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Severstal earned almost $2 billion due to rising prices for steel and raw materials

The Severstal Group, which has frequently reported acquisitions in the North American market in recent months , yesterday once again stated that, nevertheless, its presence in the Russian market is a “key priority” for it. And, according to the general director and main shareholder of the company, Alexey Mordashov, he will continue to invest in Russian assets that are showing good results. “Our investment program in Russian assets until 2012 should amount to $8 billion,” he said at a press conference yesterday. But it also intends to seriously develop foreign assets. Recently, the company has concentrated mainly on acquisitions of low-margin enterprises mainly in the United States, the largest of which were the American WCI Steel, Sparrows Point and Esmark. Now the company's task, according to Mr. Mordashov, is to create vertical integration of North American business. To achieve this, Severstal also intends to acquire raw materials assets that will provide the North American division of the company with the necessary resources. One of these steps was the August agreement to purchase large American coal producer PBS Coals Corporation, which is expected to meet the raw material needs of the group's American enterprises by approximately 40%.

Yesterday, Severstal was the last of the Russian metallurgical companies to report for the first half of the year, presenting, according to Mr. Mordashov, record financial results thanks to high prices for raw materials and steel. The company's net profit under IFRS grew by 69% compared to the same period last year, to $1.94 billion, revenue by 36%, to $10.547 billion, EBITDA by 34%, to $2.78 billion dollars. These figures exceeded even analysts' forecasts. However, Severstal does not intend to stop there and predicts that EBITDA at the end of the year will be in the range of $5.8-6.1 billion.

Mr. Mordashov stated that this year the main strategic objective was to increase the scale and expand the boundaries of the group's North American business. The production capacity of the North American division is 12.2 million tons of steel. In 2008, the company plans to produce 9.7 million tons. It is planned to bring the North American assets to full capacity within several years, after which Severstal does not exclude a further increase in capacity by another 1.5 million tons of steel, up to 13.7 million tons, due to the commissioning of a second line at SeverCorr. For the North American division, as Sergei Kuznetsov, director of finance and economics of the company, told reporters yesterday, Severstal plans to attract a syndicated loan of $1.5-2.5 billion (mainly from Western banks).

However, Mr. Mordashov noted that the ongoing process of modernizing production facilities will allow the company to increase production volumes in all divisions of the group. At the end of the year, steel production is expected to increase compared to 2007 to 23 million tons (an increase of 31.4%), rolled steel - to 21.9 million tons (by 64.7%), coal - to 2.7 million tons, coking coal concentrate - up to 4.6 million tons (decrease by 20.4%), iron ore concentrate - up to 4.9 million tons (increase by 4.3%), pellets - up to 10.3 million tons (3% increase).

According to Antanta Pioglobal analyst Evgeniy Ryabkov, the growth in Severstal’s financial performance was largely due to an increase in steel prices, as well as the purchase of raw materials from its own companies. Alexey Morozov from UBS predicts that next year average prices will be at this year's level. They will be supported by prices for coal and ore. Therefore, the profits of steel companies, in particular Severstal, will be at the level of the current year, he believes.

However, analysts did not rule out a decrease in Severstal’s profitability next year. “If Severstal does not buy more assets, after the financial indicators of North American companies are consolidated in the reporting, profitability may decrease,” says Marat Gabitov from Unicredit Aton. Mr. Morozov also agrees with him. However, Mr. Mordashov has already hastened to reassure the market, noting that Severstal is considering the possibility of new acquisitions in the Asian markets (India) and Eastern Europe. The company also sees potential in the Eastern European market, in particular in Ukraine. “We may make some acquisitions in Ukraine if it creates additional value for our shareholders,” he said.

Irina TSYRULEVA