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Severstal North American Steel Mills For Sale?

Aug. 13th, 2010


Severstal North American Steel Mills For Sale?

John Packard 10:22PM, August 12, 2010

The “rumor” about Severstal NA putting some of their North American steel mill assets up for sale is being widely reported as fact both here in the U.S. as well as in Europe, South America and elsewhere. SMU continues to be skeptical as to the accuracy of the information because many are using “union sources” for the basis of their analysis. SMU experience is union sources can be valuable tools but they don’t always have insider information as to what management may be thinking. Severstal NA has refused to comment to SMU or any other publication regarding what they consider “rumor and speculation.”

Ever since the U.S. economy tanked in the fall 2008 there have been reports of problems with a number of the Severstal mills. The mills mentioned most often are Warren (OH), Wheeling Pittsburgh (WV) and Sparrows Point (MD).

Since 2008 the above mentioned mills have either had production facilities completely idled (Warren & Wheeling) or partially idled (Sparrows Point). Severstal Sparrows Point shut down their only blast furnace in late July and on Sunday they will cease operations of their finishing mills for at least two weeks with the lone exception being their tin plate mill.

SMU sources are reporting a continued malaise in the Sparrows Point order book which is dominated by construction related products such as Galvalume which are doing very poorly in the current economic environment.

SMU reviewed the most recent lead time charts sent to Severstal NA customers. What we discovered is even with the finishing mills being idle for two weeks the lead times on hot roll for new orders is the week of September 20th, cold roll for the week of September 27th while galvanized and Galvalume now have promise dates of October 4th on any new orders. This puts their lead times at the low end of the range on all products (3 weeks HR, 4 weeks CR and 5 weeks galvanized and Galvalume).

There have been a number of articles written as to who potential buyers could possibly be. A number of companies have been mentioned as potential suitors including CSN out of Brazil. CSN had an earnings conference call on Wednesday and the subject was brought up during the Question and Answer session. One of the analysts who participated in the call explained the company’s answer as follows, “…when asked if they were interested in Severstal assets they didn't deny straight away, but went on saying that they are not interested in troublesome assets (giving a clear impression that they are not interested).”

An analyst out of eastern Europe who covers Severstal responded to our question with another question, “Why would anyone want this?”

The Baltimore Brew, a blog newspaper located in the Baltimore, Maryland area had an extensive write-up by Mark Reuter who wrote a book about the Sparrows Point mill. Here are some of the high points from his article (the whole article can be read on www.baltimorebrew.com):

“Sparrows Point is up for sale by its Russian owner, according to several union sources, while rank-and-file employees brace for layoffs and managers prepare to temporarily idle some operations next week. The United Steelworkers Union (USW) is spearheading efforts to find a new owner for the troubled steel mill controlled by Russian billionaire Alexei Mordashov, founder and CEO of Severstal.

Sparrows Point is not the only Severstal operation being shopped around. The company’s North American division is also soliciting bids for its money-losing mills in Ohio and West Virginia, according to a report by Metal Bulletin.

Several foreign companies are reportedly mulling a bid for Sparrows, including Germany’s ThyssenKrupp and Brazil’s CSN. Two domestic companies, U.S. Steel and AK Steel, have reportedly looked over the property.

Whether potential buyers will actually submit bids that are acceptable to Severstal is an open question. Severstal purchased the mill in May 2008 for $810 million. Four months later, the world recession sent steel prices tumbling. Since then, Sparrows Point has not made a monthly operating profit, according to management sources.

Asked about a potential sale, Marika Diamond, spokesperson for the company, replied today by e-mail, “It is Severstal’s policy not to comment on market rumors or speculation.”

Finishing Mills to be Idled Next Week

On Sunday the company plans a two-week outage of all but one of its finishing mills. The idled facilities included the hot-rolled, cold-rolled, galvanizing and coated steel mills, which produce the bulk of product.

Only the tinplate operation, which makes specialty steel for the container industry, will remain open.

This follows the close of the “L” blast furnace on July 25 and suspension of all steel-making operations. The company has told union officials that the furnace will be closed until market conditions improve. The earliest date for resuming operations is said to be in October.

Together these cutbacks mean that most of the plant’s 2,300 union workers will not be assigned their regular tasks for the final two weeks of August.

Attempt to Delay Layoffs

Layoffs at the mill have been delayed in part because of union complaints that Severstal violated the union contract by importing Russian-made steel slabs. That controversy has stopped the influx of foreign steel at least temporarily, according to sources.

These sources say that USW Local 9477 President John Cirri has offered to terminate the complaint over Russian slabs in return for no forced layoffs. Cirri is on vacation this week and did not respond to an e-mail request for comment.

