Q

: What, in your opinion, will be the situation on the Russian tube market in 2005 and in the mid-term perspective?
A: We expect stability. According to estimates by the company’s experts, the tube production in Russia will increase 4% to 5 % and exceed 6 million tons. And in 2008 the capacity of the Russian tube market will amount to between 7.5 and 8 million tons. By then the tube industry will be completely formed `with respect to players and to the structure of production capacities. Our estimates are based on optimistic forecasts and so far I do not see any pre-requisites to change them. The demand for tubes has overcome "the lowest point" and moved to the phase of steady growth.
As far as problems are concerned, there is, above all, an instability of the tube industry’s activity that is caused by steel companies’ pricing policy. It is clear that, in their turn, steelmakers depend on raw material markets, supplies of ore, coal. I think that the biggest threat to stability emanates precisely from this chain. But I hope anyway that the experience of 2004 made market participants realize that there should be no jerky movement.

Q: Will the tube market become more open?

A: Bit it is already open. The only example of regulation is the agreement with Ukraine on supplying tube products to the Russian territory. But it is aimed, above all, at creating equal opportunities for Ukrainian and Russian tube producers. And, despite the low load of domestic plants, Ukrainian enterprises account for approximately 12% of Russia’s tube market. It is import to note that in 2005 the issue of quotas on Ukrainian tube supplies still remains unregulated. The agreement on rolled tubes, which we have reached with 5 plants, is just an intermediate step. So far I do not see any movement towards compromise on the part of Ukrainian companies. And, above all, on the part of those, which represent the Khartsyzsky tube plant. In my opinion, the only way for Russian side to maintain stability and rules of the game on the tube market is to introduce protective duties. It is probable that the threat of such a tough measure will result in signing a comprehensive agreement on tubes, which is advantageous, above all, to Ukrainian producers taking into account commissioning of new capacities in Russia.
Volumes of supplies from other countries, most likely, will go down. For example, in 2004 supplies from Japan for Sakhalin projects accounted for a considerable share. Most of them have already been carried out. With respect to other projects in the oil-and-gas sector I do not see any pre-requisites for supplies of tubes exceeding the traditional level of 5%. The main reason is that foreign rivals are losing to both Russian and Ukrainian plants in the price/quality ratio.

Q: In the last five years there were several attempts made in Russia to create alliances in the tube industry. Why, in your opinion, many of them turned out to be unstable and they soon fell apart? The most recent example is the decision to discontinue a joint project of producing large-diameter pipes that was announced by Severstal and EvrazHolding.

A: I can admit that from the very beginning I did not see any specific need for Severstal to enter an alliance with any other company to produce tubes: Severstal is capable of implementing such projects independently. And it is quite logical that Severstal made precisely this decision.

Q: And what about the fate of the tube project by ÌÌÊ and ChTPZ?

A: Neither we nor ÌÌÊ ever announced the creation of alliances, which would go beyond the business and technical cooperation. We continue to be moving forward in these directions and I think that we have achieved a lot. The option of constructing a wide-strip rolling mill at ÌÌÊ and our participation in this project as a consumer was completely worked over. We stated our understanding of the situation in this sector on the tube market and its prospects; we informed the other side of the real volume of rolled metal that we could consume. Today our partner has a complete idea about the market for products of the future mill. It remains to be seen when ÌÌÊ will be ready to make investments; a wide-strip rolling mill is a complicated installation that requires large investments. As far as we know, MMK has already conducted preliminary tenders for developing projects.
In the last year we have been cooperating a lot with the company Uralskaya Stal in improving metal quality characteristics. We have agreed to develop new brands of steel taking into account the growing requirements of the market; we are constantly participating in discussing technical questions. And this work goes on. We are fully satisfied by cooperating with this partner.

Q: What was the reason behind the decision to unite ChTPZ and PNTZ? What strategic goals are set and what are the immediate tasks?

