Russia's Severstal To Cut Capex To Under $1 Billion Next Year -CEO

By Alex MacDonald

LONDON--The Chief Executive of Russia's second largest steelmaker, Severstal OAO (CHMF.RS), plans to reduce its capital expenditure to less than $1 billion next year from $1.3 billion this year and has no plans expand its crude steel production beyond the commissioning of a new steel plant by the end of the year.

Severstal is completing the construction of its Balakovo mini-mill in Russia with a view to begin processing steel products in December and produce its first ton of crude steel from the plant's electric arc furnace in April, the company said in its investor day presentation on Thursday. The plant will be able to produce 1 million tons of crude steel annually.

Russian billionaire businessman Alexey Mordashov, the Chief Executive and majority shareholder of Severstal, told the Wall Street Journal on the same day that the company's priority will now be to cut costs even further and improve efficiency rather than invest in additional steel production capacity.

"For us in the current circumstances...we believe it is more important to demonstrate the resilience of our company," said Mr. Mordashov. "We would like to grow [our] businesses, but not through big greenfields, but through optimization and organization which we have been doing."

The company plans to spend $600 million in sustaining capital expenditure on an annual basis with the remainder spent on capital projects that earn an internal rate of return of more than 20%, said Mr. Mordashov and the company's Chief Operating Officer Vadim Larin.

Severstal is also working on a feasibility study to develop an iron ore project in the Putu Range of Liberia but will only go ahead with the project if it's economically attractive, Mr. Larin said. He added that the project may cost about $1 billion to develop but the company only intends to use cashflow from its existing operations to fund the project. As a result it will seek a partner to help fund the remainder of the project if it decides to go ahead with its development.

Mr. Mordashov said that he expects steel demand in both Russia and the U.S. to continue growing in the year ahead. Russian steel demand is forecast to grow at an annual compounded growth rate of 4.1% from this year until 2017 while U.S. steel demand is forecast to grow 2.5% annually on average over the same period.

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