Yuri Adno

T

he transformations of the Russian economy have affected all aspects of the investment process: its dynamics, structural peculiarities, entities and decision-taking level, investment goals and motives, sources and methods of financing investments. For all that, the key role has belonged to changes that have taken place in specific economic sectors.
As far as the Russian steel industry is concerned, the entry of the country’s companies in the world market can be considered the most important result of the reforms. Precisely this has become one of the major factors of the industry’s investment process. In addition to currency earnings, which are the main source of investment resources, the participation in international trade provides constant incentives to increase quality and culture of production in general. It has become possible to attract foreign partners to taking part in corporate property and investment projects. Finally, the competition in the global market has turned out to be one of the key stimuli to consolidate assets and concentrate capacities that also raises the industry’s investment potential.
The investment potential usually implies a given enterprise’s own capabilities or resources to finance these or those projects. So, the industry’s investment potential can be interpreted as a sum total of enterprises’ potentials. The investment potential of the Russian steel industry is linked to the investment attractiveness of concrete projects, which becomes obvious due to a wide range of engineering and economic factors.
Considering these factors that determine directions and extent of investments in the steel industry it is worth noting:
1. The high degree of wear (over 53%) of fixed assets of steel-making process stages (it is more than 69% for the non-ferrous metallurgy) and low ratio of their renewal that explain the urgent need to get investment resources for modernization. By various estimates, the steel industry’s short-term needs for investments come to between $2 billion and $10 billion a year.
2. The technological lag of the main process stages at most mills. By estimates of the TACIS program experts, production capacities of just NLMK, Severstal and Oskol Electric Steel Works can be considered more or less up-to-date. The gap is particularly wide in the technology of blanks’ continuous casting. In the early 1990s this method was used for casting 20% of Russian steel only. At present, this figure has reached 60% but this, however, is still less than the world average level (over 80%).
3. The comparatively small investment in-flow. According to the data by the Institute of Ferrous Metallurgy Economy (Moscow), from 1993 to 2002 investments in the steel industry averaged $900 million a year. The investment index equals about $12 per ton of steel and that is considerably less than those in the U.S. and countries of the EU (from $25 to $30 per ton of steel).
4. As the analysis shows, the sources of forming the investment potential of Russian enterprises are, mainly, their own funds (amortization charges and profits), the share of which in recent years exceeded 80% (Table 1). The foreign capital comes to Russia either as bank credits or through strategic investors, who, by acting via investment funds, buy stakes in enterprises and participate in their management. The presence of foreign partners was especially important in the first half of the 1990s, when mechanisms of selling metal products in foreign markets were being perfected with their help. Later, as financial resources were getting accumulated, most Russian companies completely or partially bought out stakes while maintaining mutually useful contacts. Major companies, such as Severstal and EvrazHolding, are seeking to expand the strategic partnership with foreign businesses in implementing joint projects. But, on the whole, foreign investments in the Russian steel industry so far do not have such a significant role as in China.
5. The growth of investment activities in the steel industry is hampered by disproportions between investment needs of enterprises and their abilities. There is a considerable differentiation in levels of technical development between mills and even between some process stages inside mills and companies themselves. There are three distinctive groups of enterprises in Russia:
- leading integrated mills with their efficiency being dependent on market conditions and tariff policy of the State; the share of these enterprises amounts to about 85% of the steel-melting volume;
- medium-size enterprises with their capabilities being totally dependent on market conditions only;
- enterprises, which have been in a state of uncertainty for a long time: their owners are constantly changing, payables are transferred, bankruptcy procedures are started. Having, mainly, outdated production assets these enterprises are unable to implement even those investment programs, which are limited to current needs, and, in essence, they are finishing off the available production resources. This group is the largest.
6. At present, bond loans to finance the steel business are used more often than ever before. For example, since 2000 the Magnitogorsk Iron & Steel Works has placed over 10 bond issues, including the Eurobond one in 2002 for the amount of $100 million with the yield of a 10% interest per annum. In February 2003 Mechel placed a bond issue for the amount of 1 billion rubles ($34.5 million). At the same time, the stock market has not become a source of investments as yet. Obviously, companies’ owners do not want changes among stockholders and, thus, give their preference to borrowings through bond issues, since, in contrast to issues of shares, they do not lead to the emergence of new stockholders.
7. One of the most important directions of the investment process is the use of investment resources for long-term financial placements. As a rule, it has to do with acquiring fixed assets in other joint-stock companies, investing in stakes and stock of these companies, including their subsidiaries, as well as in bonds and other promissory notes, granted loans and other financial placements. In the mid-1990s, during the period of forming stock capital, the share of financial investments in the total capital placements in the steel industry amounted to between 30% and 40%. Following the crisis of 1998 this share went down to between 16% and 20%. In recent years, due to corporate reorganization, it reached 50% in some cases; among other things funds were used for acquiring mills abroad. For all that, of the critical importance is the growth of financial resources of the Russian economy, including those of steel companies. It considerably extends business opportunities. By volumes of financial investments in acquiring assets the leader is Severstal, which has established a diversified holding and has taken possession of the U.S. company Rouge Steel.
8. The main directions of the investment strategy of the Russian steel business can be defined depending on availability of funds, production specifics and engineering modernization tasks:
- the active investment policy, which combines investments in fixed assets and acquisition of financial assets, is typical of companies that possess large financial resources (ÌÌÊ, Severstal, NLMK and partly Mechel Steel Group);
- investments in fixed assets along with the comparatively small placements in financial assets are the main directions of the investment strategy for companies, which badly need technical re-equipment (EvrazHolding-integrated NTMK, Zapsib and NKMK as well as The Ural Stal Company);
- attracting outside sources of financing, mostly through integration in large holdings is the main direction for physically outdated bankrupt enterprises.
9. As the experience proved, the Russian business learned how to get adapted to any conditions but it should have an opportunity to plan actions at least 3 to 4 years in advance. There are several important state policy measures that are worth mentioning since they have had a significant role in developing the industry. Some of them are: the reduction of transportation tariffs on selected types of metal products, anti-dumping steps against Ukrainian rolled stock, reduction of bank credit rate, the recognition of Russia as a free market economy. But, at the same time, so far no optimal balance in regulating relations with natural monopolies has been found. The postponement of restructuring bankrupt mills is another unsolved problem.
As a whole, distinctive positive trends in Russia’s metallurgical complex have been formed, including the increase in investment activity (Table 2). This was helped by the country’s economic upsurge and favorable foreign economic conditions. In the last year the world market of metals showed an impressive growth: prices for all kinds of steel products have reached their maximum of many years. First, this fact promotes the investment attractiveness of the steel industry’s projects and, second, it contributes to conditions for the growth of companies’ capitalization as well as of the industry’s investment potential.