BRUNO BOLFO, CHAIRMAN OF THE BOARD OF DUFERCO

BRUNO BOLFO, CHAIRMAN OF THE BOARD OF DUFERCO(right) HAS TALK WITH YEVGENY SHASHKOV,"EURASIAN METALS" , EDITOR-IN-CHIEF

–W

hen was Duferco set up and by whom? Due to what did the company manage to comparatively rapidly gain one of the leading positions in the world market?

– Duferco was set up n 1979 by myself. The story was like this: I was then an executive of a state-owned company (today’s ILVA): I was the president in the US for them. A couple of mills invited me to take part in export of steel products from Brazil necessitated thanks to new investments. I resigned to take the opportunity to start my own business. Duferco started initially as an exporter from Brazil, then we expanded to other South American countries, North America, eventually we came to Europe. We did very well then, and in 1991 ILVA gave us all their exports which lasted till 1994 when the company was privatized. We actually participated in the privatization but lost and eventually bought back our share, concentrating on the development of own business operations in Duferco

– Why did you take a decision to develop own steel production?

– Till 1995 Duferco was a purely trading company. We worked mostly as mediators contacting steel producers and ensuring sales of their products. Here we accumulated a lot of experience and gained a name in the market. But by the middle of the 90s the conditions became much more complicated. Too many new market players appeared, besides, there was a revolution in communication and information, and the positions of the trader were diminishing substantially. Let me draw an analogy with the Middle Ages when merchants for some time made enormous margins because trade and transportation of merchandise were connected with great difficulties and even with direct dangers. However progressively, with development of economy, this risk was diminishing and correspondingly the margin was reducing. So, our business became less profitable, and we had to choose new lines of activities.
For some time we dealt with trade in aluminum but without big success. Fortunately, we fast understood that nowadays, in the conditions of narrow specialization, experience, ties and detailed knowledge of the market segment you work in is a must. It is of no promise to apply old techniques in this market. The old-time business rule proved again: company unable to move forward almost always is doomed to failure. Here to select a field of business is of extreme importance. We decided to participate in the value chain of steel. Not only as traders but distributors and producers as well. To be a distributor means to have a system of up-to-date service centers which permits a physical sale of products while the traders sell and re-sell only on paper, very often not even having warehouse facilities. Here service centers are not for storage only. Different operations can be made there at customer’s request, for example, slitting, cutting, forming, etc. However, all the same we had to buy steel for market supplies which, of course, limited the possibility to expand the business. That is why in 1995 we decided to develop our own production sector. We were not afraid of risk because we were well aware of steel market specifics, knew steel production fairly well and definitely realized what we could face. Our philosophy was to acquire existing production operations, maybe not prospering, and make it highly-efficient and profitable.

– What are the structure and main trends of corporate development, turnover and sales volume?

– Today the company is divided into two main sectors: one does trading and distribution without processing, and the second produces and distributes with processing. The first formation is purely commercial; the second has production assets, plants, equipment, etc. The trade sector deals, above all, with pure trade and also renders various commercial and managerial services, among them, purchase of raw materials. Today we have over eight thousand people all together, including 2400 in Russia, 3000 in Belgium, 700 in the US and Macedonia each, 400 in South Africa. In the industrial sector we have a group of people that supervise production in different countries. Two hundred people work in Lugano at the headquarters, including a financial group, accounts, a trading group divided by different products and responsibilities, a service group, a shipping group (of about 70 people). We are now finishing the formation of an IT system in which all our offices will be online integrated with the headquarters about booking orders, shipping, etc.
Today we are controlling production facilities in West Europe, the US, South Africa, Russia, Macedonia, but the biggest production facility we control is in Belgium. This is the center of Europe, besides, we acquired this facility for very little money.
Naturally European plants cannot compete with Russia or Ukraine in cost of production. For the plants in Belgium, for instance, we buy and ship by sea coal and iron ore from Australia or Brazil while Russia has domestic raw materials and energy. That is why today the cost of steel in Russia and Ukraine is much lower than in West Europe.
Last year the company’s turnover was around 3.4 million dollars, the total sales 22.76 million tons, including about 7 million tons of steel products and 7.7 million tons of raw materials, with over 2.8 million tons sold by the system of service centers.

– What is your assessment of the current world market of metals products and a forecast for the near future?

