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6 May, 2009 01:57

Steelmakers see global expansion in new light

Russian steel companies were on a major overseas shopping spree in recent years. But the downturn means most of those companies are scaling back their foreign operations.

Severstal was the first Russian steel company to buy production assets in North America. Now the firm may become the first to leave the continent, with those assets on the market, and the construction and car production sectors they service, amongst the hardest hit by the deteriorating economy. Boris Krasnozhenov, Metals and Mining Analyst at Renaissance Capital, believes the downturn has been so severe that some players need to leave the market.

“Prices for these products went down dramatically over last several months. The price of hot coal now in the U.S. is below $400. So, basically, most of the companies using the blastfurnace method of production in the United States are currently not able to break even at the current price level.”

Other Russian steel majors besides Severstal, like Evraz and Novolipetsk Steel also acquired assets in United States. Evraz managed to maintain profitability abroad by acquiring assets in high value added goods in the U.S. like large diameter pipes and rails. Now many in the industry think that in future, Russan steel firms will do things differently. Pavel Tatyanin Senior Vice President at Evraz believes that a more selective approach to expansion is the key.

“Over time the impact will come and clearly people will be more focused on really value accretive assets and acquisitions, and will be less concerned and driven by tonnes as the key sort of measurement for consolidations but rather they will be focused on efficiencies. And a lot of deals that happened in the past would have never happened in the new world, I guess.”

The metals sector enjoyed unprecedented growth before the crisis, and became one of Russia's most prominent manufacturing industries to reach overseas. But in future, it's likely to be more measured in its enthusiasm for buying overseas assets.