Alex Yaroslavsky

Insert With a growing demand in Russia for iron ore the integration of mining enterprises into steel companies is becoming an increasingly common practice. This way large holdings are trying to get a competitive edge and secure a stable raw material base for their main production.

Insert
With a growing demand in Russia for iron ore the integration of mining enterprises into steel companies is becoming an increasingly common practice. This way large holdings are trying to get a competitive edge and secure a stable raw material base for their main production.

The fortune of the Russian steel industry rests upon the richest mineral raw material base. There are about 170 iron ore deposits in the country with the total balance of reserves exceeding 100 billion tons. Among them is the Kursk Magnetic Anomaly (ÊÌÀ), one of the world’s largest with reserves amounting to 62 billion tons.
The extent of developing iron ore deposits is comparatively small: no more than 50 of them are in operation but, on the whole, less than one fourth of actual reserves is being developed. Deposits differ by their types and scales, concentration of reserves, conditions of developing, ore enrichment extent, geographical remoteness and other factors.
The most attractive deposits are being developed by major integrated ore mining and processing mills, which comprise the core of Russia’s iron ore industry: the Lebedinsky, Mikhailovsky and Stoilensky integrated mills in the KMA basin, the Kachkanarsky integrated mill in the Urals, the Kostomukshsky integrated mill in Karelia, the Kovdorsky integrated mill on the Kola Peninsula, the Korshunovsky integrated mill in Siberia, etc. As a rule, these enterprises are owned by metallurgical holdings and either totally or partially integrated into them. For example, the Lebedinsky mill is integrated into the same company as the Oskol Electric Steel Works, the Stoilensky mill is controlled by NLMK, the Kachkanarsky mill has been recently acquired by EvrazHolding, the Kostomukshsky and Kovdorsky mills constitute the raw material division of the Severstal Group.
Steel companies consider developing their own raw material base as a priority task. And this is quite understandable taking into account the gradual depletion of the richest deposits, worsening of mining and geological conditions as well as high capital intensity and sluggishness of the ore mining production.
The competition for control over iron ore resources has started at the beginning of the 1990s. And although at present the raw material market seems divided, splashes of this struggle emerge from time to time. Last year there was an intense rivalry between EvrazHolding and the Mechel Steel Group for controlling the Korshunovsky integrated ore mining and processing mill. As a result, this enterprise went to Mechel, which is ranked fourth among Russian steelmakers by its size and which, until recently, experienced certain problems with basic raw material supplies.
Only the Magnitogorsk Iron and Steel Works (MMK), the leader of the Russian steel industry (its 2003 production volume amounted to 11.5 million tons of steel), does not practically have its own raw material base. The share of supplies from its own sources does not exceed 13% of the total volume of iron ore shipments to this integrated mill. The Sokolovsko-Sarbaisky Mining Production Association, the main supplier, is 300 km from it MMK is comparatively near but it is located outside Russia, in the Republic of Kazakhstan. Relations between the two partners are based on foreign economic standards. This results in a tangibly higher cost of iron ore for ÌÌÊ and makes the leader unequal against other Russian steelmakers.
In the last twelve months the tension on the raw material market has gone up. The increased world demand for iron ore and favorable price conditions are prompting mining companies to raise sales on foreign markets while reducing the domestic market share accordingly. The ÌÌÊ management has called upon the Government to introduce a 30% export duty on iron ore and concentrates but it is doubtful that this appeal will have any effect.
ÌÌÊ has been trying to establish its own ore base and this year it plans to conduct intensive exploration and evaluation operations at the Uitashsky iron ore section in Bashkiria.
The task of forming its own ore base is also urgent for EvrazHolding, another steel-making major. NTMK is the only one in this holding’s group of three large integrated mills, which enjoys guaranteed supplies. It makes cast iron and steel of vanadium-containing raw material supplied by the Kachkanarsky integrated ore mining and processing mill and, being an owner of unique technology, NTMK has practically no rivals whatsoever. To other integrated mills, the West Siberian Steel Corporation (ZapSib) and Novokuznetsk Iron & Steel Company (NKMK), the raw material prospects look less certain. The loss of the Korshunovsky integrated ore mining and processing mill, ZapSib’s leading ore raw material supplier, aggravated the situation and forced the holding to take more active measures.
