Sergei Kuznetsov has been CEO of both Severstal International and Severstal North America since July 2009.He joined Severstal in 2002 to head the business planning group created to acquire foreign assets and develop international projects,and in 2004 he was appointed CFO of Severstal North America.In 2008 he became CFO of Moscow,Russia-based OAO Severstal.
In late 2010/early 2011,base prices for most flat steel products,including HDG,spiked immensely,before gradually ticking down over the course of this year.Do you foresee the same conditions that enabled the spike to reoccur at the end of this year?If not,what do you think are the main differences in the market from now and this time last year?
SK:The price increase in early 2011 was driven by sharply rising raw material costs,overall improving economic conditions,restocking needs at service centers and lack of supply from both import and domestic producers.Today,while underlying demand from almost all steel consuming segments remains good,the supply situation is more balanced.Worries about a possible slowdown of the economy have created a more cautious purchasing behavior and have pushed inventories to historically low levels.Raw material prices remain high,driven by strong demand from Asia.Many raw material contracts resetting on a year-end,annual basis will add to the pressure on domestic producers.Given the current conditions,I believe we will see a structural uplifting in pricing to reflect the tight inventory situation and raw material dynamics.
Spot prices in the US domestic flat-rolled market are notorious for rarely remaining stable for more than a few weeks--prices are constantly oscillating up and down,providing little market stability for the most consumed steel product in the United States.So far this year,concerns of overcapacity have dominated the reasoning behind price volatility,but in general,what do you think are the main sources of this instability at any given time?What do you think the steel industry would need to change to provide more price stability in the flat-rolled sector?
SK:While steel price fluctuations have increased over the last few years,the same is true in many other commodities.Major reasons for such volatility in steel include demand which has not yet recovered to support high utilization rates,and capacity additions or restarts which lead to increased supply and imports driven by the valuation of the US dollar.The main factor that will help boost demand and bring pricing stability is the continuing restoration of the economy.Currency,trade,energy and infrastructure policies will play important roles in the revitalization of domestic manufacturing and the steel industry in particular.With our state-of-the-art facilities in both Dearborn and Columbus,we are well-positioned to respond to growth as well as volatile market conditions.
HDG price increases in late summer/early fall this year were attributed to high order entry rates.What end-use sector is having the greatest influence on rising demand for HDG?
SK:Automotive,appliance manufacturers,HVAC and infrastructure(culvert)are among the strongest consumers of HDG products.High demand for these products is exactly the reason why we are adding a new state-of-the-art automotive Galvanizing line at Dearborn and a second Galvanizing line at Columbus.The new line at Dearborn,which is scheduled to launch in December,will supply both exposed and unexposed quality products primarily to the automotive,appliance and OEM sectors.The new Columbus started in October and will galvanize heavier gauge hot rolled products for the agricultural,construction and OEM markets like HVAC.
How would you forecast the HDG domestic demand dynamic for the remainder of the year?Do you expect any difference into Q1 of next year?
SK:We forecast that the automotive market strength will continue through the fourth quarter and into 2012,and steady growth in the OEM manufacturing sectors such as appliance and HVAC markets will continue.The agricultural market demand will remain steady for HDG products in storage applications,such as grain bins and irrigation pipe.Construction is the wild card right now,and we do not see this sector recovering until later 2012 or even 2013.
In July,Severstal NA was awarded a$730 million loan from the US Department of Energy to fund new finishing facilities that will produce advanced high strength steels(AHSS)for the automotive industry.Demand for AHSS,especially from new regulations for US auto emissions,has increased significantly in the last decade,yet it is still not dominant in the market.How soon do you think the US auto industry will use primarily AHSS in auto production?
SK:Automotive manufacturing and the material technology behind it is changing rapidly.As a steel producer,we need to be a step ahead in terms of materials design in anticipation of those changes.We believe AHSS will eventually replace traditional steels in most automotive applications.There's significant pressure on automakers to build lighter,safer and more fuel-efficient vehicles.Automakers will have to achieve 35 MPG fuel efficiency in light cars by year 2017 which represents an almost 30 percent improvement from the current levels.The next step is the recently announced goal of 54 MPG by 2025.AHSS,as a thinner,stronger and more ductile material,offers"lightweighting"qualities which address the new standards.We are confident that our new state-of-the-art facilities will help us meet the AHSS requirements of our customers in these most sophisticated,high quality,automotive designs and other end markets where strength,ductility for manufacturing and reduced component mass are desirable.
