Bloomberg News

Russian Steel Billionaire Mordashov Seeks U.S. Pull Out

May 16, 2014

Severstal CEO Alexey Mordashov

Alexey Mordashov, chief executive officer of OAO Severstal. Photographer: Simon Dawson/Bloomberg

After 10 years and spending about $6 billion buying American plants, Russian steel billionaire Alexey Mordashov has had enough.

OAO Severstal (SVST), the steelmaker he controls, is looking to complete its exit from the U.S. as sluggish domestic demand and an onslaught of cheap foreign imports mean the American steel industry may take decades to return to its 2006 peak.

Russia’s second-largest steelmaker is weighing bids including one from U.S. Steel Corp. (X:US) for two U.S. steel plants, including a furnace originally built by Henry Ford in Michigan, according to people familiar with the matter. A sale agreement may take several months to complete, said the people, who asked not to be identified because the information isn’t public.

Interactive Graphic: See Where Mordashov Falls within World's Top 200 Billionaires

Like rivals ArcelorMittal and ThyssenKrupp AG (TKA), Severstal is scaling back its global ambitions after the steel industry has failed to fully bounce back from the plunge in demand in the wake of the global financial crisis. For Mordashov, holding onto the last vestiges of his foreign operations makes little sense when profit margins are about half what they are in Russia.

“Demand is getting better, but the problem is we still have a long way to go to get even three-quarters of the way back to where we were in the mid 2000s,” David Lipschitz, an analyst at CLSA in New York, said in an interview.

Speculation that Severstal may sell its American plants coincides with the worst standoff between Russia and the U.S. and its European allies since the Cold War over the crisis in Ukraine. Still, geopolitics isn’t forcing Mordashov’s hand, according to Dmitriy Kolomytsyn, a Morgan Stanley analyst in Moscow.

‘Considering Options’

“The sale is unlikely linked to the tensions between Russia and the U.S. over Ukraine as the talks started much earlier than the Ukraine crisis developed,” Kolomytsyn said by phone.

The Russian company said May 14 in a filing that it’s “considering a range of strategic options” for its U.S. operations. It also said no decision has yet been made “as to which, if any,” option may be pursued. Spokeswomen for Cherepovets-based Severstal and Pittsburgh-based U.S. Steel declined to comment.

Severstal advanced 2.5 percent to 306.4 rubles by the close in Moscow. The stock has gained 9.8 percent this week.

Mordashov, 48, is the ninth-richest Russian, with a fortune estimated at $11.5 billion, according to the Bloomberg Billionaires Index.

Metals Playbook

The U.S. steel industry is supported by growing domestic demand, Morgan Stanley (MS:US) said in its Global Metals Playbook for the current quarter. “Near-term conditions will likely support the price increase,” it said.

Even so, the bank estimates that the U.S. average price of hot-rolled coil, the benchmark steel product, will be 0.6 percent lower this year from 2013. The price is still far behind the historical peak of $1,080 a ton, reached in 2008 when international companies were expanding.

While Severstal is among the lowest-cost steelmakers, it can’t bring a lot of those efficiencies to the U.S., said Christopher Plummer, chief executive officer of West Chester, Pennsylvania-based consultant Metal Strategies Inc.

Severstal’s international unit, which operates the two U.S. mills, had a profit margin based on earnings before interest, taxes, depreciation and amortization of 7.4 percent in the first quarter. The margin at its Russian business was 15 percent, according to an April 30 statement.

Lakshmi Mittal

That performance by the foreign operations was still the best, as measured by profitability, since at least the start of 2008, because of lower raw material costs, according to figures from the company.

The plants Severstal may sell -- the Dearborn, Michigan, blast furnace and its Columbus, Mississippi, electric furnace -- have a combined annual production capacity of 5.2 million metric tons, or about 6 percent of total U.S. production in 2013, according to World Steel data.

Severstal started its global expansion in 2004, when it bought the bankrupt Dearborn plant for $285 million, beating a bid from U.S. Steel. Mordashov followed a similar strategy to that of billionaire ArcelorMittal (MT) founder Lakshmi Mittal, whose string of acquisitions in the previous decade included the $36 billion purchase of Arcelor SA in 2006, the industry’s largest deal.

Before taking over Arcelor, Mittal also started to grow in the U.S., buying assets such as plants held by International Steel Group. ThyssenKrupp began building U.S. assets in 2007 in a bet on U.S. market growth, which it sold last year.

Pennsylvania Coal

By selling the Dearborn and Columbus plants, in which it invested more than $2 billion, Severstal is completing the disassembly it began in 2010. That’s when it sold plants in Illinois and Ohio back to Esmark Inc., two years after buying the assets. Severstal sold mills in Maryland, Ohio and West Virginia to Ira Rennert’s Renco Group Inc. in 2011, losing about $2 billion on the assets in the process.

The steelmaker also owns PBS Coal in Pennsylvania, which it bought for about $1 billion in 2008 and then partially closed in 2013.

“In the U.S. and Canada, if you go down the list of acquisitions, there have been many more big disappointments than great successes,” said Plummer at Metal Strategies.

To contact the reporters on this story: Sonja Elmquist in New York at selmquist1@bloomberg.net; Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; John Viljoen at jviljoen@bloomberg.net John Viljoen, Rick Schine


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