In 2003 EvrazHolding got down to tackling in real earnest the matter of uniting its assets in a ore mining complex. It set up Russia’s first integrated structure to mine iron ore, EvrazRuda JSC. The company has included seven ore mining enterprises, concentrating mills and sintering plants located in the Kemerovo region, Khakasia and the Krasnoyarsk region in southern Siberia. In 2003 these enterprises extracted 12.8 million tons of iron ore and produced 7 million tons of concentrate. These indexes placed the company in the group of six leaders of Russia’s iron ore industry.
In the first six months of 2004 EvrazRuda has increased its output of raw material by 19% more getting close to 7 million tons; the volume of primary concentrate production amounted to 3.7 million tons or by 13.6% more than in the same period of last year.
The main consumers of EvrazRuda’s supplies are the two integrated steel mills, ZapSib and NKMK, located in the Kemerovo region. The company satisfies just half of their raw material needs at the expense of its Siberian enterprises. However, as president of EvrazRuda Yevgeny Potapov says, the share of its own ore in supplies to ZapSib and NKMK increases several percentage points every month and it will keep getting higher in the next three years.
To some extent the founding of Siberian iron ore company EvrazRuda can be interpreted as a remake. The matter is that ore mining enterprises of the Siberian region were originally set up so as to meet needs of ZapSib and NKMK. What is more, the availability of the richest reserves of coal as well as of the ore base was a decisive factor in making the decision to build integrated iron and steel mills exactly in this location being far away from sea ports and large sales markets. For a long time these ore mining enterprises were operating separately but twenty five years ago a production association with the appropriate name SibRuda (Siberian Ore) was founded. Of course, it was a state structure that operated under principles other than today’s EvrazRuda.
As the new company starts its operations, it is facing the necessity of a large-scale modernization. There have been no investments in developing Siberia’s iron ore industry since the beginning of the 1990s, notes Yevgeny Potapov. He also believes that the current production has not been sufficiently financed and, as an example, Potapov refers to the Sheregeshsky quarry, which has reduced its production volumes almost two times as much due to the lack of funds.
In 2003 EvrazRuda invested first $250,000 in constructing drying apparatuses at the concentrating mills. At present, there is a ten-year program, till 2014: it provides for implementing investment projects for the total amount of more than $400 million.
The development program envisages reconstruction of quarries and concentrating mills located in the Kemerovo region and Khakasia. Since big ore bodies at functioning enterprises are, to a large extent, exhausted, EvrazRuda will start working on small satellite deposits, which are to be developed mainly through open-cut mining and with a maximum intensity. Besides, the company intends to put in operation two new deposits in the Krasnoyarsk region (with the balance of iron ore reserves amounting to 30 million tons and 15 million tons respectively) and one deposit in Khakasia (12 million tons).
Of much interest is the Beloretsko-Inskoe deposit in the Highland Altai. A possibility of building an integrated ore mining and processing mill in this region was considered during the years of SibRuda’s operations. Its explored reserves, without taking into account reserves of satellite deposits, are estimated at 300 million tons of ore and an assumed capacity of an integrated mill, building of which is also planned by EvrazRuda, will reach up to 4 million tons of iron ore concentrate a year.
One more integrated ore mining and processing mill is planned to be built in the Krasnoyarsk region on the basis of the functioning quarry. By estimates, reconstructing the concentrating mill will take from three to four years and, as a result, the iron content in produced concentrate should increase from 48% to 63 %. Investment volumes will reach $50 million. This project is a matter of interest because there is a big ridge of iron ore deposits with the total reserves of over 1 billion tons. But in order to start developing them, it will be necessary to create an infrastructure.
As president of Evrazruda Yevgeny Potapov says, "the very active work is being done on all investment projects". "I think that in the nearest future we will clearly realize, on what precisely we have to focus our efforts in modernizing enterprises", he points out. Taking into account the sluggishness and conservatism of the ore mining sector, the investment impact will be felt no sooner than three to five years later. But, despite the long term of recoupment, these investments will be justified anyway because for EvrazHolding it is a matter of ensuring raw material security.
The president of the holding’s raw material division believes that in contemporary Russia there are only two major projects, which have to do with discovering and starting up development of new deposits of minerals and which are being implemented with a comparative success. The first one is the Timano-Pechora deposit of bauxites and the second, less successful one is the Chyneiskoe deposit of titanium-magnetite ores. "Work is to be started practically from zero: a large volume of preparations will be done so as to avoid wrong decisions. It is a matter of investing hundreds of millions of dollars", sums up Potapov.