Yuri Adno

In June it was announced that the Russian steel industry was getting one more vertically integrated Holding called the Mechel Steel Group. The Holding incorporates facilities for producing coke, cast iron, steel, rolled stock, metalware products, nickel as well as for mining of coal (along with its cleaning) and iron ore. Alexei Ivanushkin, the chairman of the board of directors of Mechel JSC, was confirmed as the Holding’s general director.

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he Holding’s core is the Chelyabinsk Iron & Steel Works (Mechel) and the coal-mining company Yuzhny Kuzbass. Mechel is Russia’s largest producer of special steels and alloys being placed sixth by the volume of steel products. The IISI rating for 2002 gives it the 58th place. Yuzhny Kuzbass produces annually about 13 million tons of coal, including about 6 million tons of coking coal (its share in the Russian market is approximately between 25 % and 30 %). The company supplies about 4 million tons of coal to Mechel that processes it into coke for the enterprise’s own needs as well as for the YuzhUralNickel, the integrated mill that is also incorporated in the Holding. In its turn, YuzhUralNickel provides Mechel with ferronickel for producing stainless and alloyed steel. Mechel is steadily becoming the main supplier of steel blank (around 500,000 tons a year) to the Beloretsky integrated mill, which is producing wire and rods for a further processing them at the Vyartsilsky metalware plant in Karelia. Besides, the Mechel Steel Group is controlling enterprises outside Russia: two plants Íost and S.C. Industria Sarmei S.A. in Romania and one plant Mechel Zeljezara in Croatia, which are not in the Group yet.

CHELYABINSK STEEL AS SYMBOL OF QUALITY
The Chelyabinsk Iron & Steel Works (it is called Mechel JSC from 1992), the basic enterprise of the new Holding, enjoys a special place in the metallurgical complex. In the modern metallurgy it would be hardly possible to find another enterprise that would be equal to it by the volume of production capacities designed to make a high-quality and special metal as well as by the range of products and composition of equipment at main process stages. This integrated mill, which was built 60 years ago, was intended, in the first place, to provide metal for the science-intensive sectors of the national economy. Later on, it was serving as a reliable supplier of the aerospace complex, military defense industry, nuclear engineering, ball-bearing industry, instrument-making, etc. The mill developed manufacturing technologies of making over a thousand grades of steel and alloys. Among them 130 grades are unique and have the CHS trademark that, in short, means Chelyabinsk Steel.

P  R  O  F  I  L  E
Alexei Ivanushkin General director of the Mechel Steel Group, Chairman of the board of directors of Mechel JSC. Born in 1962. Education: an economist specializing in foreign economic activity. Worked with the USSR Ministry of Foreign Trade. Represented Russia’s trade interests in the U.S. In 1992 worked at the department of ferrous metals and ferroalloys of the company Glencore International AG. In 1994 became head of this department. Closely studied metal markets in Russia and CIS member countries. In December 1999 was appointed general director of Mechel. In June 2002 was elected chairman of the company’s board of directors. Married, two children. Loves hockey and that is no surprise: for several years the hockey team of the same name sponsored by Mechel has been playing in the Russian Super-League.

Mechel JSC has all process stages of the metallurgical cycle: chemical-recovery, sinter-furnace, steel-smelting, stock-rolling and special electrometallurgy as well as a high-capacity complex of auxiliary and engineering services. Such complicated and capital-intensive production facilities were adapted to market reforms with great difficulty. And, in the opinion of Alexei Ivanushkin, the general director of the Mechel Steel Group, precisely this factor made especially acute the crisis, which was caused by the dramatic downfall of demand for a high-quality metal. If by the middle of the 1990s the All-Russian steel consumption decreased 4 times as much, the demand for high-quality metal products went down as much as 10 times.
In fact, in that period the destiny of Mechel as an enterprise of the high-quality metallurgy with the full integrated works was being determined. Mechel managed to avoid bankruptcy and it even expanded somewhat its market niche through the so-called "big flow", i.e. mass manufacturing of standard metal products made of carbon and low-alloyed steels. At the same time the technical modernization of the main process stages was never stopped. For example, the enterprise completely abolished the outdated open-hearth process, constructed high-capacity electric arc furnaces, installations of continuous casting and out-of-furnace steel processing.
In the last three years Mechel achieved a noticeable growth of profitability and production indexes. In the years between 1999 and 2002 the coke production increased 1.5 times while the volumes of cast iron and steel rose by 1.3 times and the marketable rolled stock was ramped up 1.4 times. At the same time the production of high-quality metal was also significantly up. For instance, in 2002 alone the production of stainless section metal jumped up by 20 %, while the output of stainless sheet and alloys grew up by 23 % and 58 % accordingly.

