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. Last Updated: 07/27/2016

NLMK to Spend $4Bln to Lift Output

VedomostiNLMK’s majority owner Vladimir Lisin meeting with President Dmitry Medvedev at the plant in Lipetsk in January.

Novolipetsk Steel plans to spend more than $4 billion boosting output over the next three years as global demand recovers, chief executive Alexei Lapshin said Tuesday.

The biggest outlays will be on accelerating construction of another blast furnace at its main factory in Lipetsk and a minimill in the Kaluga region, Lapshin said. The company this year may also buy half of a venture with Switzerland’s Duferco Group that it doesn’t already own, he said.

“An upgrade at our main Lipetsk site will not only boost our capacities but also allow us to produce new grades of steel,” he said April 2. “It’ll give us access to new markets and allow us to carve out new niches in sectors, such as high-quality sheet for automakers, where we are already present.”

Novolipetsk, which plans to increase capacity 40 percent to more than 17 million metric tons in 2012, is one of the lowest-cost producers of steel slabs in the world, according to brokerage Troika Dialog. The steelmaker has been producing at full capacity since May even as demand in Russia, Europe and the United States fell by more than a third last year, Lapshin said.

“The money Novolipetsk is laying out is significant but justified,” said Sergei Donskoi, a metals analyst at Troika. “With their cost levels, they can sell in any market.”

The company’s fourth-quarter net income jumped 80 percent from the previous three months to $294 million on higher steel prices and increased reliance on more-advanced products, the company said Tuesday in a statement. Revenue grew 4 percent to $1.82 billion and earnings before interest, tax, depreciation and amortization climbed 9 percent to $528 million.

Part of the expenditure will go to speeding up completion of blast furnace No. 7 at Lipetsk by six months to the middle of 2011. The furnace will add at least 2 million tons of capacity, with another 3 million tons expected from further upgrades at Lipetsk and a new mill in the Kaluga region, Lapshin said.

Novolipetsk also has the option in December to take full control of Steel Invest and Finance, a venture with Duferco, which operates five steel-rolling mills in Europe and two facilities in the United States. Novolipetsk paid $805 million in 2006 for half of the venture, which it supplies with slabs poured in Russian factories for processing and sale, mostly to carmakers.

“It will be negotiated once we have the option,” with agreement expected by the end of the year, Lapshin said, declining to discuss the price. The transaction may add $2 billion to the Russian producer’s sales and cut its EBITDA margin, a measure of profitability, by 5 percentage points, he said. Steel Invest, which posted a net loss of $315 million last year, needs to “significantly cut costs,” he added.

“What’s important is the return on investments, and that depends on how much they pay for the shares and how quickly the venture can boost production and cut costs,” Troika’s Donskoi said. “A fall in EBITDA margin is not a sacred cow.”

Novolipetsk plans to increase slab supplies to Steel Invest 54 percent this year to 2 million tons, Lapshin said. The venture aims to produce 4 million tons of finished steel products in 2010 and 5 million tons by 2012, he said.

Including Steel Invest, the Russian steelmaker increased slab sales to Europe to half of the total at the start of 2010, up from 35 percent in the fourth quarter, as Europeans restocked, Lapshin said. Sales to Asia fell to 14 percent of total exports, compared with 26 percent in the fourth quarter.