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ndrei Morozov, First Deputy General Director, MMK:
- Since the privatization of 1992 the investment policy of the Magnitogorsk Iron & Steel Works JSC (MMK) has been based on development strategies being constantly corrected depending on the situation in world and Russian markets of metal products as well as the economic state of the integrated mill itself. The right choice of the main directions and instruments of the investment policy let the enterprise ensure its innovation development despite complicated conditions of the emerging market economy. This development has been based on the latest achievements in steel-making machinery and technology along with liquidating outdated units. Precisely on this basis the systematic growth of production still has been taking place.
Already in the beginning of 1994 the management board of MMK JSC adopted the development strategy in market conditions. Between 1996 and 1997 this strategy served as the basis for working out programs to technically re-equip the Magnitogorsk Iron & Steel Works before 2005 as well as the complex energy-saving program for 1997 to 2006, the ecology program for 1996 to 2006 and the program of metal deep processing for 1999 to 2003. These programs have become the chief instruments of implementing the investment strategy of the integrated mill. During this period practically all main process stages were renovated and the total wear of basic production assets was reduced from 89% to 34.3%.
The comprehensive technical re-equipment of the steel-rolling complex was the major undertaking during this period. As a result, MMK has formed an advanced production block to manufacture competitive hot- and cold-rolled sheet metal products of the wide range of marks and sizes as well as the first group of surfaces for the automotive industry, galvanized sheet and tin.
At present, the technical re-equipment is being done on the bar-rolling production providing for the installation of three new bar-rolling mills and two billet continuous casting machines being supplied by Danieli & Company. A project of such a scale is Russia’s first. The contract provides for shipments of three new rolling lines for MMK JSC, which will be used to make rods, wire-rod rolled products and wire as well as structural shapes. Works on installing these lines will be completed by the end of 2004; their commissioning is planned for the beginning of 2005. The main goal of installing these units with the total annual capacity of about 2 million tons of bar rolled stock a year is to upgrade the quality of these metal products.
The next stage provides for installing two up-to-date electric furnaces, each with the production capacity of 2 million tons a year, and liquidating double-bath open-hearth furnaces.
This year the most important event is the commissioning of the unit to produce polymeric coating for flat rolled products with the annual capacity of 200,000 tons.
Between 1991 and 2003 the integrated mill invested about $1.9 billion in the technical re-equipment and modernization of its basic production assets, including almost $900 million in 2000 to 2003. This is over one fourth of all investments in Russia’s steel-making enterprises. In 2004 the investment volume will amount to no less than $400 million.
MMK keeps in mind mainly its own funds for carrying out the investment strategy. At the same time, the integrated mill is constantly searching for new forms of getting investments In 2002 to 2003 it attracted over $400 million through issuing its own eurobonds. It should be specially noted that MMK followed the principle: the outside financing should not exceed 50% of the total cost of the investment financing. At the same time, there should be a systematic monitoring of financial stability.
According to Metal Bulletin’s rating, in 2003 MMK was placed 16th in world metallurgy by the volume of its steel production (11.5 million tons). And this production is located at one and the same metallurgical site. By results of 2002 the share of MMK in the national production of finished rolled products amounted to almost 20%. By estimates of experts from American Appraisal , as of 2002, the company’s market capitalization reached $1.7 billion.
At the present stage of the MMK strategic development the important task is to direct a portion of investments to acquiring efficient specialized assets and creating a large corporate structure: a holding based on the integration with enterprises engaged in the subsequent deeper processing of the integrated mill’s products.
As a result of the accession of calibrating and hardware plants to the MMK Group JSC the volume of their production in the last two years has increased 2.5 times, from 200,000 tons in 2001 to 521,000 in 2003. Such an integration ensures not only serious economic but also social results, since it creates new jobs. The integration with enterprises of the iron ore industry and coking coal mines allows to provide the integrated mill with more reliable supplies of these raw material resources. We regard the 2003 agreement on long-term strategic cooperation between MMK and Kazakhstan’s Sokolovsko-Sarbaisky Ore Mining and Processing Enterprise as a component of this strategy.
