September 8, 2008
Russian Companies Spend Billions to Acquire Plants in Pennsylvania, West Virginia, Ohio
By Joe Napsha
When Russian leader Nikita S. Khrushchev toured the United States in 1959, he visited Mesta Machine Co. in West Homestead to see a mill that made machine tool and steel mill equipment for the thriving steel industry.Today, the Russians are doing more than just visiting steel mills and steel-supply plants to see how they work -- they're buying some of the nation's steel industry assets, thanks in large part to Russian tycoons who are worth billions of dollars, experts say.
"The buying of U.S. companies by the Russian firms is a function of the size of these companies" that are bigger than Pittsburgh- based U.S. Steel Corp., said Bob Donnorummo, associate director of the Center for Russian and East European Studies at the University of Pittsburgh.
Russian companies own about 10 percent of the nation's steel industry assets and employ thousands of steelworkers through their North American subsidiaries. The Russians have spent more than $5 billion alone on steel companies and mills in Pennsylvania, Ohio, West Virginia and Maryland over the past year.
Among the players buying mills like they were property on a Monopoly game are the giants of Russia's steel and mining industries: Evraz Steel Group, Russia's largest steel and mining company; VSMPO-AVISMA, the world's largest titanium sponge producer; OAO TMK, Russia's largest exporter of steel pipe; OAO Severstal, a leading international steel producer; and Novolipetsk Steel, one of Russia's four largest steel producers.
"They've made a lot of money in the steel business ... and it's probably better for those people to get their money out of Russia these days," said Charles Bradford, a steel industry analyst at Bradford/Soleil Research in New York.
The metals and mining companies are booming because of the global demand, particularly from China, and are indirectly benefiting from the flood of petrodollars coming into Russia as a result of the sale of its oil and gas resources, Donnorummo said.
The weak dollar is a factor, among other things that are attracting the Russians to the U.S. steel industry, said Valery Yakubovich, associate professor of management at the University of Pennsylvania's Wharton School in Philadelphia.
"I believe they want higher value-added products, better access to the American market and technological and management expertise," said Yakubovich, a graduate of Moscow State University.
The Russians have an advantage over U.S. companies looking to expand -- access to inexpensive financing, said Anthony DeArdo, a University of Pittsburgh engineering professor who has conducted research in Russia with Severstal engineers.
"The Russians have access to cash or cheap capital that our companies don't," DeArdo said.
The Russians have been permitted to play a bigger role in the domestic industry vital to national security, in part because there is no more Soviet Union or the Cold War that lingered for decades between the United States and the Russian-dominated Soviet Union.
"During the Cold War, it would have been absolutely impossible," said Kent Moors, a Duquesne University political science professor and specialist in post-Soviet economics.
If the Russian companies continue to acquire the domestic steel assets, Moors said, he believes there will be a point "where Congress will step in" and prevent it. The Russians are blocked from investing in European Union steel companies, Moors said.
For now, the domestic steel industry is benefiting from the infusion of Russian investment, while the Russian firms are generating capital that is not subject to Russian taxes, Moors said. The Russian companies can sell products in the U.S. market, while not being slapped with duties on imports, he noted.
The Pittsburgh region's steel industry has seen the Russian companies expanding their presence through several recent acquisitions. U.S. representatives of these Russian companies were either not available for comment or declined to comment.
The latest Russian steelmaker to participate in the recent buying binge in the States is Novolipetsk Steel, which a few weeks ago signed a $3.53 billion agreement to buy steel pipe and tube manufacturer John Maneely Co., parent company of Wheatland Tube in Wheatland, Mercer County. The deal is expected to close before the end of the year.
Novolipetsk already operates two manufacturing plants in Mercer County -- Sharon Coating LLC in Sharon and Duferco Farrell in Farrell -- through its joint venture with Duferco Group, which is based in Belgium and Italy. That deal was completed in May 2007, when it acquired Winner Steel Co. in Sharon.
By acquiring John Maneely, which is based the Cleveland, Ohio, suburb of Beachwood, Novolipetsk gets North America's largest independent maker of tubular steel, with an estimated $3 billion in sales this year, Novolipetsk said. Novolipetsk gains entry into the highly attractive U.S. pipe and tube market, Novolipetsk's chairman, billionaire Vladimir Lisin, said in a statement.
The Russians want the entry into the North American market to take the heat off their efforts to export products into the United States, experts said.
"Nothing is more hotter than the line pipe," DeArdo said, because of a surge in drilling for oil and natural gas.
Severstal, which says it is now the fourth largest integrated steel maker in the United States, took ownership in August of the former Wheeling-Pittsburgh Steel Corp. and its mills in Pennsylvania, Ohio and West Virginia, when it bought Esmark Inc. for $1.25 billion. Severstal Wheeling Inc.'s lone Pennsylvania plant, in Allenport, Washington County, remains closed.
That deal came on the heels of Severstal buying a former Bethlehem Steel plant at Sparrows Point, Md., and the former WCI Steel Inc. in Warren, Ohio, which was previously part of LTV Steel.
The former Koppel Steel Co. steel tube plants in Koppel and Ambridge, Beaver County, are owned by tube producer OAO TMK, in a deal reached in March.
Titanium producer VSMPO-AVISMA has its eastern production center in Leetsdale, operated by VSMPO-Tirus subsidiary. Another subsidiary, NF&M International, produces titanium billet and bar stock at its Monaca plant.
The Russian companies -- owned by billionaires -- have an advantage over their American competitors because they do not need generate short-term gains to please stockholders, DeArdo said.
"They're in it for the long haul," DeArdo said. "They're not trying to wring every bloody penny out of it."
As for employees working under new Russian bosses, Wharton School's Yakubovich, a graduate of Moscow State University, said he does not expect American workers will see anything different, at least in the short run. He did not discount strategic changes, "because Russian oligarchs ... are much more willing to take risks than their Western counterparts."
"Even if their Russian owners decided to change management, they'd look for people who have experience working in the host country, albeit some exposure to the Russian business and culture, too," Yakubovich said.
That's been the experience of Rick Galiano, president of the United Steelworkers Local 9305, which represents about 680 workers at TMK's plants in Koppel and Ambridge. Local management hasn't changed, but the union has had little success learning about the new ownership, and what it might want to do with the plant.
"No one knows anything," Galiano said.
The Associated Press and Reuters contributed to this report.
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