Alexander Abramov, President of EvrazHolding:

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y all economic indicators last year was the most successful for Russian metallurgy throughout the whole period of reforms. What, in your opinion, are the reasons for the success? Is it a long-term trend?
- First, market conditions turned out to be favorable. This is the key reason. Second, there were changes among owners and managers: today, the industry’s largest enterprises are headed by people, who are qualified not just to do the job but who are resourceful, highly interested in the success of their business. How long will it last? In my view, if the Renaissance of metallurgy is a possibility, then, it can be applied to private companies only. Not necessarily to those, which are the closed joint-stock ones. They can be public companies as well. But the decisive factor of the success is the availability of large private shareholders, who live by their business. In this sense Russian metallurgy has long-term chances for success.
In the future – and it has to do with not only Russia’s metallurgy – much will depend on global matters. For example, how long the now tangible trend to significantly higher cost of raw materials will last? There is a global shift in prices for all commodities. It started with oil and today covers all kinds of minerals and products of their processing, i.e. ferrous and non-ferrous metals, oil, gas, etc. Generally speaking, this is a rather complicated matter: is the pattern of added value distribution changing? A certain peak was obvious, probably, in the mid-1980s – early 1990s, when goods with high added value – electronics, household goods, etc. – won over the chain of added value. Today, we are witnessing the long-term correction of this phenomenon that has been going on for already five or six years. This is an objective fact: in these years prices for raw materials increased considerably while the growth of prices for consumer goods and goods with high added value lagged behind. This was accompanied by changes in the U.S. dollar rates. And if these are just two components of one and the same trend, then, it is quite possible that today we are witnessing how the pattern, which was formed in the late 1950s and early 1960s, is changing. This pattern emerged as a result of the agreement on currency basket and establishing the U.S. dollar as a reserve currency.
- What real chances do Russian steel companies have to consolidate their positions in the world market? How far behind their competitors are they lagging technologically?
- It goes without saying that there are market leaders being technologically equipped much better than others. However, considering the problem of the technological potential it is necessary to take into account the global problem: the steel industry has become unattractive to investors and stagnant because, in many respects, in the 1980s and early 1990s it happened to attract too much investments. I mean that the pursuit of the technological perfection, though it is certainly good, turned out too costly in this case. The amount of funds, which were spent on technical re-equipment and modernization, was not adequate to the market potential for servicing such a financial inflow. Precisely because of that we witnessed bankruptcies all over the world. Auctioning Hanbo Steel is the latest example. Just imagine: in the late 1990s investments in this enterprise amounted to over $4 billion, it was technically impeccable possessing the most advanced technologies. But an absolute market failure! This proves that the main thing is the ability to secure with minimal investments the competitiveness in terms of both quality and dates of delivering products. In the strategy of our development we are trying to adhere to this principle.
Our major task is to consolidate the grip on markets of Southeast Asia and Europe. There are chances to succeed thanks to our good mineral-raw material base, although we are losing to Latin Americans by quality of raw materials. But I hope that we will get lucky since these producers are mainly focusing on the North American market. There is one more drawback that undermines our competitive positions: long distances. In order to prevent this drawback from becoming fatal, a sensible tax policy is needed.
- The growth of prices for rolled steel has been going on for almost a year and this makes consumers nervous. What has caused this trend and how long will it last?
- This growth is rooted in an enormous demand for metals on the part of China: its annual increment of consumption amounts to 30 million tons. The question of how long it will continue is a complicated one. China’s ideological model is built on the base principle of a consumer society. If China has really started to consume, then, it is for long. The country will be consuming steel in large quantities as well. But it is another matter, if the Chinese could manage to satisfy their demand for steel capacities. There are several problems here. First, the rate of investing in metallurgy and that mad ‘appetite’, with which it is being done in China, are causing alarm: the industry may happen to get excess investments and, if profitability goes down, the industry can find itself in a situation, when it will not be able to service debts. The danger is real since investing has such rapid rates that they make very difficult to manage the equilibrium between investments and return on assets. Second, regardless of putting new enterprises in operation, China keeps using production capacities (by our estimates, amounting to about 60 million tons), which are hopelessly outdated. With today’s high prices these capacities are profitable. But if there is a natural price correction due to limiting access to consumers’ financial resources, these capacities may turn out beyond the edge of profitability. In my opinion, in the nearest 5 to 10 years China will still retain its title of world importer of metals. There is no doubt that it will be accompanied by the cyclic recurrence, change of the general macroeconomic situation in China and in leading countries of that region.
- What factors can make it possible to increase the competitiveness of Russia’s steel industry? What particularly contributes to raising the competitiveness of your company’s products?
- The major factor of the growth of competitiveness is that we are making steel near sources of raw materials and energy. ‘Near’ by the Russian standards, of course. In the given context distances should be measured not geographically but logistically, i.e. by transport tariffs. Today, there are reasons to state that we quite wisely manage iron ore, energy, energy sources, such as coal and gas. Accordingly, this makes the level of expenses comparatively low. We can increase the competitiveness by introducing rational technologies, above all, and that is exactly what is being done now: intensification of steel casting processes, continuous steel casting, etc. And, second, there is an optimization of the mining industry, i.e. going on with the focus on ore mining, raising intensification, reducing the number of ore-mining enterprises and developing the most efficient among the remaining ones. In other words, our competitiveness mostly comes to improving the technological and financial management of enterprises that are mining not only ore but coal as well.
In recent years EvrazHolding constructed several new highly efficient mines. At the same time we closed down the old unprofitable ones and raised the intensity of mining at those remaining in operation. We are actively introducing continuous steel casting at all plants of the holding. Just this year we are to invest about $350 million in modernization under the existing business plan. The emergence of products with high added value depends on the needs of the domestic market. If there is a demand, we are ready and wiling to satisfy it as was the case, for example, with the production of rails by new standards, new types of railroad wheels. Although the situation is less dynamic and more conservative in rolling products for the construction industry, we, nevertheless, responded to the growth of demand for thermostrengthened reinforcement, for example. So, today, we are capable of reacting quickly enough to market signals by introducing new technologies and production capacities.