At present, MMK is implementing the long-term investment program that covers the period till 2010. The major strategic direction of the final stage of the company’s development is to provide growth of making high-quality and more profitable products of deep processing. In the last three years the share of these products increased from 10% to 14%. At the same time the share of selling blanks amounted in 2003 to less than 5%. The growth of making products with a high degree of readiness allows the integrated mill to consolidate its positions in world market. This underscores the participation of the enterprise in processes of world metallurgy’s trans-nationalization.

N.K. Choudhary, General Director, Ispat-Karmet Company, Kazakhstan.
Dr. N.K. Choudhary, who also represented the LNM Group, reminded that this group is leading in the process of consolidating the world’s steel industry. Although its goals might change, the vision of metallurgy by the Group’s chairman Lakshmi Mittal remains permanent. He believes that the consolidation is very important for achieving higher indexes. And he is sure that in a few years there will be many companies with the annual productivity of 70 to 80 million tons of steel.
Striving for this goal made the LNM Group a really global steel company having mills in 13 countries that have the total production volume of 42 million tons of metal products.
Noting that the Group possesses a unique ability to successfully reform unprofitable enterprises, N.K. Choudhary told about the experience of Kazakhstan’s integrated iron & steel works, which was acquired in November 1995. The reorganization of this enterprise is considered one of the most successful projects. The speaker pointed out that changing the personnel’s way of thinking that was linked to renewing the regular payments of wages, and implementing modernization, which included construction of a new galvanization line as well as reconstructing the blast furnace and equipping it with advanced computerized control systems. The resource-supplying system that was seriously damaged also needed restoration. The company acquired an electric power station and coal mines. It reconstructed and integrated them in the main production facilities. Market conditions were especially complicated. All ties with traditional markets, i.e. in Russia and other CIS countries, were lost. Besides, the works did not export its products to foreign countries. But, possibly, this was the only way to quickly raise sales volumes. Already in the first years the company began exporting metal products to 65 countries.
As soon as the critical stage was over and the works started stable operations, an ambitious task was set: to make Ispat-Karmet a world-class enterprise. Efforts were directed at achieving leading positions in production and technologies.
The ‘corporate philosophy’ supports a strong consolidation of human, natural and technological resources. The up-to-date methods of managing supplies, marketing and production guarantee that investments will be successful. There are programs to train the enterprise’s managers making them learn the most advanced management methods. Ispat-Karmet is using management programs jointly with other mills of the LNM Group in different countries. This provides an opportunity to have exchanges in experience. In the words of N.K. Choudhary, the training of young gifted specialists, who in the future can move to responsible positions at the Group’s mills, has also started.
The 5-year strategic plan is based on accomplishing important tasks concerning both manufacturing and sales of products. The investment program costing $580 million covers commissioning a new tinning line, modernization of the available cold-rolling mill, construction of a mill to make pipes for the oil-and-gas sector and a coloring line. Over half of this amount, $285 million, is meant for constructing two steel continuous casting machines with the total production volume of 5.2 million tons of high-quality slabs a year. All these will, undoubtedly, help secure access to new profitable market segments.

Andrei Kozitsyn, General Director, Ural Mining & Metallurgical Company:

- By world standards our company is a young one. About ten years have passed since the moment, when the idea to set it up has come to mind. At the first stage it was kind of a symbol or, if you wish, a banner that united a group of independent enterprises. Gradually, this informal association was growing stronger and increasing its participation in the practical activity of enterprises as well as gaining a clearer legal and organizational form. In 2002 UMMC Holding, a management company, was set up. As a whole, the process of corporate development has been going on till today but there is already an opportunity to think over the first results of realizing the idea that underlay founding UMMC, i.e. the vertical integration.
When we started to form such quite large mining and melting company, we tried to soberly assess as much as possible the situation in Russia and in the world as a whole so as to choose the most acceptable option. It is worth remembering that in the Soviet times our country’s metallurgy was a highly integrated structure. Generally speaking, there were two super holdings: the USSR Ministry of Ferrous Metals and the USSR Ministry of Non-Ferrous Metals. Everything there was centralized, distributed and limited: management, supplies, financing, commodity flows. The closed system was functioning in the atmosphere of certainty. Volumes of export shipments were insignificant. The cooperation with foreign companies was limited to selected construction projects and equipment supplies.
The single-stage transition to the open market in the early 1990s brought up a lot of urgent questions for Russia’s metallurgical enterprises.