Earlier this year,your company sold three steelmaking facilities(Warren,Ohio;Wheeling,West Virginia;and Sparrows Point,Maryland),and in the press release announcing the sale,you said that it marked a"strategic refocusing of our North American operations,"specifically to further develop the Dearborn and Columbus facilities.In addition to those improvements,is the company looking into any new facilities?If not,what further improvements to Dearborn and Columbus are being discussed?
SK:Our focus is on high value-added products,manufacturing efficiencies and raw material integration.We are prepared to make targeted,organic investments but only if they fit our strategy and meet our return on capital standards.We are considering investments in virgin metallics such as direct reduced iron(DRI)and a scrap collection network to ensure consistent low cost supply of raw materials for Columbus.We are also studying the possibility of building color-coating(or painted sheet)lines to increase our sales in those specific markets.Additionally,we are transforming Dearborn into one of the most efficient automotive steel producers in the world.In addition to the new,state-of-the-art pickle/tandem cold mill and the hot dip galvanizing line(HDGL),we will be adding a continuous annealing line(CAL)at Dearborn to make AHSS necessary to support significant mass reduction with steel-intensive automotive vehicle designs.We have a low cost capacity expansion option at Dearborn.Should we see enough demand from our customers,we can accelerate our rebuilding of the small blast furnace"B"to increase iron production and fully utilize our steelmaking and rolling capacities on site.
As the Dearborn facility is an integrated steel mill and the Columbus facility features an electric arc furnace,what do you consider the benefits of employing both traditional and state-of-the-art steelmaking processes?If you consider the two facilities to be complementary,what individual aspects of each are the most valuable?
SK:While the steelmaking process is different,Severstal approaches our entire business as one company,with one approach to the marketplace.We are unique among North American steel producers because we have new,highly capable facilities in both the North and South to serve all the NAFTA markets and we are unique in utilizing both blast furnace and electric arc furnace technologies.This allows us to leverage the best options both geographically and technologically.The EAF/CSP process is a proven method for production of a wide range of hot rolled high strength steel for many cold roll and coated steel applications with excellent thickness and profile control.The integrated or thick slab process has a proven track record for production of high quality steel for most critical exposed hot and cold rolled surface applications.Severstal's capabilities in both EAF and integrated steel manufacturing give us tremendous flexibility as well as the product range necessary to serve the marketplace.
Severstal NA also has two joint ventures involving other coating facilities:the Double Eagle Steel Coating Company,a JV with US Steel;and Spartan Steel Coating,a JV with Worthington Steel.What was behind Severstal's reasoning to join up with competitors?What benefits have the joint ventures produced for the company?
SK:We acquired our interests in these joint ventures at the same time we acquired the Dearborn assets in early 2004.The JVs allowed us to offer Hot Dip Galvanized and Electro-Galvanized coated steel sheet to the market.Both continue to be successful in terms of product quality,operating efficiency and cooperation between the owners.We not only share the line time but also process expertise and manufacturing practices so we can extract maximum benefits from jointly owned facilities.Both JVs continue to demonstrate high quality metrics meeting the customers'needs.
Severstal NA is but one of several foreign-owned steel producers operating in the US.What advice would you give to other foreign corporations who might consider the possibility of expanding here?
SK:The North American market is a mature business environment with demanding customers,strong competition and high service standards.A company's business model needs to be right to succeed in this market and they need to be prepared to adjust their business strategy as the market dictates.Entering the US market has presented us with a unique opportunity of growth,access to the latest technologies and world-class customers.We look forward to the continued development of our successful business model.
What is your opinion on the report in late June indicating that many Russian steelmakers are now preferring to build new plants at home,rather than participate in foreign acquisitions?
SK:Severstal is a global company with assets in steel and mining in different regions of the world.Like all international companies,we evaluate our investment opportunities based on expected return-on-capital and other commonly used criteria--the best projects win.In the US,we have great facilities,loyal customers and dedicated employees.After weathering the recent market downturn and optimizing our asset structure,we are much better positioned for profitable growth.
Regarding the legal battles Severstal NA has had regarding patent infringements with ArcelorMittal,it seems more claims will be made against your company in the near future,even though you won a recent case.According to press releases,Severstal fully expects to win the claims,but how has this ordeal affected or slowed down the process of creating these products and offering them to customers?
SK:It didn't.On the contrary,favorable court rulings actually helped allay the concerns of our customers.We do not believe we have infringed any of the patent claims,and we initiated the reexamination to give ourselves and,more importantly,our customers,additional comfort with our capabilities in aluminum coated boron-bearing carbon steel.We have developed the necessary technology and expertise to provide this product per the requirements of the automotive manufacturers and we are looking forward to meeting the needs of our customers as a result of the latest favorable court rulings.
