Yevgeny Khokhlov

    The cross-industry nature of the Uralskaya mining-and-metallurgical company (UMMC) obviously singles out it among other vertically integrated holdings of Russia’s metallurgical complex. Remaining the country’s second largest copper producer with the volume of over 320.000 tons (Norilsk Nickel is the first one with 450 thou. tn and the Kyshtymsky copper electrolytic mill is placed third with 80 thou. tn) UMMC has considerably expanded the range of its products in the last three years. The company does not recognize «borders» neither between industries nor between regions. It managed to incorporate over 20 enterprises located not only in the Urals, but also in Siberia, the Caucuses, Baltic region. In fact they represent different branches of metallurgy and machine-building: mining and concentration of ore, manufacture of ferrous and nonferrous metals as well as rolled stock made of them, production of gold and silver ingots, cable products, automobile joints and units.
The company is still engaged in property disputes in courts and does not refuse to make new acquisitions. Sometimes its policy of economic expansion seems too pushy and tough. This has made its impact on UMMC’ image. The Russian mass media call the company «aggressive».
So, what incentives make this dynamic structure move around and what goals the company is pursuing?

Blueprint and Implementation
Sticking by the widely accepted specialization in the metallurgical business the majority of Russian analysts keep considering UMMC «a copper holding». And since its production strategy does not fit the pattern, there are questions afloat. For example, people often ask how the company manages to integrate two so different directions as ferrous and nonferrous metallurgies?
Meanwhile, UMMC’ managers, who just recently were dealing in copper only, proved that they could professionally handle iron ore mining, melting of high-quality steel and manufacturing of steel rolled products. All three enterprises of the ferrous metallurgy, which are incorporated in the holding (the iron ore mine, Mining & Concentrator and metallurgical mill) have overcome the crisis and now are increasing their production volumes. Today they account for about 30% of UMMC’ total revenue. Because of it the company has considerably strengthened its standing in the metallurgical business and managed to make up for losses, which it suffered due to the downfall of world prices of copper.
UMMC’ president Iskandar Makhmudov believes that the principle of industrial specialization in the metallurgical business is becoming more and more a thing of the past. And although nobody on the Russian market has followed so far the example of UMMC, there are precedents in the world. In particular, Iskandar Makhmudov mentions concern Outokumpu, one of the major partners. This active participant of the copper market and a recognized leader in designing advanced technologies to produce copper is quite successful in dealing with stainless steel.
Iskandar Makhmudov started working with the Urals’ metallurgical enterprises as far back as the first half of the 1990s. That period in Russia could be called the epoch of «primary accumulation». The ascending Russian business was coming to the metallurgy mainly by two ways: through control over metal marketing and through stock consolidation. This field was attracting by chances of getting large profits real quick. But Makhmudov was interested, above all, in a production potential of not just a given plant but of the whole group of interrelated enterprises.
It was not that simple to identify and, especially, use these chances. Even such powerful well-organized structures as Glencore, Russian join-stock banks Menatep and Promstroibank-St. Petersburg failed to prevent their plants from going broke. So, being unable to find effective solutions they had to cede their stakes to Makhmudov’s group.
Initial steps toward forming a new corporate structure were taken in 1998. Uralelektromed JSC, a producer of pure copper, became the structure’s center. This integrated mill participated in the online control of SUMZ JSC, a copper-smelting mill, maintained long-term partnership relations with the Gaisky Mining & Concentrator, the Urals’ largest producer of copper concentrate, owned a stake in Safmed JSC, a copper-mining enterprise. A year later directors of these and some other enterprises, which by then fell into the sphere of influence of the Urals copper industry stockholders’ united group, approved the decision to form a holding. In October 1999 the new structure was officially registered as the Uralskaya mining-and-metallurgical joint-stock company.
At its first stage UMMC was a conglomerate of heterogeneous enterprises. Often it was too hard to understand what guided shareholders in pooling together a money-losing mine, rented gold fields, automobile components’ plants with practically no customers and, on the other hand, a successful copper complex, which was almost totally export-oriented. But soon missing links emerged. The holding gained a definite structure.
All this might be compared with LEGO, kids’ game, where each piece, plain and primitive, finds its true value in combination with others on the basis of a single scheme.