MECHEL RELIES ON ITS OWN POTENTIAL
Like all Russian steel industry, Mechel happened to find itself lately under the ever growing influence of external factors. Among them it should be noted, above all, the emergency protective measures of the U.S. with respect to import shipments of steel rolled stock (the investigation under Article 201 of the 1974 Trade Act), which resulted in escalated protectionist actions by other countries and destabilized world market. At the same time the talks have become more intense on liquidating ineffective excess capacities being conducted under the auspices of the Organization of Economic Cooperation and Development (OECD). But, as a positive aspect, there has been a recognition of Russia as a country with market economy by the U.S. and the EU. That will provide large Russian exporters with more freedom of action in international markets.
As for Mechel, of particular importance was the solution to the problem with the "Ukrainian dumping", which caused the annual loss of dozens of millions of dollars. After persistent requirements by Russian companies the Government of the Russian Federation introduced compensatory import duties on Ukrainian shipments of fittings and rods, the production of which was subsidized by the state. Other measures taken in the interests of Russian producers include the removal of export duties on metal products and the reduction of refinancing rates down to 16 % that contribute to the revival of the investment process and attraction of long-term investments in the industry.
Today Mechel JSC is able to flexibly vary the ratio between the output of ordinary and special high-quality metal products in accordance with fluctuations of market demand. But in order to strengthen the competitive positions in the market, it is necessary to implement a complex modernization of leading shops and production lines.
The largest project for the nearest two years is the construction of a section continuous casting machine with the annual capacity of 1 million tons of billets. The Daieli-made six-strand machine will have a casting speed of 5.5 meters per minute, the record-high speed for Russian plants. Besides, billets will go directly to further rolling with no intermediate heating. Just the gas-consumption saving will amount to $5 to $7 a ton, let alone the removal of auxiliary equipment, refrigerating plant, railroad car-wagons, reduction of man-hours, etc.


The investment cost of the project is $45M. In a longer term Mechel is planning to increase the share of continuous casting up to 80 %, i.e. to apply this technology to all the "big flow".
Under the adopted engineering strategy the management of Mechel JSC is trying to accomplish investment tasks, mainly, with profits of the enterprise itself. And it is quite successful in that. The dynamics of capital investments are steadily growing: in 2001 they amounted to $16M and reached $21M in 2002. As for the current year there are plans to raise them up to $58M with Mechel’s own funds accounting for about 80 %.

BY WAY OF REDUCING COSTS
Alexei Ivanushkin thinks that setting up a vertically integrated holding on the basis of Mechel JSC is a quite logical and the most optimal way of developing business. The significance and advantages of integration are obvious. The growing market competition makes it even more necessary to cut down costs at all stages, to increase profitability, to expand the range of products and ramp up the output of products of higher process stages. The competition affected the domestic market as well. Russia’s nine leading steelmakers account today for about 50 million tons of products but the domestic market demands less than the half of it.
Members of the Mechel Steel Group have set a task for themselves to accomplish: within the vertically integrated structure to achieve the state of balance between volumes of consumed raw materials and output of products as well as to establish a more effective system of marketing these products. The trading company Uglemet-Trading will manage product flows. It is assumed that the Group’s annual turnover will exceed $1B.
It should be recognized that the Holding may expect certain difficulties. First, a considerable territorial scattering of the Holding’s enterprises is sure to increase transportation costs of intracorporate shipping operations. Second, the unstable situation in the metalware market has a negative impact on one of the Group’s main business directions. However, in the opinion of Alexei Ivanushkin, these difficulties will be completely made up for by advantages, since the Holding’s structure allows to manage the production process and marketing with more flexibility and swiftness changing the range of end products as market conditions may require as well as to increase the company’s profit.