RUSSIAN STEEL COMPANIES SURGE AHEAD

18.01.07
MOSCOW. (RIA Novosti political commentator Alexander Yurov)

Russian steel companies began the new year with a huge acquisition.
Evraz Group, a leading vertically integrated mining company comprising three major steel mills and several mining and coal-producing assets, has completed the transaction to purchase U.S. Oregon Steel Mills. It has increased its stake to more than 90% and expects to take over the remaining 8.5% in the next few days.
Despite high energy prices, 2007 promises to be one of the most successful years for Russian metals companies. The demand for their output is growing in Russia, while their production costs, which are expected to remain low in 2007, will allow them to keep prices down.
Russia has been increasing the export of semi-finished steel goods, gradually shifting its focus towards Europe and America and reducing sales in Asia. According to tentative data for 2006, the reduction of metal sales to Asia may reach 22%.
The only country unaffected by the decline is China, which doubled the import of semi-finished steel goods from Russia last year.
In all, Russian steel companies have increased their exports by 3%. But these achievements have not helped them get round their main disadvantage, viz., a low volume of goods with a high added value.
Evraz Group comprises mining, ore dressing and smelting companies, as well as Russia’s largest rail producer. Contrary to the global trend, Russian metals companies still prefer to export semi-finished goods, but Evraz is now accumulating deep-conversion assets. It has bought such companies in the Czech Republic and Italy.
The acquisition of Oregon Steel fits well in this strategy. Evraz set its eyes on the U.S. company, which mainly produces pipes, sheet steel, rails and armor, in 2004. But the deal misfired, although the two companies’ executives were already discussing cooperation.
When Evraz announced the intention to buy Oregon Steel Mills in late November 2006, it became clear that it would not be an ordinary deal.
On the one hand, no one is surprised any longer that Russian businesses are spreading outside Russia. Several Russian companies have assets in the United States. In 2004, oil major LUKoil bought 100% of Mobil for $266 million, soon after metals giant Severstal bought Rouge Steel for $286 million. In 2006, Evraz bought 73% of shares in Strategic Minerals Corporation for $110 million.
On the other hand, Evraz’s transaction will be the largest ever. The steelmaker has spent $2.3 billion on buying Oregon Steel, which will make it Russia’s leader in terms of output. Moreover, this transaction is unique in that it has been approved by the authorized U.S. agencies.
Not every Russian M&A project succeeded last year. For example, Severstal failed to complete a merger with the world’s second largest steelmaker Arcelor, whose stake was evaluated at 6.5 billion euros. But Mittal Steel wedged in, offering a higher price.
Other failures include the derailed plans of the Magnitogorsk Iron & Steel Works (MMK) to buy a smelter in Pakistan.
And yet, it was a good year for the Russian metal companies. Nearly all of them improved their financial standing, and several surged into the front ranks in terms of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Novolipetsk Steel (40%), MMK (30%), and Severstal and Evraz Group (25% each).
Many analysts expect similar M&A deals in 2007, and predict that the leaders will be Evraz and Severstal, which will search for a new European partner after its failed merger with Arcelor.
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