– What impact may Russia’s entry in the WTO have on the steel industry?

– First of all, Russia’s entry in the WTO is undoubtedly the right step from the political point of view. The fundamental principle of this organization is free trade, when a consumer himself decides whom to support in the market with his purse. However, the very WTO membership, in my opinion, is not an effective instrument for solving problems of bilateral trade relations, which will remain highly pragmatic and, essentially, non-liberal as they have been before. If, for example, Americans want to take restrictive measures, they will do it. The WTO Charter only allows to start suing. Let me remind: Europeans filed a complaint with the international court against the U.S. but they got a positive result, only when the American side itself liberalized access to its steel market, mainly, under pressure of domestic consumers. So, I think that Russia’s joining of the WTO will in no way affect the country’s metallurgy.

– What might EvrazHolding lose in case the situation in regional markets, for example, in Southeast Asia, would change?

– Our strategic thesis is: if acting within the 1991-2001 price ratio, we maintain shipping blanks, slabs or other semi-finished products to, say, Taiwan for the price of $160 a ton and make money, then, we will survive in any case. In market crisis conditions, when supplies of finished products are hampered with protectionist measures while market conditions are at the low point of the negative price cycle, we should have a chance to compete in prices with any producer in the given market. In other words, we should make products and ship them to a consumer for a price cheap enough for winning the competition.
We believe that our company has sufficient technological and management potential to earn in such situations even one dollar on every ton of steel. To earn, not to lose. By the highest standards this is the essence of competition in the steel market. This market is extremely conservative: basically new products appear there approximately once in 20 years, they have about the same quality and the competition is waged around prices. And competition is very tight.
It is no accident that I referred to Taiwan as an example. In a sense it is a representative market that depends on imported raw materials and is quite liberal, the market, where protectionist measures have never been used. All our advantages in price competition as compared with the Japanese, Koreans and other exporters are realized there just as they are. It is a kind of testing ground, where competitiveness of products can be checked up.

