by MARK REUTTER
With a barrage of economic and environmental problems battering the steel mill at Sparrows Point lately, concern about the facility’s future has seized not just the steel industry but Baltimore, where “the Point” remains the region’s biggest industrial complex.
“Everybody’s scared or depressed or both,” said one employee. The worry is not so much about the mill’s order book – which has rebounded in recent months – but the intentions of Alexei Mordashov, the CEO and majority owner of Severstal, which purchased the mill in May 2008.
What will the baby-faced Russian billionaire and confidant of Prime Minister Vladimir Putin do?
Will he carry out threats to cut the union workforce by one-third, or about 600 jobs? Will he continue an austerity drive that has caused malfunctions at the mill’s key facility, the “L” blast furnace?
How will he deal with a newly aggressive Maryland Department of the Environment (MDE), which has stepped up enforcement of a 1997 pollution consent decree?
Will he sell – or try to sell – the mill in the near future (as widely rumored)? Will he cut production (as he’s done elsewhere)? Or has he crafted a strategy for a turnaround?
As usual, mum’s the word with Mordashov. But the trends at the Point these days suggest the mill is at a crossroads.
Searching for Clues
Mordashov, who occasionally flies to the U.S. to survey his properties, refuses to discuss his strategy with the media. Information about Severstal comes from website posts that extol the company’s accomplishments.
In response to reports in the trade press that Mordashov has been “shopping” the Baltimore County-based mill to potential investors, spokesperson Bette Kovach told The Brew last week that the steelmaker “is committed to its five plants, and those plants are not for sale.”
On many fronts, the Point faces some serious challenges:
• The mill has not earned a profit in the current recession. While sales have held steady, prices are weak, reflecting the steel industry’s broader malaise. Despite its ocean access, the Point is also bedeviled by rising raw material costs. Kovach said the mill is “currently pursuing action to improve long-term competitiveness.”
• Severstal has committed only $20 million to capital projects this year, according to sources – far less than the $32 million needed to maintain equipment at its present level. At the same time, the company has invested heavily in a new steel plant in Mississippi.
• Severstal is embroiled in a state probe of pollution emissions at the L furnace, with MDE taking the unusual step of subpoenaing company records.
• After years of inaction, MDE and the federal Environmental Protection Agency are cracking down on the mill’s discharges of cancer-causing benzene into Baltimore Harbor. If Severstal is forced to clean up polluted sediments in the harbor, the benzene problem alone could cost the company millions of dollars.
• Relations between management and United Steelworkers Local 9477 have deteriorated as employees continue to work under a contract that expired 16 months ago. Negotiations for a new contract have been complicated by Severstal’s latest business plan calling for the termination of about 600 union jobs by March 31, 2010.
• Relations within the workforce have deteriorated as well, with two factions jockeying for control. The U.S. Department of Labor intervened in December, filing a lawsuit against Local 9477 over alleged “dirty tricks” in the last election. The lawsuit, which seeks a new DOL-supervised election for president and other officers, has been challenged by Local 9477. The matter is now before the U.S. District Court in Maryland.
Point to be supplanted by non-union mill?
Severstal may be cutting spending to the bone at the Point, but they’re making robust investments in their non-union mill at Columbus, Miss.
Earlier this month, Severstal made arrangements with Citigroup and Credit Suisse to sell $525 million in bonds to help bankroll the mill. The company is expected to invest another $300 million of its own money. Phase 1 of the plant was opened in 2007, and Phase 2 is expected to be finished in late 2011.
Named Severstal Columbus, the mill will produce hot- and cold-rolled sheet, pickled and hot-dipped sheet, and galvanized steels – everything that Sparrows Point makes except for tinplate. There is general concern that the operation will take customers and contracts away from Baltimore.
Adding to worries at the Point is the deteriorating state of the plant’s 68-inch hot strip mill. This mill, which supplies flat-rolled metal to all of the finishing departments, was opened in 1947 and last modernized in the 1990s.
Severstal is currently evaluating whether to modernize the mill. A major rebuild or replacement would cost $100-200 million. Minor fixes and equipment upgrades would cost considerably less. In any case, the 68-inch mill is a major bottleneck. Its breakdowns cause delays and quality-control problems throughout the plant.