Production and Market
Along with mining copper ore, producing blister and pure copper UMMC composed a number of technological flows directed at putting out end products.
The first direction is connected to developing production capacities at Uralelektromed JSC. There is a steadily operating shop of electrolytic powders, which produces over 30 kinds of them. They are used, by the powder metallurgy method, in making contacts, plain bearings, extrusion profiles, rods, bushes and other products for electrical engineering and machine-building. Uralelektromed JSC covers about 70 % of the needs of West European countries’ industries in copper powders. Among consumers are almost all automotive companies. Taking into account a growing demand for powder-made products UMMC started building a new shop with an annual capacity of up to 2.000 tn.
A shop of copper rods with the designed capacity of 235.000 tn a year was commissioned in 1999. This production facility is among the most advanced ones by the world’s standards and, undoubtedly, it might be regarded as a major engineering breakthrough, which is in line with UMMC’ market strategy. Getting rods at the Hazelett two-strip smelting machine is the specific technological feature of the rod production by the Contirod method of continuous smelting never used in Russia before. By their conductance Urals’ rods surpass the eurostandard. Excellent results have been received with respect to metal microstructure stability, which secures a good workability of a cable wire’s cold drawing. The new product turned out to be a high-liquidity commodity and it immediately got its own niche on the market. Most cable mills in Russia became its permanent buyers. Production volumes are growing in progression: in 1999 around 15.000 tn of rods were produced, in 2000 the figure came to 61.000 tn and in 2001 it amounted to 86.000 tn. The company is planning to raise their production to 120.000 tn in 2002.
UMMC got more rod marketing opportunities thanks to incorporating two electric engineering enterprises Sibkabel JSC (city of Tomsk) è Lietkabelis (city of Panevezys, Lithuania). Shipments of rods to Sibkabel on terms of commodity credit helped this enterprise overcome the depression. During 2000 the mill sharply increased manufacturing copper electrical cable and by its production volume was placed third among 30 cable mills operating in Russia. This market is one of the most dynamic and promising in the country and, thus, the competition there is strong enough. With the support of UMMC Sibkabel is mastering new types of products and fulfilling orders from Russia’s largest companies, such as Gazprom, LUKOIL, YUKOS (oil), ALROSA (diamonds).
So, one more technologically complete cycle is formed: pure copper – rods –electrical cable.
The holding’s structure also includes two enterprises of the machine-building complex. They are Shadrinsky auto assembly plant and Radiator plant in the city of Orenburg, which specialize in manufacturing radiators and other parts for motorcars and agricultural machinery. With UMMC‘ financial support they got out of crises and already by 2000 increased production volumes by approximately 50 %. After UMMC acquired assets of the Kirovsky nonferrous metal treatment join-stock mill, pure copper–producing Uralelektromed JSC and radiator-manufacturing plants got a link, which was missing in the technological chain between them.

P   R   O   F   I   L   E Iskandar Makhmudov The president of the Ural Mining and Metallurgical company. Born in 1963 in the city of Bukhara (at present, the territory of republic of Uzbekistan, a sovereign state). The family does not belong to Uzbekistan's high society. Makhmudov's father is a construction worker, his mother is a Russian language teacher in one of Uzbek institutes. Judging by Makhmudov’s personality "East and West" have finally met in his character. He is a skilful negotiator, who can play a subtle diplomatic game combining it with energetic pragmatism. This quality of his character contributed to a successful business career. After graduating from a university he worked in the structures of V/O Uzbekintorg with the USSR Ministry of external economic relations representing the country’s interests in the Middle East. With the start-up of economic reforms Makhmudov chose the private sector and since then he has been a private entrepreneur. In 1996 Makhmudov became general director of the Gaisky Mining & Concentrator, the Urals’ leading enterprise in copper ore mining. In 1999 Makhmudov together with his business partners formed the Uralskaya mining-and-metallurgical company (UMMC). Married, one son. Reading and sports are his favorite hobbies from the very childhood. Prefers history books. In sports is keen on tennis and judo. Fallen for diving lately. The ability to win on a tatami in martial arts came in handy not only in sport competitions. Iskandar Makhmudov is sure that in life as in sports exactly the one, who is strong-willed, wins. Not necessarily the one, who is the strongest physically.

