By John Helmer in Moscow
Russpetstal (“Russian Special Steel”, RSS), the steel affiliate of the state-owned Russian Technologies holding, has decided to acquire up to 4 new operating mills if the price is right, and it can raise the finance from Russian state banks. Details of the targets of RSS’s 18-24 month strategy were recently approved by the RSS board, and disclosed by Igor Alexeyev, deputy chief executive of RSS for strategy and finance.
In an interview this week with CRU Steel News, Alexeyev said the new strategy includes “two to three or four targets” for acquisition”, together with a target for investment into the plants RSS has already acquired.
One of the new acquisition targets may be outside Russia, Alexeyev said, the purpose of which will be to acquire specialty steel technology and management skills currently unavailable in the domestic sector. Following the collapse of demand for stainless and other specialty steels after the collapse of the Soviet Union, Alexeyev explains in a report to be presented at CRU’s stainless conference next week, there has been inadequate investment in new technology and plant facilities for state-of-the-art finishing equipment.
RSS has therefore focused on making up for the lag in technology and skills, and meeting the new requirements of Russia’s reviving military and nuclear power industries. At Krasny Octyabr (Red October)and Barrikady (Barricades Steel Mill), plants acquired by RSS in the Volgograd region over the past two years, between $100 and $150 million is to be spent equipment to produce large castings and forgings required in nuclear reactor manufacture.
The other unit RSS currently owns and operates, acquired early this year, is the Stupinsky Metallurgical Plant (SMK), which produces engineering steels, aluminium, nickel and titanium alloys, and forgings and castings, primarily for the aerospace and aircraft industry.
The focus of RSS’s strategy, according to Alexeyev, is twofold — on specialty steels, especially the stainless market, where RSS currently holds a 20% market share of domestic production; and specialty alloys. “RSS studied the aluminium market,” Alexeyev said, “and we divided it into commodity aluminium and specialized alloys. There is no interest in upstream aluminium, but there is specialized alloys.” Alcoa operates the two main plants for manufacture of semi-fabricated aluminium in Russia. KUMZ, owned by the Renova group, is a specialty alloy producer for the aviation industry.
In parallel with RSS, Oboronimpex, another unit of the Russian Technologies group, owns and operates VSMPO, Russia’s dominant producer of titanium metal.
In specialty alloys and steels, Alexeyev said, the attractiveness of short-term asset acquisition is the timing. “There is a window of perhaps three to four years in which it will be hard for new players to get ertification.” He conceded also that, though asset values are falling sharply in the Russian metals market, and on the stock markets, “you also need money to buy. Liquidity is an issue but we have hopes of financing partially guaranteed by the state holding and funded by the state banks.”
Among acquisition targets for RSS in the Russian market, industry sources have identified the Ashinsky and Electrostal stainless mills; and the Kulebaksky Metallurgical Plant and Kulebaksky Wheel-rolling Plant, which were consolidated in 2005 into a holding called Ruspolimetal. These last two mills specialize in the production of semi-fabricated steel products for aircraft engines.
Asked whether RSS is still considering acquisition of the stainless steel division of the Mechel group, which has been under consideraion for some time, Alexeyev said that since he came to RSS in May 2007, he has not been involved in talks with Mechel. However, he noted that there is an interest, although Mechel facilities are not included in the short-term plan. “Our ability to fund a larger acquisition is limited,” he noted.
Mechel leads the domestic producers of stainless in Russia with two mills, Izhstal and Chelyabinsk. Severstal produces stainless at its Cherepovets mill; the Estar group at Zlatoust and Novosibirsk; and the Urals Mining and Metallurgical Company, a copper group, produces stainless at its Serov Metallurgical Plant. The two small independents are Serp i Molot and Electrostal. Figures provided by Alexeyev indicate that total stainless consumption in Russia in 2007 amounted to 299,000 tonnes, while domestic output was 143,000 tonnes. Per capita consumption is a modest 2 kg per head; this compares with China at 5 kg, the global average of 5.4, and the US at 8.
Russian production is growing more slowly than demand, so that the gap must be filled by imports, which comprised 57% of consumption in 2007; 53% in the first quarter of this year. Substituting for imported stainless is a key objective of the RSS strategy, Alexeyev said. Optimizing on finishing capacity is another. Serving the growing input requirements of the defence industries is a third. “If the economic growth continues according to forecasts, [the Russian] stainless market will double by 2013, largely fueled by household consumption,” Alexeyev reports.
RSS head Sergei Nosov and Russian Technologies chief Sergei Chemezov said earlier this year that RSS intends to spend $250 million on modernization of the plants it has now acquired — Stupinsky, Red October, and Barricades. Last November, Nosov announced: “We plan to invest in the development of our enterprises up to $500 million.” Out of this total, Nosov said, “approximately $156 million will be directed to manufacture modernisation at Red October, and about $100 million we will direct on renovation and upgrade at Barricades.”
Mechel has repeatedly told CRU Steel News that it will not comment on its negotiations with RSS. Oct 2007
Consolidation of the domestic stainless sector is important, Alexeyev warned, because, with the numerous upgrade programs already announced, there is overlap and duplication. According to Alexeyev’s report, a total of $925 million in capital expenditure has already been announced by six of the domestic stainless producers. “If realized,” Alexeyev said, “these programs may bring excess capacity in select product lines leading to profitability decline, rather than gain.” Consolidation is an RSS strategic objective, he explains, in order to optimize on costs and pushinto higher value-added production.