By John Helmer in Moscow
Two steel oligarchs are trying riding the Russian wave of boom and bust.
There’s nothing like a little oil (and gas) to grease the wheels of demand. But announcements this week from two of Russia’s largest steelmakers — 3rd ranked Severstal, owned by Alexei Mordashov, and 5th ranked Mechel, owned by Igor Zyuzin — suggest that the boom in Russian demand for domestic construction is also lifting their confidence of surviving the redistribution of assets expected after Dmitry Medvedev wins the presidential election on Sunday.
Inadvertently revealing how nervous he is, Mordashov commissioned his London PR agent Tulchan to get out the message that, despite two serious blast furnace explosions this year, the company’s production is on the up, along with capital investment. Mordashov has also made a a show of support for Medvedev, telling a London newspaper last weekend: “I believe I should be a good CEO – and being a good CEO of a big industrial company I have to develop a relationship with the Government to help development of the company. It is in line with the normal rules of conduct. My personal relationship with the Kremlin is normal, it resembles those in France, or the US.”
Severstal recently admitted to industry analysts that all is not so normal, at least on the plant floor. its production level at the Rouge plant in Dearborn, Michigan — the largest of the units in Severstal North America — will be cut by 35% for up to two years, on account of the accident and explosion at blast furnace B. The accident occured on January 5 at the mill; no casualties were reported. The blast furnace had been relined in 1997.
The new assessment issued by Severstal did not mention the January 31 explosion at Blast Furnace no. 5 at Severstal’s Cherepovets mill; one person was killed, two injured in the second blast.
In a bid to have the good news drive out the bad news, and do the same to imported construction steels, Severstal’s mill director Anatoly Kruchinin announced this week that the group will invest $500 million over the next three years to install a new steel making facility, including an arc furnace, ladle furnace, continuous-casting machine and rolling mill, in order to produce one million tonnes of heavy beams per year. The $500 million investment is part of a previously announced plan by Mordashov to spend $6 billion in its Russian steel operations to 2011.
A company press release says the new plant at Cherepovets will manufacture large rolled products for use in the construction industry, including T-beams, broad-flanged T-beams, angle pieces and channel beams. According to Kruchinin, “this will be Severstal’s latest facility based on the mini-mills concept, which cuts energy costs on re-heating billets prior to rolling operations, as well as reducing CO2 emissions.”
Another company source acknowledged that “with this new investment plan we are closing our open-hearth furnaces. They will be entirely removed by 2011, but their shutdown started a long time ago. Initially we had 12 blast furnaces. Now only two…”
A report by steel analysts at UBS in Moscow indicated that “the news [is] positive for the company, although rather expected after Severstal previously announced its intention to build a heavy sections mill… the booming construction market in Russia should be supportive for selling prices.”
UBS reports that the Russian construction market is currently in deficit of high quality heavy sections. Last year, Russia imported 870,000 tonnes of sections; almost double the volume of imports of this type of steel in 2006.
The boom in Russian construction makes uplifting reading. Russia represents one of the largest construction markets in the developing Eastern Europe. In 2006, economic growth was 7.4% (real GDP), and 8.1% in 2007. The construction industry saw strong real growth with a 10% increase in construction volumes in 2006. In 2007, construction output in Russia rose 18.2% over 2006 to Rb3,293 billion ($129 billion). Last December alone, the pace of growth was even faster — 26% over December 2006.
The Russian construction industry is driven by demand for both building construction and infrastructure projects. There is substantial demand for new construction and also for the renovation of existing structures. In 2006-2009, Russian construction volumes are expected to grow five times faster than in Western Europe.
The growth rates, and the volumes of money being spent, have attracted, first the domestic oligarchs, and then West European construction companies, seeking sponsors for their contract bids. Oleg Deripaska, the aluminium oligarch who needs no introduction in Mineweb, owns cement works, construction companies, and vehicle builders. Iskander Makhmudov, a copper oligarch, owns Transmashholding, a transport engineering group. Mordashov owns Power Machines, the leading power engineering group. He used to own Severstaltrans, one of the largest private rail, port, container and logistics groups.
All of them are lining up at the feeding trough represented by the Winter Olympic Games to be held in 2014 at Sochi, on the Black Sea. Between $6 billion to $12 billion in various forms of federal budget spending will go into the Games effort over the next six years.
While the oligarchs stake their positions, state owned conglomerates are also positioning themselves in the same direction. Gazprom, Rosoboronexport’s unit Russian Technologies, and Russian Railways Company (RZD) are the three dominant rivals for the oligarchs in this area of the economy.
After the presidential election, Gazprom is likely to be run by the current prime minister, Victor Zubkov. Rosoboronexport’s chief executive Sergei Chemezov appears well entrenched; and onetime political hopeful, Vladimir Yakunin, will probably keep control of RZD.
Gazprom dominates those of the steelmakers, including Mordashov, who are producing sheet and large-diameter pipes for the transportation of gas. Without RZD, there would no production of steel rails, locomotive and wagon wheels, and the other steels required for the railway transportation.
Until last week, RZD appeared to be content to order all its steel from a single supplier — the Nizhny Tagil mill, owned by Evraz, which in turn is controlled by oligarch Roman Abramovich. Then this week, Mechel announced an unprecedented move to start an entirely new and competitive production line for rails.
Mechel’s decision to enter this product market directly challenges Evraz, which last year turned out 2.3 million tonnes of rail products; up 44% on 2006.
Evraz was asked to say how Mechel’s entry into the rail market will affect its projected sales. “We are not commenting on this situation. This is an agreement between RZD and Mechel,” an Evraz spokesman told Mineweb.
Analysts see Mechel’s rail initiative as a hedge against the rise of rail tariffs for steel transport within Russia. But there are two bigger hedges, according to industry sources.
One is that Vladimir Yakunin, chief executive of RZD — a powerful figure who failed to get promotion as a presidential or prime ministerial candidate in President Vladimir Putin’s team — has commercial ambition to make his position as boss of the rail monopoly into an even bigger oligarchy comprising ports on each of the seas that wash Russia’s shores; and the container cargoes that move from ship to rail to delivery truck throughout the country.
By making Evraz compete against Mechel for rail contracts, Yakunin is doing to the steelmakers what Gazprom has been doing for the past five years to the pipemakers. He not only controls prices, but he positions RZD as a potential acquirer of its suppliers.
For Zyuzin of Mechel — who bought out his former partner, Vladimir Yorikh, last year — the deal with Yakunin is also a hedge against the takeover of one or more parts of Mechel’s steel division by Rosoboronexport’s metals unit, Russpetstal (RSS). This is headed by former Evraz executive, Sergei Nosov.
Officials at Mechel will not acknowledge that it is in negotiations with RSS or Nosov. However, Mineweb has been told that RSS tabled an offer last year, and Mechel has declined to accept or discuss it. Zyuzin is reported to have lobbied the Kremlin for delay, while Nosov himself — who declined to respond to questions — is moving slowly to digest other steel assets for his group. It is sure that Zyuzin would not be willing to risk $500 million in the capital cost of Mechel’s new rail production line without the assurance from Yakunin that the latter will protect Mechel from Nosov, and his boss, Rosoboronexport chief Chemezov.