I have a theory of my own on the present situation in the today’s market. After the War, there was a period of thirty years of economic expansion created by the reconstruction of Europe, Japan and the dynamic expansion of the United States. It lasted till the middle of the 70s, with subsequent four crises that affected the world economy: well-known oil shocks in 1974 and 1984, the collapse of the USSR and Comecon early in the 90s and the Asian crisis of 1998.
The last 25 years is a relative stagnation of traditional production and market. Industrial priorities have changed: science-intensive sectors (microelectronics, computers, communication means, some chemical products, biotechnology, etc.) and services grew extremely rapidly. This was a growth that did not have any impact on the consumption of commodities which caused their surplus. On the other hand, what happens in China and India creates a completely new situation. They are in the period of rapid industrial expansion. Probably here are the main preconditions of a forthcoming growth of world markets of steel products in the near future.

– How do you settle the matters of raw materials procurement in consideration of consistent growth of prices for basic raw materials?

– We are acting based on an individual market situation. For example, we have long-term contracts with suppliers of coal and iron ore. The situation in iron ore is rather stable. It is somewhat more complicated with coal because today world demand increased dramatically, some US and Australian mines are in force majeure, and prices grew up. We usually buy scrap for our electric arc furnaces under short-term monthly tenders. We feel secure about coke which is very important as today coke is one of the most critical raw materials. I know that some companies pay 500 dollars per ton, for example, in the US whereas two years ago it was sold for 90 dollars per ton.

– How do the processes of consolidation and concentration in the world metals industry influence the activities of your company?

– In my opinion, consolidation process will go on headily, also by bankruptcy and merging of weak companies. The main reason is that concentration in steel industry is much less than in consuming industries. Ten steel leaders make only 25% of world volume which can destabilize the market in a critical situation. I think this process will go more intensively and at a transnational level as well. Lately Russia also has been taking part in it. Just now Russian companies have plentiful financial funds for acquiring foreign assets.

– What regions are the most attractive for Duferco in terms of business development?

– The main criteria of selection are availability of raw materials, in spite of large distance to steel plants, condition of equipment that was relatively inexpensive during privatization, labor resources and labor cost. From these viewpoints, Russia and Ukraine are preferable, and then goes Australia (ore, gas and coal plus political stability) though it is far away from everybody. After that there goes Venezuela with iron ore and gas but with political instability as well. Brazil, with iron ore and good professional skills but without coal. Europe, in my view, will be more interested in processing and finishing and not in production.

– What do you think of the China’s phenomenon – unprecedented rates of production build-up at consistent rise of steel consumption? How long can it continue? Does your company have trade contracts and joint ventures with China?

– Today China is not only the largest steel producer and consumer but also the biggest iron ore importer (bigger than Japan). Now China produces twice as more steel as the US and makes as much per 20 days as France makes per year. China is very rapidly overcoming its economic underdevelopment, pushing automobile industry, shipbuilding and other metal-intensive sectors. Enormous funds are put into infrastructures. An important competitive advantage of the Chinese economy is an extremely high labor intensity connected with enormous labor surplus. For example, the annual average employment value per one worker is 2700 hrs in Chine, 2000 in America, 1750 in South Europe, 1570 in North Europe. Meanwhile labor cost is substantially lower in China than in industrialized countries. For example, labor cost is 35 to 40 euro per hour in North Europe and around 60 cents in China. That is why in China the share of labor costs in the product cost is much lower. There is no possibility to compete with China in this indicator
Most probably in the foreseeable future this example will be followed by India and then, maybe, Vietnam. Here I am rather pessimistic about the European economy, in particular, Italy that once exported a lot of low- and medium-cost products and now is surpassed by China where good entrepreneurs make good-quality commodities. I think the economy of the leading countries must be adjusted to the Chinese competition. In China our subsidiary employs about 60 people. We export coal and refractories to China, do engineering, sell steel but do not produce it. Besides, in China our trading company, a joint venture with Ukrainian IUD, is an active player.

– Duferco was one of the pioneers in active business relations with metals enterprises of East Europe. What factors promoted your success in Russia?