At present, the Kirovsky mill has mastered the technology of manufacturing a copper strip 40 to 50 mkm thick made of low-alloyed copper, which improves operation of automobile radiators. While being reequipped the Shadrinsky and Orenburgsky plants are manufacturing modern components for motorcars with the engineering assistance from Finland’s Outokumpu, Germany’s Scheler and Ebershpecher. The implementation of the project requires large investments, which only a powerful industrial company can provide. Such new products as radiators with improved heat-engineering and aerodynamic characteristics, heaters, exhaust gas neutralizers, have good marketing prospects. It is expected that most automotive plants in Russia will be buying them. In case of success there will be a chance to introduce them to international markets as well.
When assessing results of UMMC’ activities in two complete years from the date of its formation (2000 and 2001), a conclusion, which is rather flattering to the company’s owners and management, can be drawn. They managed not only to determine their priorities but also to achieve the declared goals. They were planning to overcome the raw materials orientation of their business by expanding manufacturing of products with the higher degree of finish. In 2000 the share of such products as cable, rods, powders accounted for less than 9% of UMMC’ production volume. In 2001 this indicator exceeded 30 %.
All this allowed the company to turn the considerable part of product flows toward the Russian market. Before the holding’s formation Uralelektromed JSC was producing 280.000 tn of pure copper, 95% of which were exported. Last year 327.000 tn of pure copper were produced, 110.000 tn of them were reprocessed at the company’s enterprises and as finished and semifinished products were sold to consumers, mostly on the domestic market. Thus, UMMC is reducing its dependence on LME conditions and making its contribution to Russia’s economic growth.

R   E   F   E   R   E   N   C   E The Uralskaya mining-and-metallurgical company is a vertically integrated holding, which is producing metals by the complete technological cycle. It incorporates over 20 enterprises (joint-stock companies and companies with limited responsibilities). Deposits’ mining is done by the Gaisky integrated mining-and-concentrating mill, Safyanovskaya med JSC (copper ore and concentrates), Vanadium Kachkanarsky integrated mining-and-concentrating mill and Bogoslovskoye ore administration (iron ore concentrate and pellets). The metallurgical cycle is implemented by four copper smelting mills: Svyatogor, Proizvodstvo polymetallov JSC in the city of Kirovograd, SUMZ JSC, Mednogorsky integrated copper-and-sulfur mill. They are producing blister copper. Uralelektromed is a producer of pure copper. Production of steel and rolled stock is centered at the A.K.Serov Steel Works. Semifinished products and finished products of copper are produced at Katur-Invest (copper rods), Uralelectromed (copper electrolytic powders), Kirovsky nonferrous metal treatment plant (various kinds of copper rolled stock), Radiator and Shadrinsky auto assembly plants (radiators and other parts for motorcars), Sibkabel, Emalprovod, Lietcabelis (cable and conductor products).

UMMC’ general director Andrei Kozitsyn believes that the company should not market copper as cathodes at all. «This is our task number one. If in 2002 we manage to reverse the ratio, i.e. to market 30% of copper as cathodes and the largest part as rods and other finished products, we will avoid losses, which are inevitable with current prices of copper», he says.
The complete cycle of ferrous metals’ production in the UMMC structure started forming in 1999, when owners of Uralelektromed JSC bought a controlling stake in the Bogoslovskoye ore administration and incorporated it in the company. This enterprise, which operated the Urals’ largest iron ore mine (annual production amounts to 1.5 mln tn of iron ore concentrate), became the first «piece of iron in the copper boiler». There started a chain to the concentrate consumer, the A.K. Serov Metallurgical mill, which has a sinter plant, blast furnace, steel melting and rolling production facilities. The mill has been integrated in UMMC in 2000 and now a large-scale reconstruction is being started there. The prospects of increasing supplies depend to a considerable extent on the automotive industry, i.e. the same market, on which other enterprises of the holding are oriented as well.
The Kachkanarsky Mining & Concentrator remains the only isolated link in the company’s structure, which has no connection to the common production cycle. In terms of technology and marketing this enterprise is closely tied up to the Nizhny Tagil integrated metallurgical mill (NTMK JSC). Probably, when acquiring assets of the Kachkanarsky Mining & Concentrator, Makhmudov’s group hoped to get soon the control of NTMK as well since this is the region’s largest enterprise of the ferrous metallurgy with the annual production volume of 5.5 mln tn of steel. But this desires collided with the interests of concern EvrazHolding. The confrontation between two powerful structures threatened to become an open conflict. The personal endurance solved everything. At the critical point EvrazHolding’s president Alexander Abramov and Iskandar Makhmudov managed to draw a demarcation line. Today EvrazHoldin, a leading producer of steel rolled products (14 mln tn a year) and UMMC are considered friendly companies, quite a rare case in the Russian metallurgical business. Against this background the production relations of the Kachkanarsky Mining & Concentrator (in 2001 it produced 7.2 mln tn of iron ore pellets and concentrates) with NTMK look perfectly stable.

