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hen assessing possibilities of investments in the steel industry Sergei Nosov reminds that just a decade ago experts considered this branch of the Russian economy as not inviting to investors. At that time such an assessment was true. Heaviness of production, low profitability, tight linking to specific raw materials base, unfavorable ecology – all this did not make it possible for steel companies shares to be highly quoted in the stock market. Meantime the existing bank system was not willing to offer reasonable long-term financing schedules. That is why steelmakers had to finance programs of technical development and reconstruction through internal funds. None the less, according to the data of the Moscow Center of Macroeconomic Studies, about 55 percent of Russian steel enterprises “have carried out full modernization of production operations”.
Examples of new plants and innovative technologies can be cited here but, in Sergei Nosov’s opinion, these examples do not reflect a general tendency for the time being. Russian business sends the main part of the funds to the modernization of existing process equipment while the projects connected with the new construction are much rare. As a result, Russian steel companies are still behind their competitors. "We have the personnel on the average numbering 4 to 5 times more than that of Western producers of the same steel tonnage", Nosov notes. And at that, according to him, Russian enterprises have additional social obligations which make them to input substantial changes in classical schedules of investment policy.
Opposite to West where production facilities are modernized due to outside investors and companies are focused on capitalization growth, entrance to stock markets, a majority of Russian companies manages with other tools, Sergei Nosov goes on. If internal funds are inadequate for some projects they resort to credits or placement of bonds. As to shares of steel companies they remain underestimated and short periods of interest are mostly speculative.
Sergei Nosov thinks that Russian steel companies are justified in their quest to enter western markets of borrowed capital. The wear rate of the main assets is such that with each year it becomes more and more complicated for their owners to finance modernization projects, and new investors are to be searched. The leaders are well aware of business requirements, aiming at being in line with them. So they transit to international standards of accounts, publish corporate income statements, permit possible sale of large blocks of shares. But investors that are attracted by the capacity, rapid development and doubtless promise of the Russian market have to commensurate these advantages with a rather high risks level still present. That is why there is caution in financing investment projects, as Nosov believes.
The current situation in the steel sector is assessed by Sergei Nosov by the following wording: "the steel industry is being invested in but very little so far". According to some data, an annual amount of foreign investments in the Russian metals complex is around US$2.5 billion but the share of direct foreign investments is only 3 to 4 percent.
Analysts agree in opinion that now a selection of investment projects in the Russian steel industry is purpose-oriented. The managing director of the Nizhny Tagil Iron & Steel Works gives several examples from the practice of his enterprise.
The Nizhny Tagil Iron & Steel Works (NTMK) meets many requirements according to which investment attractiveness of production plants is estimated. It is a member of a powerful industrial group, that is, EvrazHolding, stable in financial position, a leader in production growth rates in the sector. The great competitive advantages of NTMK are also an available raw materials base and special quality of raw materials which contain vanadium, thus ensuring an output of naturally-alloyed steel for transport and structural rolled products and tube billets. NTMK is the biggest supplier of railway products in Russia – it meets 50% of the requirement for rails and wheels in this market sector. A long-term export contract with Ferrotrade is a guarantee of successful operation of the works in the world market.
The technical reconstruction of blastfurnace, steelmaking and rolling operations is underway at NTMK under the corporate program of strategic development till 2009. As stressed by Sergei Nosov, upgradation of main production operations is accompanied by the construction of several new units which will make a technological breakthrough possible. Here the Russia’s first desulfurization plant unique in performance has been built. In July BF No.6 actually reconstructed anew based on state-of-the-art technological achievements is intended to be commissioned. Nosov continues, "our forthcoming plans include a transition to 100-% continuous casting of BOF steel. A regular step in this direction will be made in August, 2004 when a fourth conticaster in complex with a LF will be put on stream. It will permit ingot casting to be fully abandoned". Besides, a radical reconstruction of the BOF shop and two other BFs along with a modernization of the rail-and-beam rolling operations lie ahead.
The total investments in the technical upgradation of NTMK till 2009 will be over US$660m, by Sergei Nosov’s estimate. All investment projects have quite real payback periods and a yield that satisfies the shareholders and is attractive for potential investors.
When speaking about future results of the implementation of the program, Nosov stated that though inefficient plants and total shops will be phased out the production tonnage will be retained. The managing director of NTMK expects that the competitive position of the works will be strengthened due to substantial improvement of product quality, reduction of costs and increase in share of value-added products. As Sergei Nosov sums up, this is to affirm the validity of the strategy aimed at capitalization growth, strengthening of leading positions, new technologies, output of high-end products. "Fulfillment of this strategy raises an investment attractiveness of our works and the company at large", Nosov says.