U.S. investments become millstones for Russian steelmakers

Russian metals companies could face losses due to the weak performance of their production plants in the United States. Amid slumping demand, the metal giants are preparing to cut output to support prices.

In the last 8 years Russian metal companies have spent billions of dollars buying assets in the U.S.  – in what they thought would be the most  profitable market for their high-value added products.

But now it seems to be turning into a headache.  Severstal is the first Russian steel producer to reveal plans to cut production at its American plants by 30%.  The move comes in response to falling demand as the credit crisis hits the construction and car making industries. Maksim Khudalov, Analyst at Metropol Investment believes the outlook for steel in the U.S. isn’t good for the next couple of years.

“Producers should jointly fight against falling prices, which means they should consolidate their efforts to cut production, in order to keep prices from dramatic falls. Nevertheless we believe that Severstal’s steel assets and Evraz’s steel assets would be the worst performing of both companies both this year and next year.”

Tim McCutcheon of DBM partners says the American metal market is not consolidated enough for individual players to take efficient measures to support prices. He points out government will take steps to boost demand for steel.

“The construction sector in the U.S. is a huge sector.  And so it employs a lot of people and therefore theres a huge political interest in keeping these people busy, which means consuming steel in the future.” 

Experts forecast  Russian metal producers will significantly cut their capital expenditure on the American assets and slash production  by at least 30 percent next year. But nobody expects them to sell any of their American assets at least in the mid-term.