just posted a $1.037 billion net loss in 2009 compared to a $2.03 billion net profit in 2008 but at the same time, announced plans to increase capital expenditure from $1bn in 2009 to $1.4bn in 2010. Alexei Mordashov, chief executive and with 82% of the stock the company’s main shareholder, said in an FT article, “I am optimistic that we will see a broad improvement in the industry this year. Most of the cash will go into improving steel quality and moving into new fields such as special steels for the automotive industry rather than increasing output.

Severstal’s position is typical of most global players certainly outside of China. Wteelmakers are focused on moving upstream to more value add products, in securing raw material supplies to insulate themselves against iron ore and coking coal price risk and in improving the quality and efficiency of what they do. They are not interested in significantly increasing capacity. Even Severstal who’s highly competitive Russian plants are running at 95% capacity utilization are only earmarking a portion of their capex to expanding mini mill capacity. According to an Alibaba News article some $685 million will be spent on key projects in the Russian Steel Division (some of which will be the mini mill enhancements), $356 million in the Resources Division (developing raw materials) and $413 million at the Dearborn, Michigan in North America, replacing outdated equipment.

Severstal’s sales for the year were $13.1bn, down 42% on the $22.4bn recorded in 2008. Last year, Severstal produced 16.7m tons of steel, just under 60% of it in Russia and the rest divided between five plants in the US and one each in France and Italy. In 2008, steel output was 19.2m tons, a drop of 13%. Clearly the rest of the drop in revenue came from the collapse in prices. In fact the company’s problem is not one of falling tonnage or of prices. With mostly captive iron ore and coking coal resources, the firm is well positioned to weather the current global steel market. Severstal’s problem is debt. After a spending spree in the last decade, the firm is saddled with $4.28bn of net debt and is looking to sell its loss making Italian operation Luccini SpA according to a Business Week article.

Still Severstal is better positioned than most to return to net profit in 2010 particularly if the US operations can be brought to break-even by gradually increasing capacity utilization and rising prices. The firm says it has no plans to scale down its US presence and is optimistic about the outlook for 2010.

–Stuart Burns

Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll to Top