Boris Kononenko

    This April general director of Severstal joint-stock company Alexei Mordashov and Francis Mer, co-chairman of the board of directors of Arcelor, announced in Cherepovets (Vologodskaya region) the formation of SeverGal joint venture to make galvanized rolled products. The enterprise’s shares of both companies amount to 75% for Severstal and 25% for Arcelor. A roll train is to be constructed at Severstal’s industrial site by 2004.

R E F E R E N C E Severstal JSC, otherwise called Cherepovetsky integrated metallurgical works, is an enterprise with the complete metallurgical cycle. It is one of the largest and highly profitable enterprises in metallurgy. The works accounts for over 19 % of all metal rolled stock made in Russia. It is placed 17th among the world's leading steel-melting companies. The main products of the works are: plates for shipbuilding and large-diameter pipes, sheets, automobile body sheet, reinforcement, rolled-formed sections, galvanized sheet for construction industry, dynamo steel for electric engineering industry, consumer goods, etc.

The project’s budget is estimated at $180 million including expenses on construction works, training of personnel and measures to advance products to markets.
Severgal JV will produce galvanized steel sheet with ExtragalTM coating for manufacturing automobile exterior and interior panels. Its production capacity will amount to 400,000 tons a year. Arcelor will provide Severgal with a license to make its patented product and related know-how as well as the company’s trademark. This fact alone might become a key to the JV getting a competitive edge in future. The ExtragalTM hot-rolled product coated with fine zinc has been specially designed for automotive industry. It is being made in Europe at Arcelor plants and in Canada jointly by Dosol and Dofaco companies. In 2003 Brazil’s Vega do Sol will also start its production.
The success of this technology at Severstal JSC is in fact secured by its experience of making sheets. Severstal is considered a leader among Russian enterprises by its production volume and quality of cold-rolled sheet. In 2002 the company will supply carmakers, mainly in Russia, with 888,000 tons of cold-rolled sheet, which is used to make automobile body parts.
Manufacturing a new kind of products will be done by a complex technology of steel melting, hot and
cold rolling and galvanizing. Soon Severstal intends to commission an installation for vacuum processing and sulfur removal as well as to modernize the rolling process stage equipment. The total volume of investments will amount to $150 million.
By the time a new roll train is ready for operation, Severstal hopes to receive ISO 9000/ �� 16 947, an
international certificate for carmakers, which integrates standards of such world giants as U.S. companies
Ford Motor, Chrysler and General Motors.
Assessing the significance of the project and its prospects Francis Mer said that in this business carmakers are major consumers of rolled products. «Arcelor is the world’s largest producer of automobile body sheet. We still think though that it makes sense to keep looking for partners in some countries, especially in Russia. In our opinion, Severstal is the best contender for a partnership», he stressed.
In his turn, Alexei Mordashov said that this project is very important for Severstal. «We are, thus, entering a market, which is new to us. This is the market of automobile body sheet with coating for exterior parts, which deals in products of the highest quality and which has corresponding prices. On the other hand, with a help of technological requirements, which Severstal will be putting forward to the whole technological chain, we should upgrade production at all metallurgical process stages. After a long consideration of the partnership question we concluded that Arcelor is the world’s best maker of this product. We are counting very much on our joint operations, know-how and expertise, which our partners possess», he pointed out.
As Francis Mer said, both companies have plans for other, no less promising joint projects. It should be noted that Arcelor is not afraid to make investments in Russia and develop relations on a long-term basis. «We thoroughly examined the history of our relationship with Severstal and came to a conclusion that the game is worth the candle», Mer emphasized.
Terms of the project recoupment surely prove it. Chairman of SeverGal JV’s board of directors Vadim Makhov reminded that terms for metallurgical projects like this usually amount to 7 years but in this case partners intend to recoup investments much faster. And co-chairman of Arcelor’s board of directors added that SeverGal’s estimated return is not lower than that of other projects in the same category.
As agreed upon with Arcelor, after a new roll train is commissioned, a portion of products will be shipped to countries of Eastern Europe but the project’s participants are staking mainly on Russia’s automotive industry. And this is understandable. The European market is saturated. Today from 60% to 70 % of automobile body parts in Europe are made with corrosion-resistant coating but in Russia they account for only 10% to15%.
In the coming years the demand for galvanized steel will be much higher. It is expected that a number of the world’s leading carmakers will invest in the Russian automotive industry so as to upgrade existing production capacities and create the new ones. They are also interested in SeverGal’s products.
It is worth noting that Severstal is not the only company in Russia, which is engaged in projects of producing galvanized sheet. Two other members of the Big three, Russia’s leading makers of steel rolled products Magnitogorsky metallurgical plant and Novolipetsky integrated metallurgical works are also competing for this market. Each of them might be considered a potential rival of SeverGal JV. However, general director of Severstal Alexei Mordashov does not doubt his company’s advantages. What is more, he said it quite categorically: «�Only our project is based on partnership with the world’s best maker of these products, only our rolled stock will be produced under the international standards in cooperation with a firm, which makes a lot of these products. And our partnership will help us secure the transfer of know-how. There is nothing like that at other Russian enterprises».
As far as the competition on the European market is concerned, president of Arcelor Auto Christophe
Cornier had this to say about sales of hot-zincked sheet: «So far we feel optimistic. This year, despite
certain difficulties in Europe, the sales volume will remain at the last year level».
The West still treats Russia just as a supplier of raw materials and the simplest products like pig iron, slabs, reinforcement. But Severstal keeps steadily raising the level of metal processing and volumes of marketing high-quality rolled stock. Thus, Russian producers are facing not only the severest competition on Western markets but also manifestations of protectionism. Here is how Alexei Mordashov comments on the situation: «We are trying to make products with high value added and today there are problems with their marketing.
The U.S. is ready to raise quotas only on semifinished items and does not let in our finished products. But this situation is not everlasting. I think that times of protectionism will go away and the world trade will become freer.
Much will depend on globalization processes and behavior of market players. The project, which we start
implementing today, should contribute to raising the level of technological culture at Severstal and developing cooperation between players. In my opinion, it will let us behave on the market in a more civilized manner».
Francis Mer supported his partner’s viewpoint: «It is perfectly clear that Severstal’s plans completely rule out the possibility of the enterprise being just a slab seller. In the future this company will become one of the world’s major players. To this end it should secure strong positions domestically first and then on the global scale».