The full cycle of production and its largest volume in the copper segment were available at Norilsk Nickel only. Other enterprises, which were located mostly in the Urals, found themselves in a considerably more complicated situation. From the very beginning they were sticking to the principles of the subdivided technological chain, when each enterprise had one or no more than two process stages. Taken together, they formed the full cycle: from mining ore to getting pure copper. The situation was also difficult because enterprises were small (from 2,000 to 5,000 workers) and they were scattered about the Urals’ region, over a thousand kilometers from the north to the south.
With the transition to market relations all enterprises began operating independently; during the privatization each of them got its owners, including the foreign ones. Due to various reasons, including the subjective ones, most of these enterprises were moving toward bankruptcy or were already bankrupt. The copper segment in the Urals was sliding into chaos and, in our opinion, only through vertical integration it was possible to avoid that. So, it became the first stage of preparing to found UMMC. It took five years, since restoring the technological chain in market conditions could be done only through consolidating property that sometimes was in a rather bad state. I am convinced that, if we did not do that, someone else would, even if later and with bigger losses.
The center of forming the vertically integrated structure was Uralelectromed JSC that possessed 40% of the Russian cathode copper production capacities. The control over Ural integrated mining and copper-smelting mills allowed, with processing copper scrap taken into consideration, to balance raw materials and process stages, to ensure the stability of production. The complexity of using raw materials increased; there appeared a possibility to process man-caused waste, to provide specialization of production facilities and make them cooperate.
Results were quick to come: if in 1996 our volume of producing pure copper amounted to 146,000 tons, it was over 270,000 tons in 1999. But this was only the beginning. We kept working on improving the vertically integrated structure by fully using its potential.
One of the largest implemented projects was the construction of a copper wire shop with the annual production capacity of 235,000 tons at the site of Uralelectromed JSC. The shop was commissioned in 1999. Thanks to the advanced technological level that ensures the high quality of products, the shop’s capacities are completely loaded today. Its products are shipped to markets in Russia, countries of Europe and Asia. There is already a question of expanding its production capacities.
The shop made the vertical structure flexible and consolidated its stability in the face of demand fluctuations. We independently process our copper wire turning it into cables at the Sibkabel enterprise in the city of Tomsk, which is the next technological process stage in our structure.
The same goal – increasing flexibility and stability – was pursued, when we included into our structure the Kirov Non-Ferrous Metals Processing Plant that is making rolled products based on copper. This has had a positive impact on its consumption. The production volumes will grow even higher, when the works’ planned modernization is completed.
The integration of two radiator-making plants in the structure of UMMC has had the similar impact. On the one hand, we obtained guaranteed sales and expansion of cathode copper consumption because of flat rolling. On the other hand, we extended the range of copper products made on the world technological level. These requirements are met by the production of radiators under the CuproBraze technology started in the town of Schadrinsk in 2003. UMMC is also upgrading production of copper powders that are in stable demand in markets of Europe. It is expanding production of powdered items as well.
It is quite possible to debate whether the integration of enterprises with high process stages (cable, radiator plants, etc.) in a mining and smelting company is justified. We are proceeding from the fact that high process stages can and should be included into vertically integrated structures, if these stages are efficient and they result in expanding markets of consuming main products.
I think that, when founding UMMC, we correctly determined the scale of such a structure that is optimal in present conditions. This was proved by the company’s activity during the severe crisis with copper prices in 2001and 2002, when, regardless of unprecedentedly low prices, the company managed to maintain production volumes and keep jobs. Our production chain allowed to effectively control expenses, to prevent competition between the process stages that is quite typical of open market. Significant funds were invested in modernization and development of production: except some small decrease in 2001 caused by downfall of prices for copper, their production volumes have constantly grown and increased more than three times against 1999.
So, we managed to create a viable structure that has a strong market status. The structure is stable with respect to changing conditions and it possesses sufficient financial, production and management resources for solving questions of strategic development in the future.
The major place in our strategy is assigned to the raw material base, which is a foundation of any material production.