For months, Cirri and Moscow-based Severstal have fought over job cutbacks and a stalled contract (employees are still working on a contract that expired in 2008). “The union has lost faith in the Russians, and the Russians are tired of losing money at this plant,” said one source, using the word “Russians” to describe Severstal’s management team.

Point Losing Money

Both the union and company agree that Sparrows Point is losing money. The reason for the losses differs according to the party being questioned.

The company blames over manning and insists that 500 jobs must be cut or handed to subcontractors, while the union says that the company’s lack of long-term contracts for iron ore has made the mill uncompetitive and subject to skyrocketing raw-material costs.

Whether a property that has lost money since the onset of the world recession – and was only marginally profitable before then – would be attractive to another steel company is an open question.

Equally critical is the question of whether a potential purchaser could (or would) make the necessary investment to turn the mill into a consistently profitable operation.

Yet another issue is the potential environmental liability facing a new owner. Sparrows Point is under a court decree to clean up years of pollution, including the toxic chemicals that continue to flow from contaminated groundwater into Baltimore Harbor.

Severstal’s Unhappy Tenure

Mordashov was encouraged to buy Sparrows Point by the USW after a prior bidder, the Bouchard brothers of Chicago, failed to secure financing.

Mordashov pledged to spend $500 million to modernize production, which had suffered from sustained underinvestment following the 2001 bankruptcy of Bethlehem Steel Corp.

That promised investment was derailed by the world recession. Since 2009, Severstal’s efforts have been directed at reducing costs at the plant, including using a new type of iron-ore feed for the blast furnace that resulted in repeated malfunctions.

Brazilian steelmaker CSN reportedly offered $400 million for the steel mill in June, but Mordashov rejected the offer….” (Source: Mark Reutter, Baltimore Brew)

SMU is aware the union contract which was extended for a 120 day period will expire at the end of August. The extension covers the Sparrows Point, Wheeling Pittsburgh and Warren facilities as well as Wheeling Corrugating Division which manufacturer’s deck and roofing products. The contract first expire in the fall 2008 right after the economy imploded.

If you would like to learn more about the North American flat rolled steel markets we recommend registering for our Steel Market Update newsletter. You can receive a 4-week free trial by registering on our website: www.steelmarketupdate.com and click on the free trial logo.

We are also holding our first steel conference in Las Vegas, Nevada in conjunction with Metalcon on October 19, 2010. Look for more information about our conference in the Featured News section on our Home Page.

John Packard 10:22PM, August 12, 2010

The “rumor” about Severstal NA putting some of their North American steel mill assets up for sale is being widely reported as fact both here in the U.S. as well as in Europe, South America and elsewhere. SMU continues to be skeptical as to the accuracy of the information because many are using “union sources” for the basis of their analysis. SMU experience is union sources can be valuable tools but they don’t always have insider information as to what management may be thinking. Severstal NA has refused to comment to SMU or any other publication regarding what they consider “rumor and speculation.”

Ever since the U.S. economy tanked in the fall 2008 there have been reports of problems with a number of the Severstal mills. The mills mentioned most often are Warren (OH), Wheeling Pittsburgh (WV) and Sparrows Point (MD).

Since 2008 the above mentioned mills have either had production facilities completely idled (Warren & Wheeling) or partially idled (Sparrows Point). Severstal Sparrows Point shut down their only blast furnace in late July and on Sunday they will cease operations of their finishing mills for at least two weeks with the lone exception being their tin plate mill.

SMU sources are reporting a continued malaise in the Sparrows Point order book which is dominated by construction related products such as Galvalume which are doing very poorly in the current economic environment.

SMU reviewed the most recent lead time charts sent to Severstal NA customers. What we discovered is even with the finishing mills being idle for two weeks the lead times on hot roll for new orders is the week of September 20th, cold roll for the week of September 27th while galvanized and Galvalume now have promise dates of October 4th on any new orders. This puts their lead times at the low end of the range on all products (3 weeks HR, 4 weeks CR and 5 weeks galvanized and Galvalume).

There have been a number of articles written as to who potential buyers could possibly be. A number of companies have been mentioned as potential suitors including CSN out of Brazil. CSN had an earnings conference call on Wednesday and the subject was brought up during the Question and Answer session. One of the analysts who participated in the call explained the company’s answer as follows, “…when asked if they were interested in Severstal assets they didn't deny straight away, but went on saying that they are not interested in troublesome assets (giving a clear impression that they are not interested).”

An analyst out of eastern Europe who covers Severstal responded to our question with another question, “Why would anyone want this?”

