Severstal Closes Sparrows Point in Favor of Imported Slabs and Running Down Surplus Inventory

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As a sign of the deteriorating position for steel sales in the US market, Severstal is closing some of its primary steel making facilities including Sparrows Point starting July 1. US BOF steel makers are caught between firm raw material costs in the form of iron ore and coking coal, and a weakening semi’s market in the second and third quarters. Severstal posted a US$785 million loss in the first quarter 2010 and Sparrows Point is rumored to be the company’s highest cost plant with HR coil costs of more than US$700 per ton according to a Reuters report covered in a local paper.

Severstal said they would be closing their L blast furnace plus supporting facilities and the continuous caster in order to “balance inventories meant to imply they have been running ahead of themselves and produced too many rolling slabs. Reports suggest the firm also intends to import slabs from Russia to supplement local stocks but clearly some suspect this is merely an attempt to improve the economics with lower cost slabs. A Reuters report in 2007 said that Sparrows Point has one blast furnace, one hot strip mill and two cold mills. In 2007, it produced 3.7 million tons of slab. A report by John Packard of SteelMarketUpdate advises the plan is to idle only the hot end of the mill and to keep the finishing end operating. So the company would continue to produce HR, CR, Galvanized/Galvalume and Tin Mill products.

Although the intention is to close the facilities from July 1st for just 30-45 days, Severstal will want to be confident the demand-supply situation is in a better balance before it re-starts its blast furnace. It is a notoriously difficult process to close and re-start a blast furnace smoothly, often the re-start is problematic and blast furnaces cannot be run at half speed, it’s all or nothing. So Severstal will not re-start unless they feel confident demand is sufficient to keep the furnace operating at close to its previous 80% operating rate. In the meantime, lower priced slabs from the group’s Russian operations are a far more flexible way to run the operation and may just become the preferred model for the rest of this year.

–Stuart Burns

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