– Russian metallurgical companies have shown lately a distinct desire to trans-nationalize their business. Is this trend of any interest to EvrasHolding?

– Here the logic is simple: if you with your finished product are not allowed in a market that is attractive to you, then, you get there with your own capital, set up a joint or your own venture, make and sell products. That is the essence of trans-nationalization. As far as Russian companies are concerned, European and American markets are the most attractive to them because of their highest prices for metals. But our access to these markets is strictly limited, political considerations being among other reasons.
The situation in the European market is absolutely protectionist. Russia is assigned an annual quota of about 1.2 million tons for finished rolled products and we can sell not a kilogram more than that. The natural desire of NLMK to get to the European market and sell there not slabs but sheet ended up with the acquisition of Dansteel that was logical enough. The same is being done by Severstal in the U.S., which by buying Rouge Steel is paving the way to the market with high added value. It is well known that the key attractive factor in acquiring this American company is its long-term contract with Ford plants. Certainly, this trend is of interest to us. However, our situation is much more complex because logistically we are located considerably far away from these markets and should constantly take into account large transportation costs.


– And what about such countries as Thailand?

– Transportation costs from Zapsib (Trans-Siberian Railroad) to Thailand amount to $85 a ton. In our estimates, it is too much. So, although the trans-nationalization as a whole is of interest to us, the practical implementation of every project should be dealt with separately and specifically. We feel positive about mutually advantageous cooperation with foreign companies. As for Southeast Asia, we have just begun establishing it there. There are a lot of difficult nuances there, including the necessity to overcome the cultural barrier. But, in strategic terms, we should move to this market, find partners there, learn more about their business traditions, business culture. We should establish joint ventures there, expand them and after that move further, from JVs to founding our own enterprises and, later, possibly to the global conglomeration. This way is well known.

– Last year EvrazHolding undertook certain steps to introduce the international standards of corporate governance. May we consider it a part of the plan to trans-nationalize business? –-The fact that we are gradually improving the company’s corporate governance has two fundamental aspects. First, we are striving for an efficient management of our property. We should realize how prime cost – the key indicator – is formed in real time, even during 24 hours. To this end it is necessary to have a functioning system of collecting constantly updated financial and production information, which is in accord with the international standards. Precisely because of it we are developing the so-called ERP-system of production management, introducing accounting in accordance with the international standards. Second, we are interested in getting access to borrowed capital. Besides credits, there are also bonds in the debt market, which for a number of reasons are an even more attractive instrument to us. In order to get borrowed capital in the financial market it is necessary to fulfill a number of requirements. Above all, it means getting an international financial credit rating that assumes transparency of the business structure. The debt market of securities is the most attractive to us and we are moving in this direction. It is too early to talk about specific steps since it always comes to some balance between the state of the market – to what extent it is ready to accept our debt instruments – and our needs. Sometimes it happens that the market is good but there are no needs. –- Has the process of restructuring the EvrazHolding business been completed? Are there any plans of the company’s switch to a single share? –-No, not yet. We still do not have sufficient assets in the iron ore business. Even those mining enterprises, which we own, are still at the initial stage of restructuring. These processes will take another year and a half to two years. After that we, probably, will seriously think about switching to a single share. If this is not connected to large transaction costs, we will do it but today we are not ready for it yet. It requires unification of many aspects of our business. For example, two years ago Zapsib and NTMK were talking at our principal iron & steel works as if they were speaking different languages: in 70% of cases the same things were called differently. So, we had to compile a reference book containing terms used to describe basics of production, marketing, finances. There were about 250,000 entries and each of them was given a digital code. This work cost about $7.5 million and even by now we have not completed yet the unification of standards in the accounting procedure.

– It would be interesting to know about the participation of Mitsubishi in the program of reconstructing the rail production and sheet-rolling process stage at NTMK.

