Andrei Karunos

There is a new name appeared now on the map of Russia’s steel producers. This new brand, the Novokuznetsk Steel Works (NKMK), is a successor to the Kuznetsk Steel Corporation (KMK) that used to be the famous Soviet brand and source of traditions as well as one of the country’s largest steel enterprises.

VETERAN’S FIVE DAUGHTERS
In 2002 KMK marked the 70th anniversary crossing the remarkable frontier in its history. For the veteran of the Russian steel industry this jubilee year became the year of realizing many ideas, which no enterprise did not dare to make good of so far. Changes that took place touched upon the organizational structure in the first place.

Arc furnace

All that the management company EvrazHolding has set about to accomplish are unanimously called a unique experience by experts. Russia has never seen examples of restructuring of so large (town-planning) an industrial enterprise being implemented simultaneously with bankruptcy proceedings. What is more, radical changes are not accompanied by any social upheavals: the personnel as well as its united labor union are kept completely intact and the social infrastructure is functioning to the full.
The first stage of the structural reorganization in 2001 was marked by establishing several subsidiaries on the basis of KMK as companies with limited liabilities (OOO) and "clear market prospects":
– The Kuznetsk mining-and-concentrating complex consisting of mining administrations and sintering production facilities;
– KMK Steel that includes by-product coke, blast-furnace and open-hearth production facilities as well as sheet-rolling plant, motor transport administration, etc.;
– KMK Rails that has arc-furnace production facilities, rail and structural as well as section rolling plants, services of the chief power engineering specialist, the chief power engineering specialist, railroad transportation office;
– KMK Industrial Construction that incorporates construction subdivisions of the integrated mill;
– Siberian Goods that consists of consumer goods-producing shops.
The Coordination Council was established for day-to-day management of the integrated mill in its new state. The Council was to ensure the collective nature of decisions concerning all subsidiaries.

CRISIS CAME ALONG WITH MARKET
With the start-up of market reforms the Kuznetsk Steel Corporation found itself in a protracted crisis. In contrast to more fortunate competitors KMK failed to overcome consequences of the sharp downfall of demand in the domestic market, fast rise of tariffs on electric power and rail freightage, rigid currency policy that significantly reduced profitability of export shipments accounting for over 50 % of the total volume of KMK’s sales. Besides, it did not succeed in establishing constructive relations with the monopolistic consumer of KMK products, i.e. the Russian Ministry of Railways. The Ministry put into effect reduced prices for rails and cut down their purchases almost twice as much.
Actions of the integrated mill’s managers during that period could hardly be called professional. Not only that they could not retain positions in the market of highly profitable products but they also allowed the dissipation of financial resources. Tens of millions of dollars were frozen when constructing simultaneously several facilities, which were abandoned at the initial stage. No excessive personnel was freed as the situation demanded. In the public perception KMK remained for too long a symbol of the Soviet epoch with its such typical features as excessive social privileges and guarantees. Although it is fair to admit: political activities of metallurgists united with miners of Kuzbass ( many do remember "rail wars" of 1997, which led to blocking traffic at the Trans-Siberian Railway) was a serious enough factor that could not be ignored by the integrated mill’s leadership.
In 1998 the procedure of outside management was put into effect at KMK.
The ruble devaluation in August 1998 resulted in the growth of export profits, thus, giving the integrated mill’s managers the last chance to arrange viable technological cycles oriented on real markets. However, all free available funds went to revive technologies of yester-year. When the devaluation effect was diminished, the reconstruction was stopped: the remaining funds were enough only for current as well as overhaul repairs.
In 2001 KMK should have started to make payments to creditors but it was unable to this. The Federal Service on Financial Recovery and Bankruptcy insisted on starting the bankruptcy proceedings. Such a decision might mean a catastrophe for KMK. Fortunately enough, a proposal to restructure the mill, which was put forward by EvrazHolding, was adopted.

NO NEED TO SACRIFICE THE MILL TO CREDITORS
As was envisaged, during the restructuring shares of subsidiaries’ authorized capital would be subsequently sold to third-party investors through open bidding at auctions or auctions with investment conditions. Funds obtained at auctions went to pay tax arrears and credit debts. Under the investment conditions these funds should be also used for reconstructing production facilities.
The program to restructure the Kuznetsk Steel Corporation made it possible:
– to pay debts of KMK;
– to free the enterprise’s assets from restrictions imposed as a result of introducing the third-party management procedure;
– to ensure the enterprise’s investment attractiveness;
– to upgrade production efficiency and competitiveness of products;
– to maintain social stability;
– to arrange modern rail production.