– As I already mentioned, the philosophy of our business at the very start was such as to teach the partner how to operate in the world market, to introduce the modern marketing culture, that is, not only sell but also improve quality of sale, including advertisement, packing, shipment, etc. The East European market was very attractive, and in the beginning of the 90s we decided to apply our trader’s experience in this region, including Russia. Then when we started our first project in Nizhny Tagil a more detailed understanding of the situation was needed to estimate the problems from inside.
Today we cooperate with the biggest Russian steel producers (NLMK, Severstal, ÌÌÊ). MMK (Magnitogorsk Iron & Steel Works) is the main supplier of coils to VIZ whose share in the world market of oriented cold-rolled steel sheet for transformers is about 8%. According to our plans, in the next 3 to 4 years VIZ must become one of the leading world producers of transformer steel in terms of tonnage and what is more important in quality. Based on this, we intend to establish a vertical structure with the involvement of US and German companies to make transformers for export. We are somewhat held in check by the situation with the privatization of the plant because up to now the suit concerning sale of shares is still in court. This is the main thing which governs our investment plans in your country. I view today’s Russia as a very promising field of business.

– How is the cooperation of Duferco with the leading Ukrainian holding – Industrial Union of Donbass (IUD) – going on?

– Ukraine follows Russia in the main stages of economic development with a lag of approximately six to seven years. In the steel industry of this country there are four basic business groups: Lemann Group, Privat Bank, Interpipe and IUD (the biggest holding). The last group is the main shareholder of Azovstal and the Alcheevsk Steel Works. We have been cooperating with IUD for over 7 years, and it occupied an important position in our strategy. Jointly with IUD and VAI, we invest in the modernization project of the Alcheevsk Steel Works. Within the framework of the joint venture company (Duferco-Trading) we sell steel products in the world market, including China. The total volume of Ukrainian rolled products exported via our trade network is over 4 million tons per year. We also have several plans for expansion of our business thanks to acquisition of plants in East Europe. For example, we together with IUD were awarded a tender contract to acquire about 80% of shares of Dunaferr in Hungary. On the whole, our cooperation goes well. The only problem is that I must know Russian better and they English. That is why I am trying to learn Russian.

– What is your opinion on the development forecast of the Russian metals industry? What companies and enterprises seem to be the most up-to-date from technical and organizational viewpoint?

– In my opinion, today four main styles of managerial policy in the Russian steel industry can be distinguished. First, Severstal that is close to the world standard. It is the most understandable to western business and appealing to EBRD. Second, NLMK as the management structure is not large, very energetic and fairly efficient. Then I would mention EvrazHolding with President Alexander Abramov also striving, and not without success, to be intelligible to western business. And at last MMK where the situation with property is not fully clear. Although Viktor Rashnikov is the owner de facto but a considerable stock of shares belongs to the state and that in case it is sold can change the situation essentially.
Naturally there is also Mechel, the Oskol Electric Steel Works, other enterprises with their advantages and disadvantages. I must admit on the whole I was pleasantly surprised with the dynamic changes in this sector of the Russian economy. I am firmly convinced that the Russian steel industry has all chances to join the elite of the world steel business. At present these chances have not been fulfilled entirely. For example, it is maybe a good project for Severstal to set up a joint venture for galvanized steel with Arcelor but I think the strategy of such a company must be aimed at more grand-scale and interesting targets.
One of the significant issues for Russia is raw materials. You must be sure of supplies of raw materials and control the situation because available raw materials are not only a valuable cost item but also one of the primary competitive advantages of the Russian metals industry.
Frankly speaking, I wish I were a Russian businessman because to make business in Russia now is very interesting. Strong possibilities are offered to your business both inside and outside Russia. At last the national economy is coming out of the crisis; demand for metals is growing along with attractiveness and profitability of business.

– What determined your professional choice, why did you come to this business?

– I started my activity in this business at 21 mostly by chance. I am 63 now so I have been in this business for over 40 years. I was born in Genoa (Italy), economist by education I worked as a school teacher, and once I learned that one Italian company invited personnel to its export department with possible travel abroad. I joined the company and spent 16 years there. When we began our job in Duferco I invested a starting capital of about one million dollars. Now we have 480 million. None the less we believe it is too little for steel production. That is why one of the main issues for us is a search for investments. In principle we analyze the possibility of merging with another trade or production company but we realize that decision-making in investment matters is always risky. In our company five persons usually take decisions on matters of such significance. We gather on Saturdays or Sundays and our discussions sometimes last till late at night.
I do not have any hobby. My family lives in New York; I have a son of 23 and a daughter of 14. My wife (she is Korean, an American citizen) believes that I am crazy sitting in the office all week-ends. Exercises in the morning, then work. And in this way every day. But I think it is the only way to reach success in business.