– We are engaged in negotiations but we should take into account the specifics of the Japanese business. Their system of making corporate decisions operates very slowly. Our approach is much more radical than the Japanese one (I do not say that it is better) and even more liberal than the European and American ones. We think that it is quite enough to have from 3.5 to 6 months to work out basic principles of an agreement. By the Japanese practice it requires no less than 3 to 5 years. So, one has to make a choice: either to cooperate or get patient and wait.

– How do you assess the prospects for the development of Russia’s steel industry, its importance for the growth of the Russian economy?

– Today, fast rates of growth are shown by the engineering and construction industries, i.e. by those industries that consume a considerable amount of metals. On the other hand, metallurgy itself is a source of demand, though in specific industries, for example, in the mining industry. There are just a terrific growth today and, more importantly, qualitative changes in its structure, which are radically ahead of structural changes at the general economic level. Today, we are constructing the most advanced mines and pits through the use of the latest developments in the mining science. Modernizing our production facilities we simultaneously are giving an impetus to the development of domestic engineering. Russian plants have already started winning at tenders for supplies of metallurgical equipment from Danieli, Voest-Alpine and other world leaders. For example, ladle-furnace units made by the plant Sibelectroterm do not yield to the foreign ones and, what is more, they are significantly cheaper.
There is one more aspect. Today, Russian metallurgy forms and meets the regional demand for a much wider range of products and services than other industries do. By that I mean all sides of people’s lives, from housing to public catering facilities. At the same time, the small and medium-sized businesses are also growing at noticeable rates. In past years there has been a steady rise in quality of life as well as services. Although this is not evident, every day our workers of different levels make deals, which provide jobs and improvement of living conditions in the country’s regions.
I would put it this way: if you are successful and make profit, then, you naturally encourage demand not only for products and services of your industry. Going through the chain of interindustry connections these signals by your business will necessarily get received by allied industries and they will stimulate demand for their products, including consumer goods.

– By estimates of some experts, as a result of further consolidation in the Russian steel industry there will be 2 to 3 major companies left. What is your opinion on that?

– There is a business logic here and these processes have big chances for being realized. On the other hand, the time is not favorable right now: all make money and hope to beat each other in competition. If a negative cycle comes, then, conditions for various kinds of mergers will be more favorable because the problem of survival will arise. And, if the market is bad, these mergers and acquisitions can help not just to survive but make money as well. I do not expect such decisions in today’s conditions.

– How, in your opinion, can the problem of liquidating inefficient capacities in the Russian steel industry get solved?

– There are, in fact, two kinds of inefficient capacities. The first one covers those enterprises, which became inefficient as a result of bad management. The second kind comprises enterprises, which are inefficient because of some strategic reasons. Accordingly, the plant that is inefficient due to objective reasons can be closed down only after the migration problem is solved. Since the migration potential of Russia’ population is extremely low, this problem is a social one, which has no relation to metallurgy. We can conserve any inefficient plant for small amount of money or take it to scrap metal: with today’s price for scrap there is no need for some special expenses. We ourselves can cut everything in pieces and remove. But the problem is what shall we do with people?
As for those enterprises, which are inefficient because of bad management, the question is settled differently but, in my opinion, quite reasonably. If small enterprises are appraised as sufficiently attractive assets, successful entrepreneurs begin investing in them. Sometimes, if market conditions are good, it is enough to undertake simple management efforts to make an enterprise operate normally.

– The expression "socially responsible business" is very popular in Russia nowadays. How do you interpret it?