As a whole, the copper raw material resources controlled by UMMC in the Ural region are sufficient to maintain operation in the nearest future. However, if we look a little further, it becomes obvious that there is a need for a significant strengthening of the ore base of the Russian copper industry. Despite the rapid growth of copper consumption in Russia in recent years, indexes of consumption per capita still remain low: they are about three times lower than in Europe. There are all the reasons to believe that, as a result of our economy’s growth, the domestic demand in the foreseeable future will be higher than today’s production volumes. Even if we take the most conservative option and assume that existing capacities are sufficient to meet the demand for copper in a long term, then, we will anyway need as a minimum to make up for a rather significant retirement of mining at Ural fields due to exhaustion of their reserves.
The only Russian site with reserves sufficient for replenishing and, even more so, for expanding the raw material base is the Udokan copper field in the Chita region. Having unique reserves, about 20 million tons of copper, it is located in a difficult-to- access, poorly developed mountain area with practically no infrastructure. Its development will require unique technological and production solutions as well as considerable investments. When this field was put out to tenders in 1992, everybody was convinced that such a complicated project could be implemented by a foreign company only. It is quite possible that it was so during that time, although a foreign company, which obtained the license, did not implement the project. But today, 10 years later, Russia has its own strong structures that possess all necessary potential to implement this project in the country’s interests. UMMC is one of such structures and it is actively getting prepared for a participation in licensing this field.
The vertically integrated structure allows not only to get resources necessary for developing the field but also – and it is more important – to ensure a maximum effect from doing it through deep processing of Udokan’s copper in Russia so as to get products of high readiness. We are convinced that geographical and climatic difficulties of economic activities in Russia can be made up for only in the natural way, by riches of the country’s subsoil. And we are prepared to spare no efforts to make it really happen.


Chung Myong Cho, POSCO, Republic of Korea
The speaker cited the impressive figures characterizing the activity of POSCO. The company was founded in 1968 and since then it has been quickly growing; the annual rate equals 11.5%. Since last year the POSCO share owned by foreigners has amounted to over 70 %. According to the report on dynamics of the company’s development, which was published in 2003, it was placed first by its profitability, skill of workers and access to outside financial funds. The share of POSCO in Korea’s volume of hot-rolled products equals 63%. The company has a high credit rating.
In the mid-term the company intends to accomplish three strategic tasks: to keep increasing the production volume, to upgrade its competitiveness and to use technological innovations to a maximum extent possible. This will allow POSCO to become a world leader. At present, the potential of POSCO in Korea equals 20 million tons of steel. In the forthcoming decade it should go up to 42 million tons. In addition, the company’s production potential abroad will be expanded; by 2013 it will reach 10 million tons. POSCO will make investments in developing new fields and supply infrastructure in India, Brazil and other countries. Concentrating on making the most promising products the company hopes to properly consolidate its positions in the automotive industry by 2007. By expanding the range of its products the company will try to enter the Japanese market as well as markets of Southeast Asian countries. In order to implement the company’s mid-term strategy it plans to invest about $2.3 billion in the nearest 5 years.
As for the global strategy, it corresponds quite well to the mid-term plans of the company’s development and is aimed at reaching three goals: to penetrate new emerging markets, to consolidate the competitiveness through its subsidiaries abroad, to ensure the necessary volume of the raw material base so as to maintain a stable growth. Long-term investments for these purposes will be gradually growing in China, India, Brazil and Russia.
In November last year POSCO set up a holding company in Peking. In the future precisely this company will become a center to implement the company’s strategy in China. At present, POSCO is developing 4 projects in this country, including a center of rolling sheet for the automotive industry. There are similar strategies with respect to India, Brazil and Russia. These countries have a sufficiently optimistic economic outlook. That is why from the strategic point of view it is not surprising that the company wants to secure a good raw material base in India. POSCO is positioning Brazil as a potential source of supplies to Asia. The company does not have a detailed strategy yet with respect to Russia: with whom to cooperate, how to cooperate. But, in the opinion of the speaker, soon the picture here will be absolutely clear. And the participation in the Moscow Metals Summit will also help in this respect.


Vladimir Kim, Chairman, Board of Directors, Kazakhmys Corporation, Kazakhstan:
- At present, the corporation Kazakhmys is a purely ore mining company. We deal with ore only. The corporation has its own stations and coal, it does construction works on its own and so on. As far as its size is concerned, we, as a mining company, are constantly placed 9th or 10th in the world’s copper industry. Today, our reserves are: reserves of copper ore amount to 30 million tons, reserves of zinc equals 4.9 million tons, there are gold and silver as well as brown coal with reserves of over 1 billion tons.
