T

he year 2003 was especially successful for the company EvrazHolding Ltd. The total volume of steel production reached 13.83 million tons (it was 13.44 million tons in 2002). The volume of product sales by the holding’s enterprises NTMK and ZSMK (or Zapsib) amounted to $960 million and $950 million with increments in output equaling 20% and 30% respectively. The NTMK profit increased 5 times, up to $70 million. Zapsib, which in 2002 incurred losses of $10 million, yielded a profit of $80 million.
The following interview given to Yuri Adno from Eurasian Metals
by Andrei Sevenyuk, the executive director and senior vice president of EvrazHolding Ltd., started with comments on these results.
EM: What factors played the decisive role in achieving such an impressive financial and economic success?
A.S.: In the first place, it resulted from perfecting the structure of the Holding’s corporate management. At the end of 2002 the management company EvrazHolding became the sole executive body of NTMK and ZSMK, the two integrated iron and steel mills. We established a single financial structure and a single commercial service. Also, we centralized the trade activity. The company succeeded in unifying the management standards and achieved the synergetic effect by taking the day-to-day and strategic management upon itself.
At the end of 2003 the Novokuznetsk Iron & Steel Works (NKMK) devolved on the EvrazHolding management. Last year the first stage of restructuring was completed. It was connected with the end of the bankruptcy procedure at the former Kuznetsk Integrated Mill and formation of NKMK on the basis of its steel assets. As we see it, the current year will be the decisive one because the strategy to further develop the Novokuznetsk Integrated Mill is to be determined. At present, heading these three enterprises management directors and directors of the integrated mills in specific areas of activity, who deal directly with production, belong to EvrazHolding.
The next point is that during 2003 conditions in the world market were good. It was especially true with respect to the demand for long-length (bar) rolled stock, production of which is the chief specialization of our steel group. The market activity was mainly due to the growth of consumption of this product in countries of Southeast Asia. As far as EurazHolding is concerned, these countries represent its strategic markets, which account for about 70% of export shipments by the Novokuznetsk Group (NKMK and ZSMK) of the Holding. The existing level of world prices for steel let maintain a high profitability of this export.
Being the only maker of railroad rails in Russia and annually supplying about 600,000 tons of them to the domestic market, EvrazHolding exports a considerable amount of these products. We expect that this year the annual export shipment level will still equal about 200,000 tons. The North American market of rails is one of the most promising for us since local enterprises there are unable to fully satisfy the existing demand. Besides, we are planning to expand our shipments to countries of the Asian region as well, for example, to Turkey. After reconstruction of the rail and structural steel production facilities at NTMK as well as construction of the Techint continuous heating furnace with walking beams at NKMK are completed, the total capacities of the Holding will amount to about 1.1 million tons of rails a year. This will significantly increase our export potential.
Finally, thanks to the positive dynamics of the economic growth the situation in the Russian market was favorable as well. The steel industry was one of the first among others, which grasped this positive impulse. It is worth mentioning a considerable increase in demand for steel in the construction and train car building industries, which need products of this kind. The annual increment of production volumes in these sectors equaled 10% and 15% respectively.

EM: What are the main directions of the company’s development strategy? Are they reflected in specific programs?
A.S.: The main directions are set forth in the single program of the strategic development of the EvrazHolding Group as a unified steel-making complex till 2008. In accordance with this program, starting in 2005 the average amount of annual investments will reach about $200 million. Under our plans in the current year construction as well as reconstruction works on production sites will be the most intensive because the volume of investments will be up to $300 million.
I would like to mention the following projects, which are among the largest in 2004. In the case of NTMK these are the completion of constructing billet continuous casting machine No.4 and reconstructing the blast furnace, the radical reconstruction of the rail and structural steel production facilities (in essence, it is a complete renovation job with the replacement of press equipment and mechanical processing section). As for ZSMK, it is the construction of a furnace-ladle unit and reconstruction of coke-oven battery No. 1. NKMK is to construct the Techint continuous heating furnace.
The mid-term plans at Zapsib provide for the completion of providing the steel-melting process stage with continuous casting and that means a construction of four continuous casting machines (three bar and one slab machines) as well as up-to-date units of the out-of-furnace steel processing. Also, it is planned to reconstruct the by-product coke and blast-furnace production facilities that will allow to annually melt no less than 7.5 million tons of steel starting in 2005.
We should complete reconstructing the converter shop and wheel-tyre production facilities at NTMK and continue to modernize coke-oven batteries along with the blast-furnace process stage.
Tasks of financing the development program have already been accomplished. Contracts with equipment suppliers have been signed.

EM: What is the ratio of investments from your own funds to credits?
A.S.: Our investment resources are formed, mainly, on the basis of profit. Therefore, this ratio depends on the profit amount. The planned ratio provided for by the program equals 30% of our funds and 70% of the borrowed ones. The borrowed funds are essentially foreign credits. Today leading Russian banks also offer big loans on quite favorable terms. These loans are the so-called "long money" with repayment of credits in 5 to 7 years.
At the same time we are using other instruments as well, for example, corporate securities. Just recently we placed Eurobonds for the amount of $175 million.