– To me this notion is simple. As soon as I start believing that my goal is capitalization, i.e. increasing my business’ value, I am obliged to work out a long-term strategy, because the question of business value arises, only when an investor, who is the only one to asses the value of your business, trusts your business plan. The value of business plans in the metallurgy, which serve as the basis for enterprise appraisal, are considered viable for 7 to 10 years. Accordingly, if I work out such a realistic business plan and try to convince serious investors in its feasibility, I should provide for labor resources of required skill, qualification and motivation. At the same time you get dozens of problems on your hands, which should be solved so as to be sure that you will have this source of labor force. Housing, education, kindergartens, social infrastructure should be considered a prerequisite. For example, when I went to work for a scientific institute, I wanted to become its future director and an academician. I understood that, first, this business (if it might be called business), was of long-term nature and, second, it provided me as an individual with a set of social conditions and guarantees that satisfied me. The same is applicable to an integrated metallurgical mill. If a young man graduated from a metallurgy institute and went to work as a shop’s foreman, he should believe that his business is the business of the whole enterprise, that he can become the mill’s director. That this business is stable, respected and that working for this company he will get the whole set of social guarantees and conditions that are satisfactory to him. All this is of fundamental importance. In order to ensure business’ long-term stability, a proper social environment is needed. People should believe that their children will get education, that they will get due medical care, that they will live in normal conditions and have enough money to this end. As you can see, it is a colossal complex of questions. And it is only natural that, as we consider our social responsibility, we should do everything in our power to form a proper environment. We should allocate money, educate, compel, persuade and press the State, from local authorities up to the federal ones, for carrying out these functions as well.

– EvrazHolding is implementing the program to modernize its enterprises designed for a period of 5 to 7 years. But what is the company’s development strategy for a longer term?

– We think that so far our horizon, so to say, is limited to seven years. During this period we would like to fully modernize our mining enterprises, cast iron and steel production facilities. This is the basis of our program and this means enormous investments. Between 1996 and 2004 we have spent about $1.5 billion. For this kind of money we could have built, probably, 30 or 40 breweries. But it is not much for our industry. We are planning to construct or modernize mines, pits, sintering and concentrating plants, by-product-coke production facilities, blast furnaces, converters, continuous casting machines, rolling mills. These are the directions that our efforts are concentrated on.

– What is your opinion on the feasibility of futures trading of ferrous metals at the stock exchange like non-ferrous metals are traded.

– Together with Daewoo, Cargill and Duferco we participated in establishing an electronic stock exchange in the U.S. The fate of that project was deplorable: the stock exchange went broke. The reason: we are not engaged in trading stock exchange commodities. The fundamental condition for developing stock exchange trading is the interchangeability of products, since you can resell contracts for their supplies. Steel is a specific commodity with characteristics varying within wide limits from one customer to another. For example, one’s contract for slab supplies cannot be sold to another because they use different slabs. The list of names in the grade-and- size range of ferrous metals is very big. That is, on the one hand, a lot of deals are seemingly made but, on the other hand, there are practically no similar deals concluded. I think that this is a fundamental factor, which prevents establishing the so-called exchanges. Only in the case with construction rolled products such exchanges can be probably set up, most likely, on a regional scale. For example, certain substitutes to deal with exchange contracts could be established within the Moscow region or central Russia. But such an endeavor on a nationwide scale has no prospects.

– In what direction, in your opinion, will metallurgical technologies be developing in the foreseeable future?

– Apparently, the technological progress will still continue in the direction of reducing costs of metals production. I do not expect anything radical in this respect because, as a matter of fact, I do not consider radical even the emergence of continuous steel casting. If you wish, this is just a practical implementation of the age-old principle of oriented crystallization, which became known to physics long ago. It just reached the metallurgy late because the intellectual level of those, who dealt with engineering, was much lower than that of people, who were making arms in the mid-1990s. It would also be wrong to talk about some revolution in production of sheet slab coils. In my opinion, this is an engineering trick realized in practice and this is really difficult to do in the machine-building industry and metallurgy. As a matter of fact, this is a realization of the relatively long-living, extremely reliable technologies.
I feel skeptical in assessing the scientific and technical progress in the metallurgy. The complexity and, maybe, even dramatic character of the matter are that tens of thousands of engineers, designers and technologists put in an enormous labor, literally by millimeter after millimeter, and manage to make what we have in the end: a reliably operating equipment with a cost acceptable for its manufacturing on a mass scale. I believed and I still do that this progress is not revolutionary. It is rather evolutionary.