Annual Report 2007 - Severstal

Crude steel production
Million tonnes
2007 2006 Change Share in 2007
year-on-year % %
China 489.0 422.7 16 36
EU27 210.3 206.8 2 16
Japan 120.2 116.2 3 9
USA 97.2 98.6 –1 7
Russia 72.2 70.8 2 5
India 53.1 49.5 7 4
South Korea 51.4 48.5 6 4
Ukraine 42.8 40.9 5 3
Brazil 33.8 30.9 9 3
Turkey 25.8 23.3 11 2
Taiwan, China 20.5 20.0 2 2
Mexico 17.2 16.3 6 1
Canada 16.4 15.5 6 1
Iran 10.1 9.8 3 1
South Africa 9.1 9.7 –6 1
Other 74.5 70.7 5 6
Total 1,343.6 1,250.2 7 100
Total, excluding China 854.6 827.5 3 64
Source: International Iron and Steel Institute.
Although raw materials contract prices increased only
marginally around the world in 2007, the supply of raw materials
was unable to catch up with surging demand in the second half
of the year. As a result, spot raw materials prices increased
substantially – in certain cases by as much as 70%–150% –
compared with 2006 levels. Price increases were acute for all the
major raw materials costs of steelmaking, including coking coal,
coke, iron ore and steel scrap.
These price upgrades will be reflected in 2008 contract prices
for iron ore and coal, contributing to a substantial increase in
steelmaking costs in 2008. Price pressure from the raw materials
market has highlighted the benefits of vertical integration and
increased the level of strategic interest from steelmakers in
upstream markets. Vertically integrated steelmakers like Severstal
are therefore in a stronger position regarding raw materials prices
than those buying their iron ore and coal on the open market.
Prices of hot-rolled flat metal products rose most steeply in
Europe and Asia – growth of 15% in 2007. In Russia, prices grew
by 7%, while in the US they fell by 9%.
Significant global price increases for long-rolled steel in 2007
were due both to increased demand, and the growth in prices for
scrap metal. The rates of price increases were particularly steep in
Russia where beams were up by 51%, fixtures by 29%, and rolled
wire by 33%.
M&A and valuations
Global consolidation in the steel industry continued in 2007 as
steel companies aimed to expand their geographic presence,
consolidate supply, and gain access to new markets and
customers.
M&A activity was particularly strong in North America where
many of the remaining mid-sized companies were acquired by
international majors from Europe and emerging markets. There
was also a new trend: steel companies became increasingly
interested in acquiring raw materials suppliers, including scrap
collectors. For example, Nucor and Steel Dynamics, the two
leading mini-mill steelmakers in North America, made substantial
acquisitions of scrap companies operating in the US market.
As further evidence of this trend, Severstal acquired Vtorchermet,
a 1.1 million tonnes scrap collector in Russia.
Increases in iron ore, coking coal and other bulk materials
prices have prompted more M&A activity in the mining sector.
Many leading steel companies made self-sufficiency in raw
materials a key strategic priority.
In this climate of continued consolidation, disciplined
production behaviour and strong global demand for steel, the steel
industry has benefited from increased attention from investors.
The average EV/EBITDA multiple for the major publicly-traded
steel companies has increased from less than five in 2006 to just
over six in 2007, reflecting increased investor confidence in the
long-term sustainability of steelmakers’ earnings.
This increase in multiples was particularly strong for Russian,
Latin American and Asian companies as historical discounts were
eliminated and higher long-term demand growth rates justified
higher valuation. For markets like Russia, with relatively few
opportunities to invest directly in infrastructure growth,
investments in steel companies were seen as the gateway
to the infrastructure and construction boom.
Despite the recent consolidation activity, the steel
industry remains much more fragmented than that of its
suppliers (particularly iron ore), or its largest customers (such as
automotive), or other metallurgic industries, such as Aluminium.
Further takeovers, mergers and alliances are inevitable as
producers look to integrate horizontally with other mills, and
vertically with raw material suppliers and steel distributors, to
secure their futures.
Severstal Annual Report 2007 27