EM: How reliable are the raw material supplies that the Holding’s enterprises are provided with?
A.S.: As far as this most important problem is concerned, there are two main raw material resources that obviously should be singled out. These are coal and iron ore.
We are chief shareholders of the company YuzKuzbassugol, which is the principal supplier of coking coal to our steel enterprises. I think that already by the end of the current year we will become fully self-sufficient with respect to coal through implementing investment projects. In March 2004 we will increase volumes of coal production as a result of commissioning the Tomusinskaya 5/6 mine with the capacity of over 1 million tons of coal a year. Last year the Ulyanovskaya mine with the capacity of 2.5 million tons was put in operation. Besides, we are implementing a $180-million project in Yakutia, where works are underway on constructing a mine with the capacity of 3.5 million tons of raw coal a year and a concentrating mill. This coal will be exported, mainly, to markets in Japan and South Korea.
Supplies of the iron-ore raw material are ensured by our subsidiary Evrazruda. The program of this company’s strategic development provides for investments of about $300 million. As far as the iron-ore raw material is concerned, we plan to put in four years on the full self-sufficient basis the Novokuznetsk Group of the Holding’s enterprises (ZSMK and NKMK). The Nizhny Tagil Iron & Steel Works (NTMK) located in the Urals is provided with ore by the company Kachkanar Mine & Concentrator. NTMK is the only enterprise that wields the effective technology of processing the specific vanadium-containing raw material from the Kachkanarskoye field.

EM: EvrazHolding was one of the first to start creating strategic alliances with other companies of the Russian steel industry. How would you assess results of this policy? Are there any ideas to set up joint enterprises with foreign firms?
A.S.: It is obvious that a poorly consolidated industry cannot effectively withstand fluctuations of demand and, even more so, it cannot impose its conditions on the market. The consolidation makes it possible for steelmakers to have a dialogue with metals consumers at least on equal terms and assert their positions with more confidence. I believe that precisely this is the major positive significance of the consolidation process. Besides, it is easier for a large integrated structure like Posco or Arcelor to attract funds in financial markets, which are needed for its further development.
The global regrouping of forces in the world metallurgy and serious changes in the market connected with it literally oblige Russian companies to respond. Today consolidation processes in the Russian steel industry are beginning to actively evolve. We think that in five years there may be only two or three large corporations left in this sector. Apparently, there is no other way out, if we intend to preserve our export potential and compete strongly in the world market. Our metallurgy just will not survive without export shipments. Like Ukraine, Brazil, Korea and, to some extent, Japan, Russia is among those countries, where production capacities considerably exceed metals consumption volumes in domestic markets. In foreign markets we are being fought against with antidumping sanctions, quotas and other means. And the prospects are that in the future this fight will intensify even more. We should be ready for it. Therefore, the concentration of production capacities is becoming one of the most effective instruments of real competition.
In the nearest future EvrazHolding intends to officially announce setting up together with Severstal a joint enterprise that will make large-diameter pipes in the town of Kolpino (near Saint Petersburg). Just two years ago we were rivals. But today we are partners in implementing this quite promising and large project. I believe that this is a great achievement of not only the corporate strategies of both companies but of the whole Russian steel industry as well.

EM: Is EvrazHolding planning to acquire new assets in Russia and abroad?
A.S.: The analysis of the existing markets and those that are to emerge provides the answer to this question. It is clear that assets are acquired for the obvious purpose to increase sales. I have mentioned earlier the imbalance between the domestic production and metals consumption in Russia. That is why EvrazHolding will always have an excess of steel products apt to be exported to markets, which are concentrated in Southeast Asia. And we, naturally, want to keep these markets. We are shipping there, mainly, square billets, slabs. And our positions are strong enough. But we would like, of course, to provide these markets with products having a higher degree of processing. We are ready to acquire final process stage enterprises in such countries as Indonesia, Philippines, Vietnam, Thailand, where the level of steel consumption per capita is relatively low and prospects for increase in demand are good. So far we do not have specific proposals but the desire to participate in such projects exists.
I think that other Russian companies stick to the same tactics of acquiring foreign assets being available in the main marketing directions so as to have kind of a foothold in foreign markets. The recent example is the acquisition of the US company Rouge Industries by Severstal.
As for buying non-specialized companies, currently EvrazHolding has no such intentions. The basis of our development strategy is the mining and steel specialization of the company.

EM: What, in your opinion, are the advantages of the vertical and horizontal integrations of steell enterprises in Russian conditions?
A.S.: In this case it makes more sense to consider not advantages but rather a strict market determinacy of integration of Russian steel companies. The reason for the vertical integration is a complicated geographical location of Russia’s enterprises, which are tied to specific ore and coal fields. The availability of its own accessible raw materials is, by the way, the principal competitive advantage of our economy. That is why the only way for our steel mills is to create vertically integrated structures with Russian raw material enterprises.
As far as EvrazHolding is concerned, it is worth noting certain signs of the horizontal integration in its structure. By that I mean the integration of the three mills with the full production cycle and about the same-type product specialization within the EvrazHolding Group. Nevertheless, in my view, EvrazHolding is a vertical mining and steel company with the steel production volume of about 14 million tons.
EM: How would you assess the policy of the Russian government toward the country’s steel industry?
A.S.: I think that last year the role of the State increased in the positive sense. I mean the regulative functions of the Ministry of Economic Development and Trade. In particular, it showed a quicker reaction to protect the domestic market at least in the question of taking antidumping measures against import shipments of Ukrainian metal products. Probably, this is the most important thing that is needed by the metallurgical business from the state power. We will do the rest ourselves.
There are three integrated mills with the full production cycle being managed by EvrazHolding Ltd. They are the Nizhny Tagil Iron & Steel Works (NTMK), West Siberian Steel Corporation (ZSMK), Novokuznetsk Iron & Steel Works (NKMK). Besides, there is a number of ore mining, coal, transport, trade and financial companies. The Group’s assets are controlled by the holding company Mastercroft, which also owns the EvrazHolding brand.