With a net worth that reached a peak of $22 billion before the 2008 stock market crash, Mordashov definitely qualifies as a Russian “oligarch.” Although the market decline cost him dearly, he still has enough to tide him over any rough patches – $8 billion based on his stockholdings in Severstal.
And yet, the 44-year-old Mordashov eschews the opulent lifestyle his wealth could sustain. He doesn’t own an island in the Caribbean or a sports team in England. In fact, he doesn’t like sports and spends his leisure time mostly with his second wife and three children at bullet-proof dachas near Moscow and Cherepovets.
“When the caravan turns around, the last camel becomes the first” is said to be his personal motto. That’s one way of explaining his rise to riches after Boris Yeltsin’s government privatized the Cherepovets steel mill in 1992.
According to sketchy media accounts, Mordashov, then a junior economist at the plant where his parents had been engineers, formed a company that bought “privatization vouchers” issued by the government. Forbes magazine later reported that Mordashov sacked his superiors and used mill money to buy the vouchers, something he has denied.
Whatever the case, Mordashov became the majority owner of one of Russia’s biggest steel companies at age 27. Instead of looting the company like other privatizers, Mordashov invested in new technology and built Severstal into a major steel player.
He expanded his reach into mining, shipping, media companies, insurance and banking. Making things happen earned him the nickname “The Tank.” In other words, a man not to be messed with.
An enduring theme of his business success, according to a 2006 profile in The New York Times, was his Kremlin connections, most notably his warm relationship with Vladimir Putin.
It is widely believed that Mordashov consults with Putin before he makes a major business decision. Last December 4, he was photographed meeting with Putin at the Kremlin by the government news agency, Novosti. A communiqué from Putin’s office quoted Mordashov discussing his efforts to retrain workers laid off at Severstal’s Russian mills.
“Good,” said Putin. “Let’s talk in more detail.” That’s where the transcript ended.
U.S. Shopping Spree
Mordashov made his first foray into North America when he snatched Henry Ford’s old steel plant, known as Rouge Steel, out of bankruptcy in 2004. After failing to win Luxembourg-based Arcelor Steel in a high-stakes duel with Indian steel mogul Lakshmi Mittal, he picked up Lucchini, the Italian steelmaker, in 2007.
This was a prelude to his mad dash into America in 2008, buying Sparrows Point from Mittal for $810 million, then shelling out $2.3 billion for steelmakers Esmark and WCI Steel and Pennsylvania coal miner PBS.
Mordashov made big promises about his commitment to Sparrows Point. In a tour after the sale, with the Baltimore media assembled to memorialize his words, he vowed to invest more than $500 million and bring the mill back to its full capacity of 3.6 million tons of steel per year.
“If you run the plant at full capacity, it positions you better in terms of cost,” he announced, adding, “A change of hands is a good time to do some of these things.”
That was in June 2008. Along came the world recession in September 2008.
A Reversal of Fortunes
Severstal North America sunk deeply into the red. The company was forced to write down $1.5 billion. CEOs came and went at Severstal’s U.S. headquarters – two were fired in a matter of months – and company strategy zigzagged accordingly.
The current top honchos are Sergei Kuznetsov, an accountant and graduate of the Moscow State Technical University, and Alexander Pogozhev, an engineer and veteran of the Cherepovets operation.
The Point’s modernization plans were delayed and then scrapped. Company headquarters decided it would, then it wouldn’t, then it might close the L blast furnace. Eventually, the furnace was kept running on the now-controversial “all-pellet” diet.
Both WCI Steel and Esmark were idled, leaving 6,000 steelworkers without jobs in Ohio and West Virginia. Severstal recently announced it would reopen some mills, although how many workers would get their jobs back is up in the air.
Today, the prevailing mood at the highest levels of the United Steelworkers Union is that Mordashov should sell Sparrows Point and perhaps exit North America altogether. The USWA has reportedly even suggested potential buyers.
But the oligarch apparently doesn’t feel compelled to answer to anyone outside of his political and business cronies in Russia. Regarding the future actions of his company – and the fate of the Point – he’s as tight lipped and enigmatic as ever.
Mark Reutter can be reached at [email protected]