Head division of the rail and structural steel mill (general view)

All 33,000 workers from KMK were transferred to the newly established structures and, starting on January1, 2002 these subsidiaries got down to independent business. Basic production assets were handed over to them on the leasehold right. It was assumed that later they would be transferred to subsidiaries’ authorized capital on the right of ownership.
The restructuring made the most positive impact on activity of KMK. All production facilities continued to operate as before. As for economic indicators, results for 2002 showed that all subsidiaries, except the integrated mining-and-concentrating mill, reached the level of profitability ranging from 1 % to 15 %.
The reduction of internal expenditures was "the main task set for the subsidiaries by the leadership of the management company EvrazHolding". The example of OOO KMK Steel is very indicative in this respect. Despite the fact that maintaining open-hearth furnaces is very expensive, since the efficiency of open-heart steel is significantly lower than the one melted in arc furnaces, the steel-melting plant containing 4 open-hearth furnaces was left intact to keep the necessary balance between steel melting and production. In just a few months the enterprise’s specialists introduced a number of innovations (bottom casting, transferring furnaces to coal resign heating, etc.), which permitted to considerably reduce costs of the open-hearth melting production.
One more important result of the subsidiaries’ activity was the expansion of the product and service sales. It had a positive effect, above all, on the non-specialized subdivisions, which had previously had the integrated mill itself as the only "large partner". At present, they have started to actively work with outside customers and bring real profits.

PRODUCTS WITH GUARANTEED SALES
In contrast to large enterprises of the Russian steel industry, KMK is the only integrated mill, which unsuccessfully waited for its turn of radical reconstruction during the whole epoch of the planned economy, although such a need became evident even 40 years ago. First, it was ‘obstructed’ by the construction nearby of one more giant, the West Siberian Steel Corporation (ZSMK), and, then, by the mistakenly chosen strategy of development. In 1980 KMK put into operation the incomplete arc-furnace plant built under outdated projects and later started constructing an oxygen-converter plant, which was abandoned at the foundation level. The ineffective investments reached an impressive amount of $200 million.

THE COMPANY EVRAZHOLDING PROPOSED A DIFFERENT RECONSTRUCTING WAY.
The program’s core is the transfer of melting rail steel from open-heart to modern arc furnaces with active out-of-furnace processing and continuous casting. In order to maintain the "arc-furnace – rail and structural plants" link it is necessary to complete constructing the head part of the rail and structural plant, where a cast section will be heated in continuous furnaces and, then, delivered to the rolling mill. The contract to supply furnaces was signed in July with the Italy’s company Techint. After the first phase of the reconstruction is completed (2005), the mill will be able to fully satisfy needs of the Ministry of Railways for quality rail products and bring them to world market. By experts’ estimates, their profitability will amount to no less than 15 %.

Arc-furnace plant No.2

The program of reconstructing rail production at NKMK was positively received by both the Ministry of Railways and the administration of the Kemerovo region. By the order of Prime Minister Mikhail Kasyanov, an interdepartmental commission was established. The commission also adopted the first phase program of reconstructing and recommended Russia’s Government to provide the project with state support and put it on the priority list. The Ministry of Railways was advised to sign a long-term agreement (till 2005) with NKMK on guaranteed purchases of rail products.
It is worth noting that the integrated mill has already mastered the production of rails with upgraded operating characteristics and today it completely meets the needs of Russian railroads for low-temperature as well as high-speed rails. The successful experiment with making rails of continuously cast sections made it possible to completely switch over to making thermostrengthened rails of electric steel. The quality of the integrated mill’s rail products conforms to requirements of the new state standard adopted in July 2001.
After giving up production of unprofitable kinds of products, the integrated mill started to actively develop the market of quality steels. It restored production of stainless steel sheet. The integrated mill obtained the permission of the Russian River Register to produce and sell sheet products to enterprises of the river-boat building industry.

TEAMED TOGETHER UNDER THE HOLDING’S MANAGEMENT
In 2002 the EvrazHolding Group invested over $10 million in developing arc-furnace production at NKMK. The modernization of furnaces allowed to raise the productivity of arc-furnace plant No.2 up to 900,000 tons a year and lay the foundation for its further growth to achieve the level of making 1.5 million tons of liquid electric steel. In 2003 sets to intensify melting were introduced and a unit of steel complex processing was put into operation.
The Novokuznetsk Steel Works JSC owns production assets of OOO KMK Rails. However, today NKMK itself and all the subsidiaries have one and the same owner, i.e. the EvrazHolding Group.
NKMK does not intend to limit its production activity to making rail products only. It plans to enter the market of round billets, the more so since similar production facilities at the Nizhny Tagil Iron & Steel Works, which also belongs to the EvrazHolding Group is be stopped for reconstruction. No later than this October NKMK will produce the test batch of round billets equaling about 500 tons.
In managers’ opinion, NKMK should become a compact flexible enterprise capable of quickly adapting to changing conditions of the modern market and making competitive products.