Problems and Prospects
UMMC’s own raw materials base still does not meet requirements of the metallurgical production. And this is one of the most difficult problems in the company’s development. It has to buy additional raw materials on terms, which are being determined by the market. Bringing copper ore and concentrate from other regions raises the prime cost by 1.3 to 1.5 times.
The deficit of ore raw materials is made up for by secondary resources. Their share of UMMC’ raw materials balance accounts for between 35% and 40%. This is the maximum level and in the future it will be going down. Ensuring supplies of a quality scrap copper is getting harder and harder and its reprocessing is requiring more and more expenses. That is why the company’s long-term strategy envisions forming a mineral – raw materials base through developing new deposits. It goes without saying that the key role in this belongs to the Udokan field, Russia’s largest by copper reserves: 20 mln tn with the copper content in ore averaging 1.53 %. (check Eurasian Metals magazine No.1, 2002 for details of UMMC’ plans on developing Udokan).
Another serious problem, which is holding back UMMC’s development, is a state of production assets, which is typical for the Russian metallurgy. They are not only lagging behind modern technologies, their wear extent is critical. Among the company’s enterprises, which might be called more or less safe in this respect, is just Uralelektromed JSC only, although the wear extent of its equipment already amounts to about 40%.
The company is forced to carry out modernization of the production capacities using mainly the enterprises’ own finances since it has got an obvious shortage of investment resources. For example, in 1999 Uralelektromed JSC invested about $10 mln from its profit in developing production, in 2001 the amount already equaled $20 mln. Altogether these expenses of UMMC as a whole totaled $ 60 mln but it still needs much more.
The modernization, which is underway now at the holding’s enterprises, is targeted on several goals: replacing obsolete equipment, mastering advanced technologies, improving the ecology. And all these help accomplish the common strategic task. That is to implement large-scale structural changes so as to ensure the optimal balance between the company’s raw materials and production resources with long-term market demands taken into account.
The key element of modernizing UMMC’ copper complex is the construction of a new electrolysis shop. Its two phases with capacities of 150.000 tn each are designed to produce pure copper of the Cu-CATH-1 kind. This is a joint project with Outokumpu. UMMC’ engineering director Konstantin Plekhanov thinks that the chosen option is in no way inferior to similar production facilities operating in Western Europe, where just recently modernizations of the same kind have taken place, in particular, at Norddeutsche Affinerie, Union Miniere and Outokumpu itself. By the level of technical decisions and technologies the UMMC shop of copper electrolytic refining is in the same plane with those in West European countries and it will be the best in Russia. So as to implement this large-scale project it is planned to secure investments totaling 105 mln euros.
Besides developing production of copper as well as putting out copper-based products a whole number of directions should be also mentioned because in not too distant future they might determine UMMC’ market behavior. The company’ managers shared their plans with Eurasian Metals correspondents.
The most realistic projects are connected to arranging zinc production. In Russia this metal is considered scarce, although the existing raw materials base provides good opportunities to get it. The matter is that ores of the Urals’ deposits are the complex ones by their content. But only copper, precious metals, selenium and tellurium are extracted from them by traditional methods. Other useful components are left in concentrating mills’ disposal areas and in metallurgical production waste. By experts’ estimates, up to 50.000 tn of zinc, from 8.000 to 9.000 tn of lead and over 1.000 tn of tin are lost this way annually.
In order to start processing accumulated reserves of the technogenic raw materials UMMC is setting up new facilities for production of polymetals on the basis of the Kirovogradsky integrated copper smelting mill. Its concentrating plant will be reconstructed and the plant’s capacity will be doubled. The metallurgical process stage will also get modernized and this will allow to start producing metallic zinc. It will be used by the company’s enterprises. UMMC has already announced the intention to expand its presence on the market of steel rolled stock and, among other things, to offer galvanized products to the automotive industry.
Another promising direction is connected to stainless steel. The demand for this product in Russia is constantly climbing up and UMMC has got a chance to become its producer. Before the reforms the A.K.Serov Metallurgical mill, which is incorporated in the company, was specializing in producing quality steels to orders of the defense industry. It might be assumed that the mill is still capable of getting back to complex technologies. A possible raw materials base is located practically nearby, there is a deposit of nickel ores in 10 km from the mill.
Finally, UMMC should be expected to take new steps for expanding production of noble metals. In the opinion of the company’s managers, this is a very promising business, which will presumably be developed through the complete technological cycle, not limiting UMMC to getting just raw materials. In this connection UMMC’ general director Andrei Kozitsyn said that important decisions are being prepared within the company.
…By the way, just a few words about the term «aggressiveness». There is a term in Russian, which is close to it by meaning but has no negative undertone. It sounds like derznovennost or something like audacity in English. This Russian word means one’s ability not only to set goals of any scale, which many folks consider unattainable, but also to make persistent efforts to achieve them. It seems that in order to assess UMMC’ character this definition is much better.