Andrei Karunos

R

ussia’s two largest steel companies Severstal and EvrazHolding signed a general agreement on joint implementation of the project to make pipes with the diameter of 1,420 mm. Some time earlier they were fighting each other for an entry to the market of pipes for trunk gas pipelines. General director of Severstal Group Alexei Mordashov called this decision "quite logical that takes into account the economic position of both companies and market conditions".

Alexei Mordashov and Alexander Abramov at the Russian Steel Summit (Moscow, June 2003) organized jointly by Metal Bulletin and Eurasian Metals. It is quite possible that right now they are discussing terms of the pipe-making project, about which they will declare after the Summit.

According to the reached understanding, using the parity (fifty-fifty) principle Severstal and EvrazHolding will use the base of Izhorsky pipe-making plant JSC (the city of Kolpino near St. Petersburg) for constructing a mill to produce large-diameter pipes, which is planned to be put into operation at the beginning of 2005. The mill’s productivity will amount to about 450,000 tons of 12 m-long single-joint welded pipes with three-layered coating and the diameter of 1,420 mm. Pipe strip will be made at Russia’s only wide-strip mill-500 that is owned by Severatal. Slabs are to be provided by one of EvrazHolding’s enterprise, the Nizhny Tagil Iron & Steel Works (NTMK), where works are underway now to construct Voest-Alpine wide-slab continuous casting machine No.4.
The project’s cost is estimated at $130 million. The portion of these funds has already been used by Severstal to reconstruct the mill-500, which will make it possible to produce not only high-quality strips but also sheets for shipbuilding as well as other rolled stock with a size drift of no more than 0.15 mm from the assigned profile by thickness. There will be Voest-Alpine automatic control system, ultrasonic check installation, equipment for cooling metal and transferring it to the processing line. The mill’s productivity is expected to reach up to 800,000 tons of sheet a year.
As both partners said, while implementing the joint project, there will be most likely an additional emission of shares of Izhorsky pipe-making plant JSC and this way Severstal and EvrazHolding will divide the property half-and-half. At the same time, Alexei Mordashov and president of EvrazHolding Alexander Abramov do not rule out a possible participation of any third company in Izhorsky pipe-making plant JSC "so as to obtain investments or new technologies".
Construction of a large-diameter pipe-making plant (ZTBD) in the city of Nizhny Tagil should become the next stage of cooperation between the two companies. "We are talking about our parity participation in both (Izhorsky pipe-making plant JSC and ZTBD) pipe-making projects", stresses Alexei Mordashov.
The background history of both projects are not that simple. In 1999 the Russian Government made a decision to establish in the country its own facilities to produce straight-line-seam pipes with the diameter of 1,420 mm for trunk gas pipelines so as to substitute a costly import and provide the economy’s strategic independence. In the spring of 2000 the Government signed an order to form a joint stock company ZTBD with the State’s participation in the city of Nizhny Tagil. In the fall 2000 Gazprom also joined the company’s stockholders. In February 2001 a contract was signed between NTMK and Voest-Alpine for constructing in Nizhny Tagil billet continuous casting machine No.4 as a component of the ZTBD technological complex.
At the same time Severstal acquired a mill-500 in the city of Kolpino and made an attempt to arrange on its own a large-diameter pipe-making production. The company even signed a contract with Gazprom to supply for 5 years 1 million tons of pipes with the diameter of 1,420 mm. Later on Severstal with its mill-500 and the United Metallurgical Company (UMC), which had a pipe-making complex at the Vyksa Steel Works, formed an "Alliance 1,420". However, this project also failed.
Now the incomplete inheritance will belong to both partners. In case with ZTBD, which has the State (25 % + 1 share) and Gazprom (19.9%) as its stockholders, companies of Alexander Abramov and Alexei Mordashov will share the controlling block owned by EvrazHolding.
"Today the project to construct ZTBD is basically frozen", concedes Alexander Abramov. He explains it with the uncertain position of Gazprom, which so far has not made up its mind as to how many pipes it will need tomorrow and in the future. Nothing is clear with it yet and, thus, in Abramov’s opinion, to invest in this large-scale project does not make sense.
At the same time, in the words of Alexander Abramov, by starting the stage-by-stage implementation of their pipe projects, the partners "proceeded from the analysis of the number and the state of pipelines". "We are sure that in several years, if not today, the need for pipes will be growing up. And we will fight for this market", he stresses.
"We are joining our effort not to construct a rolling mill but to provide Gazprom with a promising product", adds Alexei Mordashov.
Today the market of straight-line-steam pipes with the diameter of 1,420 mm is estimated at 280,000 to 290,000 tons a year. In the forthcoming years the demand may increase up to 400,000 tons a year. The Russian pipe-making companies UMC, Pipe Metallurgical Company (TMK) and recently formed United Pipe-Making Plants (OTZ) are not happy that steelmakers decided to go into the pipe business and that they are even trying to take root in this most prestigious sector of the market. In an interview with the newspaper The Russian Gazette president of UMC Anatoly Sedykh (the official publication of the Russian Government) said that the activity of Severstal and EvrazHolding in this respect would undermine the balance that exists in this market. "By 2006, when "big steelmakers" are planning to enter the market of pipes with the diameter of 1,420 mm, there will still remain the Khartsyzsky pipe-making plant (Ukraine), Europipe (Germany), Italian and Japanese producers as well as the Volzhsky Pipe Plant and Vyksa Steel Works. And all of them will be fighting each other so as to divide between themselves the niche containing between 300,000 and 400,000 tons of pipes", said Sedykh.
However, besides supplies to the Russian gas company, steelmakers are hoping to enter foreign markets as well. "It is too early to discuss it right now but we are counting on a significant share of export shipments", says Alexei Mordashov.
By joining their advantage potentials and reaching the partnership deal so as to reduce risks, the partners feel confident that the project will pay off, although they avoid mentioning any specific dates, when it starts to bring profit.
"The probability is minuscule that the project will not pay off", says president of EvrazHolding Alexander Abramov. "The risk is small that the project will be recouped in less than four years".