Essar says it would grow Esmark

By PAUL GIANNAMORE, Business editor
STEUBENVILLE, Ohio — Essar Steel Holdings Ltd. has invested to bring Canadian producer Algoma Steel from 2.5 million tons to as much as 4 million tons a year capacity in one year.

Essar plans large investments to improve Wheeling-Pittsburgh Steel Corp. if it is successful in its offer to buy Esmark, the local steel producer’s parent.

Essar has offered $19 a share plus assumption of debt for Esmark, including the company’s steel processing plants and Wheeling-Pittsburgh, a deal totaling more than $1.2 billion.

Madhu Vuluppuri, president of Essar Americas, part of the international Essar conglomerate with holdings in construction, telecommunications, power, oil and gas, steel and shipping, said Essar is growing its steel business.

“We have a significant presence in India, with close to 5 million tons of operating capacity, but with a few more plants in construction there, we will be at 10 million to 12 million tons in India,” Vuluppuri said in a telephone interview Friday. “In this part of the world, we already have 4 million tons of steel in Canada, and with the plant in Trinidad and potentially Esmark, we will be a very formidable player in this part of the world.”

Essar bought Algoma, based in Sault St. Marie, Canada, on June 20, 2007. Last fall, Essar bought Minnesota Steel, a venture to reopen an ore mine and build a modern steelmaking plant that would produce direct reduced iron and convert it to steel and cast slabs, all in one site.

Vuluppuri said there are 1.4 billion tons of iron ore in the Hibbing, Minn., location.

He said all three products from there, iron pellets, sponge iron and slabs, represent a significant value to Algoma and Esmark.

“Esmark requires, as is the case with Algoma, iron ore pellets right now,” Vuluppuri said. “Once ours is in operation in Minnesota, it can feed Algoma and Esmark.”

Construction in Minnesota is to begin this summer. Essar’s total commitment to the plant is $1.6 billion, he said. Algoma was acquired for $1.63 billion.

“We will start with the pellets, then produce sponge, direct reduction iron, which can be a significant value to Esmark for its Electric Arc Furnace,” he said. “An EAF, with the scrap prices today, is very difficult to make a very attractive profit.”

Vuluppuri said the sponge iron from the direct reduction iron plant could allow a good fit with the EAF, producing a quality product from a higher quality raw material and allowing control of costs.

“It’s a great fit for Esmark, with integrating with Minnesota,” he said.

He said slabs produced in Minnesota when the caster there is eventually completed would be able to supplement local production at the Wheeling-Pitt Mingo Junction works.

“Slabs are in great need for Esmark’s operations. It has good rolling capacity, but it needs an investment to increase, which we are committed to do, to unleash the latent capacity in Esmark to its full potential,” Vuluppuri said.

Essar has announced it will commit $525 million in capital expenditures during the next five years to Wheeling-Pittsburgh. Vuluppuri said the company has made a broad capital expenditure commitment to Algoma since its purchase, taking the plant from 2.5 million tons of annual capacity to 3.4 million tons now and to as much as 4 million tons when refurbishing of a closed blast furnace is completed and the furnace comes on line in the third quarter.

He said there would be major expenditures at Wheeling-Pitt aimed at the blast furnace, the EAF, the continuous caster (which produces steel slabs for further processing) and the rolling mill.

“All four are prominent assets of the company. We have a fairly well drawn plan,” Vuluppuri said.

He said Essar looks at capacity and potential capacity in a plant and assists in operations to unleash capacity to make operations “be more robust, more profitable and make sure they’re more sustainable.”

“We get capacity to optimal levels. We don’t hesitate in investing in capacity. Algoma is an example,” he said.

At Algoma, Vuluppuri said, “Nobody thought we would achieve what we have there today in such a short span of time.”

Immediately after the acquisition, Essar set about relining a blast furnace and started construction on a cogeneration plant to make power.

“In addition, we have been working with a very tight timeline to restart an idled blast furnace, which had full environmental approvals but had not been utilized for more than 10 years,” Vuluppuri said. “The company did not have plans to restart it before we entered, in any short span of time. Within the first quarter of acquiring the company, we had very elaborate plans to restart the blast furnace, and we’re moving ahead very actively on that.”

He said Algoma thus will grow from the 2.5 million ton a year producer it was when Essar came in last June to about 4 million tons a year.

The United Steelworkers have opposed the Essar offer for Esmark so far, resulting in the union filing a grievance contending Esmark didn’t give the union time to mount a competing bid under its contract for Wheeling-Pitt. Esmark has countered with a charge to the National Labor Relations Board claiming the Steelworkers are using the contract language to interfere in legitimate business dealings to choose a merger partner.

The Steelworkers have sided with a bid by Severstal of Russia, at $17 a share and a $250 million capital expenditure plan. Esmark’s shareholders rejected that bid Thursday in favor of Essar’s improved $19 a share offer.

Algoma is a USW plant.

“We have good relations with our employees, with the steel union. We respect the process,” Vuluppuri said.

Essar floated $110 million to Esmark to pay off a government-backed loan and for operating capital.

“They had long-term debt coming due and other short-term debt coming due that would cause a cross default, which definitely should be avoided for a company of this magnitude,” he said.

Wheeling-Pitt as a stand-alone company struggled to optimize its EAF, and Esmark has made strides to improve its operation. Vuluppuri said Essar has heavy experience with electric furnaces to produce steel.

Essar’s entire Indian operations are based on four electric arc furnaces.

“The whole operation is based on DRI and the EAFs. We are one of the few in the world operating fully on DRI as a charge to produce steel in an EAF,” Vuluppuri said.

He said Essar is the largest natural-gas based direct reduction iron producer in the world.

Vuluppuri also answered questions about the general state of the steel industry.

“Globally, the steel industry is doing well, particularly with the kinds of plants we have from raw materials to steel production. That is the best strategy for any steel operation globally,” he said. “In commodities like steel, the raw materials are not available where the operations are and they’re largely dependent on other locations for raw material, intermediate products and even markets. Having a global reach through a global organization is important to operations such as Esmark, otherwise they are isolated from access to any raw materials or any other support.”

“Even today, Esmark operations are dependent on iron pellets coming from Minnesota, but they’re from a third party. If they’re under the same ownership, it’s far more attractive,” said Vuluppuri, who has been with Essar for 13 years.

Asked if the current frenzy of international investment in steel is an economic bubble that could burst, Vuluppuri said he thinks steel will only become stronger.

North American steel consumption, he said, is at between 130 million to 140 million tons a year, while capacity is at 110 million tons a year, meaning imports serve the remaining capacity-to-consumption gap.

“Anyone who increases capacity here, like what we have done at Algoma or potentially in Wheeling, will help the local demand,” he said.

Globally, he said research shows the potential for growth from current global capacity of 1.3 billion tons a year to as much as 1.8 billion tons in the next decade.

“Countries like India need large amounts of steel to be used for our infrastructure build-up. China continues to consume significant volumes of steel,” he said. “Research has shown that the steel, or any such commodities, needed for the infrastructure building will be needed in significant volumes. Countries that are not adequately equipped with the right infrastructure are looking at building infrastructure. And in countries like the United States and Canada, they will continue to spend on the steel consumption at the level of 130 million tons. And soon, some of the steel to rebuild the infrastructure is needed in these countries as well.”

Vuluppuri said steel can be expected to be healthy in the near to medium term and perhaps the long term as well.



(Giannamore can be contacted at pgiannamore@heraldstaronline.com)