Andrei Karunos

T

he Russian pipe-making business is becoming increasingly attractive for long-term investments. The Magnitogorsk Iron & Steel Works (MMK) and the company ChTPZ-Group announced their intent to sign a partnership agreement on implementing plans to jointly produce large thick-walled pipes. Both Urals-based companies (the base enterprise of the ChTPZ-Group is the Chelyabinsk Tube Rolling Plant) are located in the Chelyabinsk region, close to Russia’s major oil- and gas-bearing areas. General director of the ChTPZ-Group Vitaly Sadykov shared his views on the project’s prospects in an interview with Eurasian Metals.
he investment attractiveness of this business is linked, above all, to expectations of a considerable increase in demand by the gas and oil industries for trunk pipes of large diameter. In 2003 several steel and pipe-making companies stated their intent to enter new sectors of the market in a few years and start a serious competition with foreign producers that traditionally have been occupying this niche. Last July EvrazHolding and Severstal signed a general agreement on building in the Saint Petersburg region a complex to make single-joint welded pipes with a three-layered coating and with the diameter of 1,420 mm (see Eurasian Metals, No. 4, 2003, p. 24). Precisely such pipes are being supplied to the Russian market in large amounts by the Khartsyzsky pipe plant (Ukraine). The enterprises Vyksa Steel Works (United Metallurgical Company) and Chelyabinsk Tube Rolling Plant are active in the sector of pipes with the diameter of up to 1,220 mm. The ChTPZ-Group and MMK are planning to begin production of single-joint thick-walled pipes with diameters from 1,020 mm to 1,220 mm.
It is assumed that in the course of implementing the project with the cost totaling, by estimates, about $500 million MMK will construct a new wide-strip rolling mill and electric steel-making furnace. In its turn, the Chelyabinsk Tube Rolling Plant will get a new pipe-producing mill. It is worth noting that the program to modernize this plant being implemented by the ChTPZ-Group has already provided for setting production of double-joint thick-walled pipes with diameters from 1,020 mm to 1,220 mm. However, the problem has been the absence of a supplier that would be able to provide a high-quality wide strip.
"We knew that MMK was planning construction of a wide-strip rolling mill", said general director of the ChTPZ-Group Vitaly Sadykov. "That is why we acquainted them with our projects and our vision of developments in the market of large-diameter pipes". The ChTPZ-Group’s choice depended on the choice of the Magnitogorsk Iron & Steel Works. If MMK had decided to construct a rolling mill-5000, then, it would have been possible to start implementing the project to make pipes with the diameter of 1,420 mm that was also included in the company’s long-term plans. However, leaders at MMK gave up on constructing such a mill saying that high costs of construction works would not be recouped: there were not enough consumers of a strip with the width of over 4,200 mm in the Russian market. As a result, the Magnitogorsk Iron & Steel Works made a decision in favor of constructing a mill with a roller’s width of 4,200 mm. The ChTPZ-Group chose producing pipes with the diameter of up 1,220 mm. "We decided to invest funds precisely in this sector", says Sadykov.
According to the general director of the ChTPZ-Group, the project will be implemented between 2007 to 2008. MMK will need two and a half years to arrange new production capacities and the ChTPZ-Group will be prepared to construct a new pipe-rolling mill in a year and a half.
Describing peculiarities of this project Vitaly Sadykov points out that the company Gazprom, one of the major consumers of large-diameter pipes in Russia’s domestic market, has already announced its decision to switch over to using pipes with thicker walls at trunk gas pipe lines. "We will start making such pipes already by the end of 2004. After one of the modernization stages is completed, we will be able to increase wall thickness of double-joint pipes up to 22 mm. But we also would like to make thicker walls for single-joint pipes with the diameter of 1,220 mm. A new rolling mill at MMK with a 4,200 mm roller will make it possible to produce strip for pipes with wall thickness between 28 mm and 30 mm", says Sadykov.
In the opinion of the general director of the ChTPZ-Group, such pipes will be widely used in constructing gas pipelines when developing new gas fields in Eastern Siberia, in the first place. Besides, Vitaly Sadykov, who, by the way, until recently was the vice president at one of the leading oil companies, believes that this product will be in much demand by the oil sector as well. In his words, if Gazprom is to increase pipe thickness because of the necessity to raise pressure when pumping gas, then, oil companies will give their due to another advantage of such pipes: their improved corrosion resistance and, as a result, a significant prolongation of service life.
Vitaly Sadykov thinks that the ChTPZ-Group will be supplying a considerable portion of new products to Eastern Siberia. It will become Russia’s new center of the oil and gas industries in the future. Developing large fields will start precisely there along with construction of trans-continental export pipelines, such as the ones from Angarsk to Nakhodka and from Angarsk to Daqing (China). By its geographical position the Chelyabinsk Tube Rolling Plant is the closest one among others to this promising market.
Other competitive advantages depend on technologies, which are planned to be used. In the words of Vitaly Sadykov, steel being produced by MMK meets the highest world requirements and a new rolling mill will ensure a 100% quality of rolled stock. When the ChTPZ-Group starts constructing a pipe rolling mill, it will take into account the experience of foreign producers. "We are going to build a shop at an absolutely new level", promises Sadykov. "We will use the principle of the one-step operation, which is not widely used in the world so far", he adds.
The major rival of the new project in the Russian market will be the United Metallurgical Company (UMC). Its representatives declare that the company will offer "products of the highest quality that have no analogues in Russia’s market". In the opinion of Vitaly Sadykov, the technological positions of UMC and the ChTPZ-Group will be about equal. Besides, the ChTPZ-Group constantly consults with the state companies Gazprom and Transneft, the main consumers, and has a clear idea of the needs of the gas and oil monopolies. Accordingly, the ChTPZ-Group takes into account these needs when planning its operations and working to improve products’ quality.
The partners believe that the question of creating a special business structure to implement the new pipe-making project is premature. Vitaly Sadykov says that his company "is open to any negotiations and it hopes for the same openness on the part of MMK". The European Bank for Reconstruction and Development will be the most likely financial partner of the ChTPZ-Group since the bank still provides funds for production modernization at ChTPZ.
Parameters of a price policy and distribution of profits in the alliance of the ChTPZ-Group and MMK have not been determined yet. Meanwhile, in 2003 a considerable growth of prices for round billets in Russia caused a number of complaints by the state companies Gazprom and Transneft, the largest pipe consumers, to the Ministry of Anti-Monopoly Policy. Commenting on the situation Vitaly Sadykov notes that "the strategy of implementing such large-scale investment projects is much more important than tactical business decisions".
According to the data by the ChTPZ-Group, the growth of selling products of the Chelyabinsk Tube Rolling Plant in 2003 amounted to 42%. The enterprise supplied 816,600 tons of pipe products to its customers (the 2002 volume equaled 574,900 tons). Large-diameter pipes produced in 2003 accounted for 436,000 tons out of 822,500 tons in total. Sales proceeds amounted to $450 million.
By the data of MMK, the volume of selling products and services by the Magnitogorsk Iron & Steel Works exceeded $3 billion. The profit amounted to over $1 billion and the profitability equaled 48.9%. These indexes were higher by over 1.5 times than the 2002 level.
In 2003 the share of export shipments went down from 57% to 52%. At the same time, the volume of selling metal commodity output in the domestic market considered strategic by MMK increased 14% against 2002 and reached approximately 4.5 million tons. For the first time in the last decade the total metal commodity output exceeded 10 million tons.