Why SOS From Severstal's CEO Mordashov to Steel Industry Matters

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It will take more than President Obama’s visit to an Ohio Steel plant owned by the firm for ArcelorMittal’s fortunes to be revived.

The steel company came out with an upbeat report after EBITDA results to 30 September came in 19% up on the year earlier. Most steel mills, certainly the traditional vertically integrated steel producers, have been going through a program of rationalization, cost-cutting and efficiency drives to turn around profitability after two years of poor sales and weak markets (particularly in Europe) have left many of them losing money and most doing no better than break-even.

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With such a backdrop, the more pragmatic comments of Alexei Mordashov, chief executive of London-listed Severstal OAO, cuts through the face most steel mills present to the media in typical hard-hitting style.

The billionaire majority owner of the firm called for the industry’s leading players and their respective governments to hammer out a global agreement to slash output and to reduce excess capacity, much like the aluminum industry did in 1994.

According to the FT in that instance, the EU, US, Russia, Canada, Australia and Norway all agreed to reduce capacity; a decision that pushed down global aluminum output by 6%.

Mr. Mordashov is quoted as saying, “Without solving the problem of supply and demand, without optimising the industry, we are doomed to be in a struggle for survival in the best-case scenario. That is, if there aren’t mass cases of bankruptcies and industry enterprises shutting down. Excess capacity is a serious problem for the whole global sector and without a solution the industry risks falling into a deep crisis like it was 10 to 15 years ago when one in four US steelmakers went into bankruptcy.”

The article observes that in contrast to (integrated) steelmakers in the US and Europe, which are by and large loss-making, Severstal has managed to remain profitable thanks to self-sufficiency in iron ore and coking coal – allowing it to maintain lower input costs – and also the company’s decision to sell loss-making assets in the US and Europe in the years immediately following the 2008-2009 global financial crisis.

Severstal’s ‘colleagues’, such as domestic competitor Evraz, big dog ArcelorMittal, and India’s Tata Steel, are all looking to keep their heads above water. How?

Continued in Part Two.

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