Russia's largest steelmaker by output, Severstal, expects a stable 15 percent profit margin at its U.S. operations within three to four years, a company official told Reuters.

Severstal has acquired several underperforming U.S. assets at knockdown prices in the last few years. If its latest $1.2 billion bid for Esmark Inc is successful, the company's U.S. steel capacity will grow to rival its Russian output.

Russian steel companies, with cash to burn from record profits, have accumulated almost 10 percent of the steelmaking capacity in the United States, betting the world's largest economy will ride out a global credit crunch.

The Severstal official, speaking on condition of anonymity, said the company's North American mills would average a profit margin of 15 percent on earnings before interest, taxation, depreciation and amortisation (EBITDA) in three to four years.

He did not reveal the current profit margin, but Severstal's record $1.9 billion in 2007 net profit masked a sharp decline in earnings at its North American unit due to weaker market conditions and a blast furnace re-lining.

Controlled by billionaire Alexei Mordashov, Severstal recorded a company-wide EBITDA margin of 24.1 percent in 2007, up from 23.8 percent a year earlier.

Severstal was the first Russian company to buy a U.S. steel mill when it bought Dearborn, Michigan-based Rouge Steel, once the in-house steel unit for Ford Motor Co, in late 2003.

Analysts said Severstal has acquired U.S. assets at favourable prices but has yet to prove it can revive these ailing mills.

Severstal believes in the favourable prospects of the U.S. economy, said Lehman Brothers metals analyst Valentina Bogomolova.

Severstal proposes it can successfully transform bankrupt assets into profitable assets, she said. They have yet to show the market that they are capable of doing so.


This month, Severstal completed a $810 million acquisition of the Sparrows Point mill in Baltimore, Maryland.

It also agreed to buy steel products manufacturer WCI Steel for $140 million plus over $230 million of debt and other obligations. It also announced its bid for Chicago-based Esmark, owner of steelmaker Wheeling-Pittsburgh, putting it into competition with India's Essar Steel Holdings.

Esmark would give Severstal an annual steelmaking capacity of 11.3 million tonnes in the United States alone. Its Russian assets, based around a large integrated mill in the city of Cherepovets, produced 11.9 million tonnes of steel in 2007.

Severstal's general strategy is to purchase inefficient steel melting assets with low multiples, Unicredit Aton analyst Marat Gabitov said.

He said Severstal could realise $230-240 million in synergies in 2010 by merging the Dearborn and Sparrows Point plants with WCI and Wheeling-Pittsburgh.

(Writing by Robin Paxton; Editing by Jason Neely)

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