Maximum mini-factories

Severstal will focus production on the domestic market

Yesterday it became known that the board of directors of Severstal recommended that shareholders at an extraordinary meeting on September 28 vote for the payment of dividends for the first half of the year in the amount of 10 rubles. per share - in total this is more than $390 million. If such a volume of dividends is approved, then taking into account interim payments for the first quarter of the same year (about $100 million), shareholders will receive almost $500 million, this is 18.9 % more than for the whole of last year.

This summer, the company announced a new strategy - the construction of mini-factories in Russia. Until now, the industry has been talking mainly about projects to modernize or install new equipment at existing facilities. Only small companies that grew out of dealership centers announced the construction of new production facilities.

Anatoly KRUCHININ, general director of Severstal's main production site - the Cherepovets Metallurgical Plant, and a member of the board of directors of Severstal OJSC, told Vremya Novostei about how the company's Russian enterprises operate.

-- Severstal recently announced its intention to build so-called mini-mills for the production of rolled products in the Nizhny Novgorod and Saratov regions, and a pipe-profile plant in Sheksna (Vologda region). Why is it now that the decision was made to build these plants, three at the same time?

-- The construction of new facilities is a logical continuation of our strategy of organic growth in attractive markets. Over the past three or four years, we have invested mainly in the Cherepovets Metallurgical Plant. We have practically built a new electric furnace melting shop, launched capacity for the production of polymer-coated sheets, and a new Severgal galvanizing line. A large amount of work was done to transition production to the production of strip steel grades and steel for the automotive industry. During the same period, the Izhora Pipe Plant (ITZ) was built and the mill-5000 near St. Petersburg was modernized.

The Russian market has always been a priority for us. And the construction industry, one of the main consumers of metal products, has recently demonstrated the highest rate of growth and development. Every year the demand for rolled metal in this sector increases by 10-15%, and in order to satisfy it, we decided to build facilities. The pipe profile plant in Sheksna will annually produce about 450 thousand tons of bent steel profiles with a diameter of up to 650 mm. The launch of this facility will help us create high value-added products, which is the basis of our growth strategy.

The decision to build mini-mills (mini-factories - Ed. ) in the Saratov and Nizhny Novgorod regions was also made based on the prospects of the domestic market, forecasts for the consumption of fittings, and our understanding of the effectiveness of these projects. We are constantly increasing our presence in the domestic market and intend to adhere to this tactic. If four years ago we sold 30-40% of the total volume of our products on the domestic market, and 60-70% were exported, now we supply 70-75% to the domestic market and only 25-30% goes to export. Export for us is primarily spot (sales under contracts with immediate delivery. - Ed. ). And we strive to work in those markets where the prices are the most attractive. In the domestic market, we act based on the interests of key clients.

-- In the future, the shares of exports and imports may change or is the current ratio optimal?

-- The distribution of our sales will depend on the market situation. If the domestic market demonstrates the same consumption growth rates and the same stability, then, of course, we will strive to strengthen our presence in it. It should be noted that almost all of our competitors are also actively increasing their supplies to the domestic market and investing in new production facilities. Therefore, the competition here is quite strong.

-- The announced projects for the construction of enterprises in Saratov and Nizhny Novgorod are almost identical: production volume - 1 million tons of long products, launch date - 2010. Does this mean that they may turn out to be alternatives?

- We plan to implement both of these projects in parallel. Theoretically, some subtleties related to the preparation of accompanying documents and approvals could hinder us. This may cause these projects to move slightly in time relative to each other, but in principle we would like to build them all at the same time.

— How much will these projects cost?

- We can talk about this only tentatively for now, as there is no complete package of working documentation yet. But based on our experience, investments in the construction of one mini-mill with a capacity of 1 million tons of long products can amount to $550-600 million, therefore, both projects will cost just over $1 billion.

- Why will enterprises work on scrap? And where will this scrap be supplied from?

-- All mini-mills work only on scrap. This production does not use liquid cast iron. The choice of site for a mini-mill is determined by three factors: availability of scrap, availability of electricity, and proximity to the consumer. All such factories are close to the end consumer. Both Saratov and Nizhny Novgorod are located very favorably: they have free generating capacity, a certain volume of scrap and a convenient logistics structure connecting them with the consumer. So we will get a positive effect due to savings on the transport component.

-- What other niches of the domestic market is Severstal ready to occupy?

— We don’t see any radically new niches for ourselves. We will try to expand our influence in segments where we are already present, whose needs we are accustomed to and know what they will need tomorrow, the day after tomorrow. We have chosen several priority areas for ourselves: the automotive industry, the fuel and energy complex, the construction industry and mechanical engineering. In addition, we provide the production of hardware for the Severstal-metiz company.