Is there any difference between Russian and Kazakh mining companies? There is one difference: we got used to work with copper ores only. The content of copper in ore is no more than 1% or less than 1%. That is why in order to get 430,000 tons of copper concentrate we are mining 2.5 as much as the whole copper industry of Russia, including Norilsk Nickel. Our corporation has its production facilities to produce copper concentrate, zinc concentrate. We have our own zinc mill with the total production volume between 100,000 and 120,000 tons of metal zinc a year.
At present, we have the lowest prime cost of cathode copper in the world equaling $600 a ton. There is a production of gold out of our own raw material. We have enough silver. The coal production volume amounts to between 10 and 11 million tons. It is enough for us because its consumption volume equals 6 to 7 million tons and the rest is sold as power-generating coal. All deposits are open.
I would like to say that ours is a debt-free company. We realize that it is necessary to borrow funds in outside market and we will get a credit any time because our EBITDA coefficient is high.
The corporation’s head touched upon the problem of the Udokan copper field since Kazakhmys is considered being one of the most likely candidate to obtain a license for developing it. The corporation is meeting resistance of Russian competitors. Dwelling on the fact that Kazakhmys is a company fully balanced with respect to raw materials Vladimir Kim said the following:
- A year and half ago we did not have a license for recovering 12 to 15 million tons of copper concentrate. Fields containing it are located in Kazakhstan. At present, we obtain them through auctions. We in Kazakhstan have no bidding contests or investment tenders at all. An auction is the only thing that we do have. That is why we always support the principle: pay more, buy better terms. With our production volume of 430,000 tons, even 450,000 tons and 500,000 tons of copper in five years you yourself can figure out for how long our own reserves will last.
Nevertheless, let us discuss a bigger question, i.e. Udokan. I have the following question: which copper-producing company needs it? Undoubtedly, it is needed by Russia because it will provide the country with an opportunity to become a world copper power as well as with an opportunity to get raw materials for the next 30 to 40 years. But which Ural company can handle such volumes? Which one of them can really raise such volumes?
The speaker referred to calculations, which, in his opinion, speak for themselves. Bringing the Udokan copper concentrate from the city of Chita, the loading station, to Yekaterinburg, where a probable processing site might be located, costs 20% less than to bring it to any Kazakh railroad station. But the prime cost of refining one ton of copper at Russian copper mills is three times higher than the prime cost of doing it at the Kazakh ones: at Kazakhmys the refining costs from $115 to $119 while in the Urals its cost amounts to $300 and more. The third factor is funds. When buying some copper mines in the Republic of South Africa even large Norilsk Nickel had to take a credit from the City Bank, notwithstanding the fact that this company has a high capitalization. That is why there is a need for financial instruments.
Summing up, Vladimir Kim stressed that Kazakhmys is a unique company. At the same time it is open to joint work and is ready for participation in new business projects.

Michael Eyett, Senior Vice President, Voest-Alpine Company.
The representative of Voest-Alpine began his address with a remark that his company is not among leaders in steel production. Its annual production volume amounts to 5.7 million tons and this is much less than any of the Russian leading integrated iron & steel mills has. Nevertheless, Voest-Alpine is quite a unique company because, first, of its strategic market position and, second, by rates of its growth, which it has been showing for already several years. In 1999 its turnover amounted to 2.7 billion euros and today it equals 5 to 7 billion euros. In Eyett’s words, the company’s profit is much higher than in Europe’s steel industry as a whole.
The company’s structure has four major directions of activity: steel production (about 47% of the turnover), products for railroads (27%), the segment, which does business with the automotive industry (16%) and specialized sections (about 10%).
Three years ago Voest-Alpine was structured mainly as a traditional steel company but, as a result of the strategic planning, the structure underwent considerable changes. Since the Group consists of different divisions, each of them is trying to take leading market positions through technologies developed in their segments. The company is thoroughly assessing prospects for its growth adjusting its capabilities to clients’ requirements as well as to expenses and competition. In particular, the company intends to expand the range of products for the automotive industry. Having started practically from zero it invested sufficient funds and in three years the company achieved the turnover amounting to 750 million euros.
