Memo from Moscow
Steel News from Russia and Ukraine
Russia's role in steel Sector Consolidation, December 2008
From the 1990s especially, globalisation activity and world integration of the European steel industry started in the form of interregional consolidation of ownership through mergers, asset swaps, joint-ventures and acquisitions. This trend continues today as steel companies aim to expand their geographic presence and gain access to new product markets. World steel nonetheless remains very fragmented in comparison to iron ore supply or some sectors of steel consumption (such as the automotive industry). Further takeovers, mergers and alliances are thus inevitable as producers look to integrate horizontally with other mills, and vertically with raw material suppliers and steel distributors. As detailed below, the role of the Russian steel sector in this regard can be expected to be pronounced.
In terms of consolidation targets, last year's M&A activity was particularly strong in the USA where many of the remaining mid-sized companies were acquired mainly by international majors from Europe. There is also a new trend for steelmaking companies - the 2008 upturn in iron ore and coking coal and other materials prices has prompted much merger and acquisition activity in the mining sector. Many leading steel companies have made self-sufficiency in raw materials a key strategic priority; and many Russian steel holdings are also moving this way.
Severstal Group is an international, vertically-integrated metals and mining company that sells high-quality steel and mining products all over the world. The Group has about 100,000 employees and produced over 17.5 mt of steel last year making it the world’s 15th largest steel producer. The Group has a full production cycle comprising iron ore mining enterprises, crude steel and rolled product plants as well as downstream production businesses. The production facilities are geographically diversified, with locations in Russia, the USA, Italy, France, UK, Ukraine and elsewhere. Following a corporate restructuring in April 2008, the company today comprises three divisions: Severstal Russian Steel, Severstal Resources and Severstal International. Severstal Russian Steel division includes Russian Steel, Izhora Pipe Mill, and Metalware. Severstal Resources is the result of a series of acquisitions and disposals over the last 12 years of iron ore and coal-mining and ferrous scrap collection companies as well as gold-mining. Severstal International includes North America operations (with ~12.5 mt capacity) and Lucchini (Italy) is the result of a series of acquisitions over the last four years. The North American business unit itself was created when the Group acquired substantially all of the assets of Rouge Steel in January 2004. In 2005, the Group entered into a joint venture for construction of the new SeverCorr mini-mill - a 1.5 million tonne capacity high quality hot, cold-rolled, galvanised and galvannealed sheet operation. The construction of the mini-mill has essentially been completed and the facility is operating at near target capacity; in January 2008, the Group acquired a controlling interest in SeverCorr. In May 2008, the Group acquired the Sparrows Point plant in Baltimore for US$ 810 m. Total Severstal investment in United States M&A activity in 2008 with WCI Steel, Esmark, PBS Coals reached more than US$ 4.4 bn.
Evraz Group S.A. is one of the largest vertically-integrated steel, mining and vanadium businesses in the world. Evraz Group’s principal assets include three of Russian leading steel plants: Nizhny Tagil (NTMK), West Siberian (Zapsib) and Novokuznetsk (NKMK). The Company also owns Palini e Bertoli in Italy, Evraz Vitkovice Steel in the Czech Republic, Evraz Oregon Steel Mills and Claymont Steel ($ 565m) in the USA. The acquisition of Ipsco's Canadian plate and pipe business ($ 4.025 bn) further enhances the Company's operations in North America. Evraz's presence in South Africa is constituted by Highveld Steel and Vanadium Corporation. In 2008, Evraz made its first investment in the Asia Pacific region entering in a share purchase agreement to acquire up to 51% of Chinese steel manufacturer Delong Holdings. Its vanadium business comprises Strategic Minerals Corporation in the United States and Highveld Steel and Vanadium Corporation in South Africa. In December 2007, Evraz signed an agreement to acquire majority stakes in select production assets in the Ukraine, including the Sukhaya Balka iron ore mining and processing complex, the Dnepropetrovsk Iron and Steel Works and three coking plants.
Mechel is one of the leading Russian companies. Mechel is the second largest producer of long products in Russia, and the most comprehensive producer of specialty steels and alloys in Russia, producing ~39% of total Russian specialty steel output. Its business includes three segments: mining, steel, and power. Mechel unites producers of coal (coking coal and steam coal), iron ore concentrate, nickel, steel, rolled products, hardware, heat and electric power. Mechel's businesses includes facilities in Russia, Romania (Mechel Targoviste, Mechel Campia Turzii, and from 2008 Otelu Rosu and Ductil Steel Buzau), Bulgaria, Lithuania (Mechel Nemunas) and some mining in Kazakhstan via Oriel Resources (UK). According to Managing Director of Mechel Vladimir Polin 'This is only the start of our penetration into the EU market, as Mechel studies potential asset acquisitions in a number of EU, North American, Asian and African countries'.
Novolipetsk iron and steel work in January 2006 acquired a 100% stake of Danish steelmaker DanSteel for US$ 104 m. Overall annual production capacity of DanSteel is about 0.5 mt/year of hot-rolled steel heavy plate. NLMK has a long-standing client relationship with DanSteel, being its major supplier of quality steel slabs since 2002. In 2007 100% of DanSteel shares were transferred to the books of NLMK International BV, unifying NLMK's foreign assets and interests. At end 2008 NLMK had planned to pay ~$400m for Beta Steel and ~$ 3.5 bn for John Maneely Co. but these deals appear to have been stopped during the credit crisis of recent weeks.
TMK Group, the largest Russian pipe producer recently acquired leading Romanian pipe manufacturers TMK-ARTROM (Slatina) and TMK-RESITA, producing carbon, low alloyed and medium alloyed vacuum steel continuously cast in round billets and blooms as well seamless carbon, low alloy and alloy steel tubes - hot and cold rolled and drawn. TMK-ARTROM is one of Europe's largest producers of industrial seamless pipes. In 2008 TMK received pipe business of Ipsco for $1.25 bn.
In times of economic stability Russian steel producers have seemed more interested in acquisition of foreign steelmaking assets, especially in the USA; but in present economic conditions the focus seems to be coming back to opportunities closer to home. Indeed, there are recent industry rumours about the possible integration of some of the big Russian steelmakers into other Russian holdings. As the present crisis recedes, however, MCI expect that the appetite of Russian steelmakers for international M&A activity will return once more.
| 01-Nov-08 | Investment activity |
| 01-Oct-08 | Stainless steel sector in Russia |
| 01-Sep-08 | 2007 Russian steel industry review |
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