-- What share of domestic supplies comes from the automotive industry, the fuel and energy complex, and the construction industry?

-- We ship the majority of products to regional distributors - this is 32% of our total sales volume. 25% of this 32% comes from the construction sector. We supply 19% of total production to pipe companies, 16% to machine-building companies, and 8% to car factories.

-- As part of the industrial assembly regime, many foreign automotive companies are coming to Russia. And most of them create their production facilities in the Leningrad region, which is logistically convenient for you. Do you intend to cooperate with them? To what extent will Severstal be able to meet the needs of this growing segment?

-- In working with this segment, we were a little ahead of our time and built Severgal. (An enterprise for the production of galvanized sheets, intended mainly for the automotive industry. The plant is located on the territory of the Cherepovets Iron and Steel Works, the project was started in 2002 together with Arcelor, production was launched in 2005, it is planned to reach its design capacity of 400 thousand tons this year. In June of this year, Severstal bought 25.1% in this project from its partner. - Ed. ) Let's say, a little earlier than the real need for auto sheets of this quality arose. However, we do not experience any problems with sales; builders willingly take our list.

The domestic auto industry does not yet use metal products of this quality. For example, VAZ, the only significant consumer of galvanized sheet metal so far, is actively engaged in reducing costs, so the strict budgetary framework within which the cost of the car must be included does not allow a significant increase in the share of progressive (and, as a rule, more expensive) materials in the body structure. Although at one time it was AvtoVAZ that was the main initiator of the development of galvanized sheet production in the country.

However, we are confident that the leading automobile companies that have come to Russia, which for now will only engage in assembly, are interested in supplying high-quality automotive sheet metal and will eventually have to localize production. And we are ready to provide them. After all, in fact, today we are the only company in Russia that can produce and ship sheets of proper quality to its consumers. We made trial deliveries to leading companies and received positive feedback. I personally have no doubts that we will be able to produce a product that this or that company will need. Our trial batches received very good quality reviews.

— Are specific negotiations already underway on supplies to foreign automakers operating in Russia?

-- It is too early to talk about immediate localization of production (Decree No. 166 obliges manufacturers to localize at least 30% of production six to seven years after the start of work. - Ed. ). Negotiations on the supply of rolled metal, which will be needed in seven years, are not ongoing. Usually the realistic prospect is two to three years. Of course, they are studying the possibilities, the product that is on our market. As soon as someone makes a decision on localization, we will immediately be ready to cooperate with them and supply rolled metal.

-- Does anyone already use Severgal products on a regular basis?

— We have experience working with the Moscow Renault plant (“Avtoframos.” — Ed. ). In the near future, we are going to move on to supplying material for the manufacture of such critical parts as the hood and roof of a car. High-quality rolled metal is required there. When considering possible options for cooperation with automakers, we would like to provide the service that Western companies are accustomed to, and this will require a serious modernization of our work, in particular the creation of specialized service centers. It must be taken into account that, in principle, throughout the world, automobile factories are very rarely directly connected with rolled metal suppliers. As a rule, they work through service centers, because automakers do not want to keep a large volume of rolled metal in their warehouses.

— Is sheet metal supplied from Severgal for export?

-- Until recently, ArcelorMittal owned a blocking stake in Severgal. And we were obliged by contract to supply rental products through his channels. Now we have bought this blocking stake and have the right to independently make decisions on the sale of rolled metal from Severgal. It turned out that it was more profitable for us to sell it in Russia. Prices on the domestic market today are almost comparable to prices on the European market for the automotive industry, and in a number of respects they are even more interesting. Taking into account logistics, it is much more profitable to sell our rental here. In addition, about 180 thousand tons of rolled metal from Severgal per year meets the needs of the Cherepovets Iron and Steel Works for the production of rolled products with polymer coatings.

-- Another serious consumer of your products is the fuel and energy complex. Does the company intend to increase supplies to him?

-- Our mill-5000 (located on the territory of the Izhora Pipe Plant. - Ed. ) is designed to produce 850 thousand tons of rolled metal per year. For now, we plan that the ITZ will produce 450-650 thousand tons of pipes per year. It is impossible to increase output beyond this without additional investment. However, we quite clearly see the picture for the next 5-10 years for those fuel and energy projects that will either definitely be implemented or are already being implemented. Taking into account the commissioning of new capacities by other companies operating in this segment (ChTPZ, OMK, Magnitka), our decision to expand production will be guided, among other things, by how well the launch of their projects will meet the needs of the fuel and energy complex. There is no point in building something that will not be in demand.

-- How are things going with the certification of ITZ products for the deep-sea branch of the Nord Stream?