The divisions, which are making steel for Voest-Alpine, still remain the key ones. To these end there is an investment program underway that is worth 2 billion euros. The first stage of its implementation is almost over; the second one is planned to be finished between 2008 and 2009. By that time the financial return from this business will be provided in full. Making investments in sheet hot galvanization the company intends to expand these production capacities and consolidate its position as a producer ensuring the highest quality of these products in Europe. In recent years it has invested up to 1.2 billion euros in making products for railroads. In particular, it has already signed a contract with a company that provides a railroad link between Cologne and Dresden. This will be an expressway and Voest-Alpine will become a supplier of rail products.
As for making pipes, Voest-Alpine is working with companies not only in Europe (Austria, Belgium, Great Britain, Czechia) but also in the U.S. The ratio of the turnover is as follows: Europe - 90%, all other countries - 10%.
The official from Voest-Alpine finished up his address with the following statement. The development program is to run till 2020. The company will keep growing; its participation in the global business will be expanded. Voest-Alpine regards its access to markets in East European countries as one of the strategic advantages.
Alexander Abramov, President, EvrazHolding management company:

- By actively participating in the international division of labor, the Russian steel industry today is an integral part of the world steel market. That is why all problems of the world steel industry have a direct impact on Russia.
During the steep downfall of the domestic solvent demand in the 1990s Russia’s largest enterprises were forced to actively develop new markets and that required fundamental changes in their management technique. What is more, the Russian crisis of 1997 and 1998 made change in management styles and methods inevitable. As a result, managers’ cadre and quality of their work were considerably altered. Today, business is managed by highly educated, pragmatic, mobile and – what is important – quite young people. From the management point of view, the Russian steel industry has got a long-term chance for success.
Winning new markets gave a boost to the process of renovation of production capacities and rise in quality of Russian enterprises’ products bringing them to the level of international standards. The Russian metallurgy has managed to become a serious player in the global competition and it looks quite impressive against the world’s general situation.
As far as the engineering level of metals’ production is concerned, we are far from being ‘the most advanced country’, regardless of considerable investments of the last 5 to 6 years. However, there is a global problem here: the industry has become unattractive to investors as well as stagnant because, to a large extent, in the 1980s and the early 1990s it turned out to be flooded with investments. The pursuit of engineering perfection is, undoubtedly, important but with respect to metallurgy it is very expensive. We take into account this fact as well as the fact that the global rivalry is not about who will outrun whom in the production technology. In the real life efforts are concentrated in two strategic directions.
The first direction is access to markets. When we invest in technology and modernization of available production capacities as well as in deployment of the new ones, our caution is explained, to a large extent, by the fact that we do not see markets sufficient enough for selling our new products. The protectionism is blooming in world markets: it looks, of course, like some atavism that is incompatible with the liberal model but, nevertheless, practically all countries act this way. That is why at present the domestic demand is important for the Russian metallurgy as a major incentive for upgrading technologies, manufacturing products with high added value, improving quality and extending range of products. The latest changes in the Russian market give grounds to a certain optimism. But rates of the economic growth in the country as a whole will, to a large extent, determine duration of the trend toward rising demand for metals.
The second direction of the rivalry is the prime cost of the liquid steel. Today, two countries, Russia and Brazil, can produce liquid steel for $120 a ton. This is our competitive advantage, which is worth retaining. To this end it will be enough, for the time being, just to carry out modernization based on traditional technologies of steel continuous casting and liquidating open-hearth production.
Today’s market of metal products is rather conservative; fundamentally new products appear there approximately once every 20 years and all competition is about prices. Above all, it means that a company like ours should have a clear-cut domestic strategy and marketing tactics.
The outlook for the Russian steel industry should be considered through the prism of main factors that determine prime cost of our products. Russian steelmakers do not have radical advantages either in prices for raw materials (ore and coal) or prices for electric power and gas. What is more, in the last six months prices for the main kinds of raw materials in Russia have practically matched the world ones.
The conclusion is obvious: to keep a steel company competitive is possible only in case of having control over articles of basic expenses.
Here is the structure of basic expenses: iron-ore raw material – 24%, coal – 16%, electric power – 6%, gas – 4 %, operational and technological costs – 10%, wages – 15%, transport – 15%.
