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By John Helmer, Moscow

Severstal reconfirmed this week that the control shareholder and executive chairman, Alexei Mordashov, has ruled out buying brownfield projects or loss-making steelmills. The company is not saying, however, whether it will agree to buy from ArcelorMittal parts of the Florange steelmill in northeastern France. Two blast furnaces at the struggling site have been shut down for the past fourteen months, but operations have continued at the downstream hot and cold rolling mills and coating lines, as well as at the upstream coke plant. Full capacity production at Lorange is 2.5 million tonnes per annum.

On October 1, ArcelorMittal announced it intended “to permanently close the liquid phase [blast furnace production of steel at Lorange] and concentrate efforts and investment on the high-quality finishing operation, which employs more than 2,000 employees.” It claimed that 629 jobs would be lost in total. This triggered local demonstrations. ArcelorMittal is also claiming that it will continue to operate part of the Florange complex. “The company is proposing that in the future, slab for the Florange site will continue to be transported from Dunkerque, a world class site, thereby maintaining the industrial chain in France. ArcelorMittal will then focus on enhancing Florange’s position as a centre of excellence for developing high-quality value-added products for its customers, most notably in the automotive industry.”

The financial report for the first half of this year indicated that the Florange mill, together with its Dunkerque and Desvres plants in northwestern France, had lost €340 million, following a loss of €499 million in the second half 2011. The full ArcelorMittal group announced a few days ago that in the September quarter it had suffered an operating loss of $49 million; this compares with an operating profit of $959 million in the June quarter, and a profit of $659 million in the third quarter of 2011. “Today European demand is still approximately 25% below 2007 levels and any recovery is expected to be slow in the coming years,” the company says.

The French government has notified ArcelorMittal it has sixty days to try to sell part or all of the Florange plant. French press leaks have suggested that ArcelorMittal is talking to three potential buyer-partners, one of them Severstal. If ArcelorMittal intends to retain part of the Lorange steelmill, it is unclear what the buyer-partner would get for his money, and how dependent on the rest of ArcelorMittal’s production chain it would be.

Is Mordashov contemplating a fresh affair with Lakshmi Mittal in France, after their 6-year lossmaking history together?

A Severstal spokesman, who asked not to be quoted by name, said: “Officially, we do not comment on this issue because it is a mergers and acquisitions deal, and we never comment on those, whether potential or not.” She confirmed that at an investor presentation on September 3, Mordashov had said “now is no time for M&A transactions for cash.” The text of Mordashov’s presentation, released on Severstal’s website, added: “We do not plan to add steel capacities after finalization of the ongoing projects: Columbus Phase II [US] and Balakovo mini-mill [Russia].”

The Russian steel proprietors have been under pressure all year from the Kremlin not to undertake high-cost, potentially lossmaking steel or iron-ore mining projects outside Russia. In May Evraz, owned by Roman Abramovich, was dissuaded from buying Scaw Metals in South Africa for more than $500 million. Victor Rashnikov of Magnitogorsk Metallurgical Combine (MMK) withdrew his A$546 million takeover of Australian iron-ore miner, Flinders Mines, between March and July. In parallel, Mordashov has been offering to sell half or more of his stake in the $2 billion Putu iron-ore project in Liberia. In the September 3 presentation, Mordashov also acknowledged he is ready to cut the capital expenditure planned for this year of $1.6 billion to about $1 billion, if global steel market conditions continue to deteriorate.

In that presentation, Mordashov said he would be guided by the following “greenfields development principles: invest only in low-cost high-quality assets competitive under any price scenario; phased development approach: proceeds from the first stages to finance large-scale developments; [and] employ various financing options to limit Severstal cash contribution: Strategic partnerships, IPO, project financing.”

ArcelorMittal’s plan to find money and partner for the hot end at the Florange steel works and concentrate its profit-making on the steel finishing operation at the plant looks less than optimal for Severstal, if Mordashov is seriously thinking of dividing ownership of the Florange works. But such a deal might meet Mordashov’s foreign investment strictures without contradicting his promises to the Kremlin.

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