-- We have mastered new types of rolled metal products at the ITZ in accordance with the requirements set forth by the consumer (“Gazprom” is the main customer. - Ed. ). Pipes prototypes have been manufactured. As far as I know, they are now undergoing the necessary certification, and I think that a positive conclusion should be received in the near future.

-- Could you name the total volume of investments in Severstal enterprises for this year or for the next five years?

— We probably won’t announce it for five years yet. We have an understanding of what we would like to do during this period, but the situation is changing very quickly, and it is difficult to talk about investments for such a period of time. For this year, excluding external projects, the volume of investments is about 28 billion rubles. A significant part of these funds will be used in Cherepovets. The funds will be used, among other things, to complete the modernization of continuous steel casting units in the converter shop. Recently, a project was launched to build a second line of polymer coatings with a capacity of 200 thousand tons. With turnkey construction, its installation will cost approximately $70 million. In addition, work has begun on the reconstruction of blast furnace No. 3. Investment funds will also be used for the relocation of coke oven battery No. 7, for modernization of the hot rolling mill-2000, for hydraulic pressure devices, automation systems and energy-saving technologies.

I think in the next two to three years the level of investment will be slightly lower. When developing an investment program, we try to ensure that it is stable from year to year. From 1998 to 2006, we invested 116 billion rubles in the development of production in Russia. This process should be clear, this is very important for a public company.

- How will all these projects be financed - from the company’s own funds or from loans?

- This could be the company’s own money, which we have today, or borrowed money. Everything will depend on what conditions we can receive them from financial institutions. The company has a positive cash position (i.e. the excess of cash over debt). Therefore, options are possible.

—You refuse to talk about plans for mergers and acquisitions in which Severstal could potentially participate. But maybe the company has a plan for some joint projects, joint ventures with foreign companies?

-- Literally the other day (the launch is scheduled for September 5), a joint venture with the French Air Liquide to produce oxygen in Cherepovets should start operating. In general, the company operates a number of joint ventures abroad, for example, Severstal North America produces galvanized sheets together with US Steel and coke together with Wheeling Pittsburg. We are constantly negotiating with colleagues and considering options for joint projects. This mainly concerns the development of new technologies or the development of new products for the Russian market.

-- What are the prospects for the development of the global steel industry?

- This will be the opinion of a private person. And how much it will coincide with what will actually happen is a debatable question. China poses the greatest risks for Russia today. To a lesser extent - India. We see how these countries are increasing production. China began to export rolled metal in large volumes, including to Europe and Russia. Of course, this factor puts pressure on the Russian market. At the same time, now, unlike previous years, there are many rolled products on the market with high added value and with a polymer coating of fairly high quality. The volume of such supplies is growing every year.

At the same time, metal consumption within the country increases annually. And there is great potential for the development of this trend. If we estimate, for example, steel consumption in kilograms per capita, we will see that we are still very much - three to four times - behind developed countries. And we can confidently predict that the achieved growth rate of domestic consumption will only increase. The construction industry is demonstrating excellent dynamics, not only the housing market, but also infrastructure construction. As world experience shows, if these processes begin, then, as a rule, they do not end within two to three years, but develop over ten to fifteen. Currently, the provision of modern housing in Russia lags behind the level that corresponds to the development of our economy. But this gap is narrowing: housing construction funds are being actively updated, the scale and efficiency of construction is increasing, and large European construction companies are coming to us. All this revives the growth of domestic metal consumption.

It should be taken into account that all metallurgical companies take capacity modernization very seriously, update their fixed assets and introduce new technologies. Therefore, in the medium term, competition in the market will intensify.

We do not plan to increase production at the Cherepovets site in the next 5-10 years. It will remain at approximately 9.5 million tons of converter steel per year and 2.2 million tons of electric steel. A further increase in production here will be associated with the need to invest in all stages, and this is already a very large expense. Instead, we will focus on reducing costs and investing in quality.

We see the best way to acquire new markets in Russia in the construction of mini-Mills on other sites, as close to the consumer as possible and at the least cost of a ton of metal rolling.

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OJSC Severstal is the largest manufacturer of steel in Russia (taking into account foreign assets). Recently, the company has increasingly turned out to be the object of attention of competitors, especially after last year’s history with the failed merger with the Luxembourg Arcelor. At the end of last year, Severstal placed 9.1% of its shares on the London Stock Exchange, and later increased Free Float to 17.7%. The main shareholder of the company, which controls 82.3% of the shares of OJSC Severstal, is Alexey Mordashov. He is the general director of the company. The company has two large foreign units - SeverStal North America and the Italian group Lucchini. According to the results of last year, the company's net profit amounted to $ 1.23 billion, revenue - $ 12.422 billion.

Anna Lander spoke