Wages cannot be reduced for apparent reasons. Operational and technological costs (for example, the expendable coefficient or, say, the coefficient of optimizing reserves and replenishing them) have been for a long time controlled by automated systems, which are installed at integrated mills. So, there remain suppliers of raw materials and natural monopolists (railroad transportation, electric power, gas). That is precisely where reserves for increasing competitiveness are.
To optimize the ore-mining industry, to raise concentration of mining and its intensification, to reduce a number of enterprises and develop the most efficient of the remaining ones are those tasks that should be accomplished. In other words, currently our competitiveness is mostly related to improving the technological and financial management of enterprises that produce ore and coal. And it is understandable.
In the last 15 years world prices for raw materials increased 2.5 times while prices for steel rose one third only. We are witnessing a certain trend, when raw material commodities are getting significantly costlier and a global shift in prices for all goods is taking place. This shift started with oil and today it embraces all kinds of minerals as well as products of their processing, i.e. ferrous and non-ferrous metals, oil, gas, etc. On the whole, it is obviously a complicated question of the global nature: is the structure of the added value changing? A certain peak fell, probably, on the mid-1980s and early 1990s, when goods with high added value such as electronics, household articles, pulled the chain of added value, if I may say so, over to themselves. Today we are watching the long-term correction, which has begun approximately in 1998. This is an objective phenomenon; during these years prices for raw materials rose significantly but prices for consumer goods and goods with high added value lagged behind. That is, in other words, a global shift took place in the chain of forming added value. This should be taken into consideration when determining directions of further investments. At present, the raw material base is our priority.
All our actions in this direction are quite natural. The matter is that in the Soviet times the existing isolated economic entities were united by the common technological chain and ideology that determined whether to construct this or that plant. After the collapse of the USSR and the beginning of reforms each of them became responsible for itself, while the technological unity remained. In this sense the world market is supplied with rolled products by not simply NTMK, Zapsib or NKMK but by the whole production complex, from coal mines to rolling shops and all social infrastructure.
And the last point that is worth mentioning: prospects for metallurgy in the process of the world economy globalization.
The process of mergers and acquisitions of enterprises, including those being on different sides of state borders, is becoming, to a greater extent, the globalization motor. According to the data of experts from the United Nations Conference on Trade and Development (UNCTAD), today about 80% of all direct investments in the world economy are provided through mergers and acquisitions.
The world economy globalization is not bypassing steel industry either. And the consolidation in this industry is just beginning. Ten largest steelmakers account for approximately 26% of the world market of these products while ten automotive companies control 90% of the world automotive industry and ten aluminum companies produce 75% of this metal.
As time goes by, the consolidation in the steel industry may reach the same extent. There are examples already available. Take the market of stainless steel rolled stock. At present, four major players Arcelor Stainless Group, Acerinox, Avesta Polarit and ThyssenKrupp are setting the tone there. As the last 4 to 5 years prove, the concentration in this industry is gaining strength:
– 1999 – the merger of British Steel and Koninklijke Hoogovens (the Netherlands) and the formation of Corus (about 19 million tons of steel a year);
– 2002 – the merger of Usinor, Aceralia and Arbed and the formation of Arcelor (about 43 million tons of steel a year);
– between 2002 and 2003 – the merger of Kawasaki Steel and NKK Corp. (Japan) and the formation of JFE Steel (about 30 million tons of steel a year), etc.
At the same time the following is worth mentioning. By the data of UNCTAD, the most important motive for making direct investments in the form of mergers and acquisitions is the anxiety over the international competition. Probably, in the pursuit of unification, precisely the desire to secure business as fast as possible against negative consequences of competition makes the struggle for the value of companies, which participate in deals like these, retreat to the background. According to the statistical data of the leading consulting companies (KPMG, PwC, At.Kearney), from 65% to 70% of all merger and acquisition deals were made with reduction of original value of participating companies. Just a few of them managed to reestablish the price of their shares even after a year of operating as ‘merged’ assets.
Nevertheless, forming large companies in steel industry through mergers and friendly takeovers is a natural process. It will not be smooth and fast because of objective as well subjective reasons. Among them are:
– differences in management and accounting systems;
– the need to work out a detailed clear-cut plan of merger, not only the outlines of strategic advantages. It requires a lot of time;
– the so-called ‘cultural shock’, if a merger concerns enterprises operating under different state systems. In other words, there are dissimilarities in mentality, styles and many other things;
– suddenly emerging personal ambitions of CEOs of participating companies also play a significant role.
