Severstal Defers $8 Billion Steel Investment Program

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Researched by Industrial Info Resources (Sugar Land, Texas)--As the global economic crisis continues to check industrial progress worldwide, industry majors in the steel sector are continuing to curb production and defer proposed capital expenditures, the latest being Severstal (MCX:CHMF) (Cherepovets, Russia), Russia's largest steel producer. The firm announced an indefinite withdrawal from an ambitious investment program of $8 billion that was announced last year and was to be implemented over a period of three years up to 2011. It also plans to reduce capital expenditures by 20% this year.

Severstal's $8 billion program was aimed at increasing steel production and enhancing the quality of products from the company's main plants in Russia. The firm had also planned to expand steel production at plants in France, Italy and the U.S. and enhance iron ore mining activities in Russia. The firm has already trimmed production by 50% at plants in the U.S. and Russia since August this year. Other steel majors that have adopted similar output reduction measures include ArcelorMittal (NYSE:MT) (Luxembourg), which is reducing production by 35%, and Corus, the European subsidiary of Tata Steel (BOM:500470) (Mumbai), which is cutting output by 30%. ArcelorMittal has also deferred an eight-year investment program of $35 billion.

Severstal, like other majors in the steel industry that had been thriving on a strong run of profitability for more than five years, was taken unawares by the severity of the economic slowdown that began to reflect on the industry's earnings since September of this year. The firm's chief executive, Alexei Mordashov, described the firm's plans to scale down as essential in order "to allow the group to operate profitably in a tougher environment." Crude steel production in 66 countries that are part of the World Steel Association amounted to 100.5 million tons in the month of October, registering a 12.4% drop in production compared to the same period last year.

Severstal has a production capacity of 27 million tons per year of steel with an output of about 12 million tons per year each from its plants in Russia and the U.S. The company expects output for the current fiscal year to be about 20 million tons, reflecting production cuts in response to declining demand in the market. Severstal has revised its forecast for its earnings before interest, tax, depreciation and amortization in 2008 to between $5.1 billion and $5.3 billion from an earlier estimate of between $5.8 billion and $6.1 billion as was announced in September this year.

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