The Baltimore Brew, a blog newspaper located in the Baltimore, Maryland area had an extensive write-up by Mark Reuter who wrote a book about the Sparrows Point mill. Here are some of the high points from his article (the whole article can be read on www.baltimorebrew.com):

“Sparrows Point is up for sale by its Russian owner, according to several union sources, while rank-and-file employees brace for layoffs and managers prepare to temporarily idle some operations next week. The United Steelworkers Union (USW) is spearheading efforts to find a new owner for the troubled steel mill controlled by Russian billionaire Alexei Mordashov, founder and CEO of Severstal.

Sparrows Point is not the only Severstal operation being shopped around. The company’s North American division is also soliciting bids for its money-losing mills in Ohio and West Virginia, according to a report by Metal Bulletin.

Several foreign companies are reportedly mulling a bid for Sparrows, including Germany’s ThyssenKrupp and Brazil’s CSN. Two domestic companies, U.S. Steel and AK Steel, have reportedly looked over the property.

Whether potential buyers will actually submit bids that are acceptable to Severstal is an open question. Severstal purchased the mill in May 2008 for $810 million. Four months later, the world recession sent steel prices tumbling. Since then, Sparrows Point has not made a monthly operating profit, according to management sources.

Asked about a potential sale, Marika Diamond, spokesperson for the company, replied today by e-mail, “It is Severstal’s policy not to comment on market rumors or speculation.”

Finishing Mills to be Idled Next Week

On Sunday the company plans a two-week outage of all but one of its finishing mills. The idled facilities included the hot-rolled, cold-rolled, galvanizing and coated steel mills, which produce the bulk of product.

Only the tinplate operation, which makes specialty steel for the container industry, will remain open.

This follows the close of the “L” blast furnace on July 25 and suspension of all steel-making operations. The company has told union officials that the furnace will be closed until market conditions improve. The earliest date for resuming operations is said to be in October.

Together these cutbacks mean that most of the plant’s 2,300 union workers will not be assigned their regular tasks for the final two weeks of August.

Attempt to Delay Layoffs

Layoffs at the mill have been delayed in part because of union complaints that Severstal violated the union contract by importing Russian-made steel slabs. That controversy has stopped the influx of foreign steel at least temporarily, according to sources.

These sources say that USW Local 9477 President John Cirri has offered to terminate the complaint over Russian slabs in return for no forced layoffs. Cirri is on vacation this week and did not respond to an e-mail request for comment.

For months, Cirri and Moscow-based Severstal have fought over job cutbacks and a stalled contract (employees are still working on a contract that expired in 2008). “The union has lost faith in the Russians, and the Russians are tired of losing money at this plant,” said one source, using the word “Russians” to describe Severstal’s management team.

Point Losing Money

Both the union and company agree that Sparrows Point is losing money. The reason for the losses differs according to the party being questioned.

The company blames over manning and insists that 500 jobs must be cut or handed to subcontractors, while the union says that the company’s lack of long-term contracts for iron ore has made the mill uncompetitive and subject to skyrocketing raw-material costs.

Whether a property that has lost money since the onset of the world recession – and was only marginally profitable before then – would be attractive to another steel company is an open question.

Equally critical is the question of whether a potential purchaser could (or would) make the necessary investment to turn the mill into a consistently profitable operation.

Yet another issue is the potential environmental liability facing a new owner. Sparrows Point is under a court decree to clean up years of pollution, including the toxic chemicals that continue to flow from contaminated groundwater into Baltimore Harbor.

Severstal’s Unhappy Tenure

Mordashov was encouraged to buy Sparrows Point by the USW after a prior bidder, the Bouchard brothers of Chicago, failed to secure financing.

Mordashov pledged to spend $500 million to modernize production, which had suffered from sustained underinvestment following the 2001 bankruptcy of Bethlehem Steel Corp.

That promised investment was derailed by the world recession. Since 2009, Severstal’s efforts have been directed at reducing costs at the plant, including using a new type of iron-ore feed for the blast furnace that resulted in repeated malfunctions.

Brazilian steelmaker CSN reportedly offered $400 million for the steel mill in June, but Mordashov rejected the offer….” (Source: Mark Reutter, Baltimore Brew)

SMU is aware the union contract which was extended for a 120 day period will expire at the end of August. The extension covers the Sparrows Point, Wheeling Pittsburgh and Warren facilities as well as Wheeling Corrugating Division which manufacturer’s deck and roofing products. The contract first expire in the fall 2008 right after the economy imploded.

If you would like to learn more about the North American flat rolled steel markets we recommend registering for our Steel Market Update newsletter. You can receive a 4-week free trial by registering on our website: www.steelmarketupdate.com and click on the free trial logo.

We are also holding our first steel conference in Las Vegas, Nevada in conjunction with Metalcon on October 19, 2010. Look for more information about our conference in the Featured News section on our Home Page.

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