As for the Russian market, in the mid-term the process of merging enterprises has rather big chances for realization. If a negative cycle happens, then, conditions for mergers of any kind will be more favorable. When market is bad, any mergers/acquisitions could help not only survive but earn money as well. Today, when the market has reached its peak, such decisions can hardly be expected, although there are business logic and certain prerequisites for them. Whatever will happen further down the road will depend on specific conditions and personalities.
Alain Davezak, Vice President, Arcelor:
The speaker singled out two important examples of the accelerating consolidation: the takeover of Rouge Steel by Russia’s Severstal, which is now present in North America, and the process of privatizing steel enterprises in Eastern Europe, such as Krivorozhstal in Ukraine.
Europe needed 100 years to start consolidation. In the opinion of Davezak, this process began as far back as 1911. And in 2002 the formation of the company Arcelor took place. The consolidation level in Europe, Japan and the U.S. is high. But there are no such processes in China despite the fact that this country is both the largest producer and the largest market. China’s steel industry is fragmented and this may lead to a certain problem.
The representative of Arcelor thinks that Russian companies are not ready yet for mergers. They have to settle first the question: which one of them will be at the head? Joint ventures in Russia have better prospects. They are already operating in many areas, for example, rolled stock-making JVs with participation of Russian and foreign capital.
Presenting his long-term forecast Alain Davezak said that, as he expects, in a few years the Russian steel industry will have 2 to 3 alliances instead of existing 5 to 6 giants, Later, these alliances will be consolidating with companies of Eastern, not Western, Europe, which have established ties with West European partners.


William Shor, Vice President, SUAL Group:
The vice president of the SUAL Group devoted his address to Russia’s largest project to establish a new aluminum complex that this company is implementing. He reminded that SUAL, one of the two Russian aluminum holdings, has the full production cycle: extraction of bauxites, production of alumina, making of primary aluminum and its products. The company’s employees number 62,000 people. Its annual revenue comes to about $1.7 billion.
At present, Russia is placed seventh in the world by bauxite extraction. This raw material with quality being average by world standards is concentrated, mainly, in the country’s north. The SUAL Group controls 83% of the Russian reserves of bauxites. The project Komi-Aluminum is based on Russia’s largest Sredne-Timan deposit of bauxites.
Its reserves are estimated at 250 million tons. The existing plans provide for the formation of a world-level aluminum-alumina complex with a production cycle from extracting ore to making primary aluminum. In the world practice such new production facilities are called ‘green fields’ (meaning that facilities are constructed from zero in the virgin ‘green field’). As the speaker said, production capacities of the Sredne-Timan being integrated in the complex will be upgraded and reach the volume of up to 6.5 million tons a year, production of alumina will amount to 1.4 million tons and production of primary aluminum will come to between 300,000 tons and 500,000 tons a year.
The representative of the SUAL Group mentioned the following five advantages of the Komi-Aluminum project:
-First, considerable reserves of bauxites, which, by estimates, should be enough for no less than 30 years;
-Second, the advantageous geographical position: the deposit is located not far from the ports of Saint Petersburg and Murmansk, the region has a pretty good railroad link to the country’s industrial centers;
-Third, there are considerable energy resources in the region, particularly reserves of natural gas and coal that give grounds to counting on getting sufficient electric power;
- Fourth, the practical experience of SUAL in developing all process stages of aluminum production;
- Fifth, the interest and political support at the federal and regional levels.
The implementation of the project will result in raising Russia’s alumina production by almost 50% while significantly reducing the necessity to import this raw material (the volume of its import shipments reached 4 million tons a year).
William Shor said that at present the Sredne-Timan bauxite deposit is successfully developing: last year it produced 1 million tons of bauxite and this year the volume of its production will amount to no less than 1.5 million tons. A railroad has already been built, which will be bringing bauxite to Ural aluminum enterprises. The feasibility study for constructing an alumina and aluminum plants is near completion. The company plans to start building them already this year. Consultations and negotiations are underway with the European Bank of Reconstruction and Development (EBRD) as well as other financial organizations to discuss questions of obtaining credits for the second phase of the project.