A: The basic goal is to satisfy more fully the needs of concrete consumers. As we said many times, ChTPZ and PNTZ are perfectly supplementing each other with respect to the ranges of their products. There are intersections in a small segment only and even there both plants get along fine as far as volumes are concerned. It allows to avoid the inter-company competition.
That is why we intend to get the main effect from the ability to offer a wider range of products to clients. We expect the consolidation of our positions in the procurement sector.
As the first step, there should a unification of managements keeping in mind the best in the experience of each company. Further, there should be one representative on the market now and for this purpose we are setting up a joint trading house: I think that it will start operating already in April. We will also have to unify and centralize a number of other functions. We will be doing it gradually. The uniting process will take two years. I think that after the completion of this program we will be ready to switch over to a single share.
From the point of view of the company’s management, after the completion of planned procedures nothing will impede this switchover.

Q: Are any corrections and changes possible in the new company’s range of products?

A: We are going to consider this in the nearest future. We will move towards specialization in producing smaller-diameter tubes and, thus, it is possible that some capacities will be closed, most likely at ChTPZ. Besides, in order to ensure the complete range of products for oil and gas companies, it is necessary to make pipe casings of medium diameter. ChTPZ is using threaded pipes to make large-diameter pipes (426 mm), while PNTZ is producing tubing strings with the diameter of 114 mm. There is a niche between pipes of these sizes and we would like to be present in this niche as well.

Q: What production facilities will be invested in? Will PNTZ get modernized?
A: In the first place, there is a need to complete the work on facilities that are being modernized at ChTPZ under the strategic program of reconstruction. As for the investment policy of the united company (ChTPZ and PNTZ), at present, it is being developed. As of today, the $52-million investment program for two plants has been approved. The case in point, above all, is projects to perfect technologies.
The largest joint project is the construction of a steel-production complex All efforts are focused on it. There are two main options: to build this complex on the basis of which plant, ChTPZ or PNTZ. After the final revision is completed, all options will be submitted to the board of directors, which will make a decision on the construction location and the project’s parameters.
The complex’ capacity being considered amounts to 1 million tons of steel billets a year. In this case we will be able to fully satisfy our needs. We will calculate actual production volumes in mid-2005, when main technical decisions are to be made. In this case it is, of course, a question of round billets. We will still be buying flat rolled stock on the market.
That is a generally accepted practice at tube-making enterprises. It is due to technological reasons. Large integrated metallurgical mills are oriented on the mass market, they are making dozens of thousands of tons of one product of one and the same size and of one and the same brand of steel. But a tube-making plant needs small batches and that requires a more thorough work with equipment.
There are also examples in the world practice, when tube-producing companies are making flat rolled stock for themselves. But it is not advantageous to us to construct such a rolling mill. Our plants need about 500,000 tons of flat rolled stock a year. And the efficiency of such projects comes, only when production volumes reach over 1,200 thousand tons.


Q; What share of the market will united plants have? Will it increase?

A: In 2004 our share inside Russia amounted to about 23 %. We would like to have such a share (between 23% and 25%) in the future as well. I do not think that individual companies, whether it is the ChTPZ Group or Pipe Metallurgical Company, can seriously change the situation on the market to their favor. Possibly, only the United Metallurgical Company can because it commissioned new capacities and the company will increase its share somewhat in the niche of pipes with the diameter of 1,420 mm. But this not our market, we are not present there.

Reference:
The Pervouralsky Novotrubny Works (PNTZ) is one of the leaders of Russia’s tube industry. Its personnel numbers over 15,000 workers. PNTZ makes about 25,000 standard sizes of tubes and structural tubing shapes of 200 brands of carbon, alloyed and stainless steels. In 2004 PNTZ produced 690,000 tones of tubes and put out almost 90,000 tons of export products, the highest level in the last 15 years. PNTZ supplies its products to 25 countries, including customers in Europe and North America.

Reference:
The Chelyabinsk Tube Rolling Plant (ChTRP) is a leading producer of large diameter pipes, its share of the Russian market equals 40 %. Since 2002 it has been implementing a 5-year program of technical re-equipment of production facilities. ChTRP is integrated in the ChTPZ Group, which also contains the Chelyabinsk Zinc Plant, the division of making and selling tube components, the metal trading company MeTriC, the enterprise to stock up and reprocess scrap. In 2005 the Group is to start managing the Pervouralsky Novotrubny Works.