September 8, 2008 / 7:35 AM / 9 years ago

Severstal eyes U.S. steel market for growth

<p>Workers enter Russia's steel major Severstal group's representative office in Moscow, May 26, 2006. REUTERS/Shamil Zhumatov</p>

MOSCOW (Reuters) - Severstal CHMFq.L will spend up to $1.4 billion in the next four years to make its U.S. steel mills more competitive as Russia’s largest steel maker bets on a robust North American economy and long-term demand for steel.

Chief Operating Officer Gregory Mason said the Russian steel giant had faced no political obstacles in establishing itself as the fourth-largest steel producer in the United States and would continue to pursue U.S. acquisitions, particularly in coal.

“We are not just witnessing, but we are very active participants in the re-industrialization of America,” Mason, the chief executive of Severstal’s international division, said in an interview ahead of the Reuters Russia Investment Summit.

Steel makers in Russia, the world’s fourth-largest producer, have snapped up around a tenth of U.S. steel capacity as they spend record profits transforming themselves from Soviet-era behemoths into international players amid a commodities boom.

Severstal, majority-owned by billionaire Alexei Mordashov, has spent about $3 billion on U.S. acquisitions in the last year, most recently agreeing a $1.3 billion deal to buy coal miner PBS Coals Corp to secure better access to raw materials.

“In North America, our foremost objective is to secure our vertical integration; to have enough raw materials,” Mason said.

“Are we buying PBS to take American coal to Russia or elsewhere? No: we need it in the U.S. to feed our U.S. facilities, to ensure that we can run a sustainable business in the U.S. and our employees will have secured jobs.”

‘DIAMONDS IN THE ROUGH’

Severstal has 12.5 million tonnes of steel capacity in the United States, about half of the company’s total, and this will rise to 14 million tonnes when the second phase of its plant in Columbus, Mississippi, starts up in 2009.

Severstal will invest $500 million at Sparrows Point, the world’s largest steel plant in the 1950s, plus $250 million at its Wheeling plant, $100-150 million at its Warren plant and the remaining $500 million of the $1 billion on modernization of its Dearborn plant, once Ford Motor Co’s (F.N) in-house steel unit.

”They used to be underperforming companies, but if you look at the assets, there are a lot of diamonds in the rough.

“We have the skill, the initiative and the experience to turn around the companies,” Mason said.

Further acquisitions were likely, Mason said. Severstal posted a record $1.94 billion profit in the first half of 2008, its debt-to-EBITDA multiple is less than 1 and the company is in talks with banks to raise a loan of up to $2.5 billion.

“We have a strong balance sheet, but we are prudent money spenders,” Mason said. “We are very disciplined in our M&A.”

He said long-term investors in Russia need not be deterred by the recent drop in stock indexes to their lowest in nearly two years.

“If you’re paranoid about short-term events in the market, you should be concerned. If you believe in the fundamentals of the Russian economy, of your company, you should probably say ‘that’s OK -- I‘m here for good’.”

Higher living standards in Russia and elsewhere would also support long-term demand for steel, Mason said.

“People around the world are acquiring the taste for a better life,” he said.

“The better life requires infrastructure and all sorts of goods made of steel, so if you believe in the global economy, that there’s a huge amount of the population that desires a better life, you should believe in the steel industry.”

Editing by Jason Neely

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