Ferrous Metallurgy 2000-2004
The four years of Vladimir Putin's presidency were very favorable for the Russian metallurgy industry. Growth began in earnest in 2001, when a surge of investments was recorded. Steel production increased 1.9% to 59.9 million tons in 2002, and production of rolled metal increased 3.8% to 48.5 million tons. This was despite increased prices for coal and coke, increased railway freight rates, and a poor world price situation. Production increases were achieved solely due to a revival of the domestic market.
Nearly all metallurgical companies have operated according to one scenario in recent years: investments – increased demand on the domestic market – increased exports due to the favorable market situation – price increases within Russian – investments. At the end of President Putin's first term in office, ferrous metal producers took advantage of the extremely favorable situation in China and the United States and almost brought the Russian prices of their products to world levels, although not without scandal. All of this was accompanied by a rapid consolidation of assets. In the period 2000-2004, the concept of “metallurgical plant” gradually gave way to the term “metallurgical group”. A similar situation was observed in nonferrous metallurgy.
Analysts believe that the factors that led to the growth of Russian metallurgy in 2001-2002 will continue to operate at least until 2010. This is a visible success of the new industrial policy of the economic team working under Vladimir Putin in recent years, particularly since in practice, this policy appeared to be a refusal to interfere in the affairs of metallurgical companies and assistance in their international problems.
History: 2000-2004
The events of the past four years have given the impression that totally different people own metallurgy in Russia. The psychology of metallurgical company owners changed completely when the state gave up trying to regulate this market.
The History of the Managers
The largest regrouping of forces in the Russian metallurgical industry occurred almost immediately after Vladimir Putin came to power. Within several months of his inauguration, a new pattern of forces had formed in the aluminum industry. Instead of going to war as expected, Roman Abramovich and Oleg Deripaska joined forces and set up the Russian Aluminum (Russky alyuminii) holding, which included the Krasnoyarsk, Bratsk, Sayansk, and Irkutsk aluminum smelters and the Achinsk Alumina Refinery (Achinsky glinozemny kombinat). In the course of these grandiose deals, former giants of the aluminum market left the industry, for example, the brothers Mikhail and Lev Chernoi, the head of the Bratsk Aluminum Smelter (BrAZ), Yury Shlyafshtein, entrepreneur Anatoly Bykov, and Krasnoyarsk Aluminum Smelter (KrAZ) co-owner Vasily Anisimov.
The revolution on the nonferrous metallurgy market was the conclusion of a general process connected with the collapse of the TWG holding formed on the initiative of head of the Novolipetsk Iron and Steel Corporation (NLMK) Vladimir Lisin and head of the Sayansk Aluminum Smelter (SaAZ) Oleg Deripaska back in 1999. The collapse of TWG determined the new set of owners of a sizable part of the industry, which then subsequently remained almost unchanged. The exceptions were nickel production (where the Interros holding did not change its positions), copper production [where the actual owner of the Urals Mining and Metallurgical Company (UGMK), Iskander Makhmudov, only came out of the shadows a bit], and Severstal and Magnitogorsk Iron and Steel Works (Magnitka) where the actual owners were still Aleksei Mordashov and Viktor Rashnikov.
In theory, there should not have been any radical changes in metallurgy, since in essence no new people appeared in it. However, even these shifts were enough to change the industry beyond recognition and transform it from one that was literally dying into the strongest and most developed industry in the Russian economy.
The History of the Investments
The switch by all Russian metallurgical companies to an active investment strategy is the first, and still the decisive factor in the industry's development. The players mainly directed investments into their own production facilities; but by 2001, extensive development began to compete with intensive development. Metallurgists bought up other members of the production chain and consolidated assets in their industry.
Product manufacturers were the first to be consolidated. For example, in 2002-2003, Severstal bought Karelian Pellet (Karelsky okatysh) and the Olenegorsk Mining and Concentrating Combine (OLKON), which are now a part of Severstal's raw materials division, Severstal Resources (Severstal-resurs). In the last three years, Evrazholding, which was initially set up by Aleksandr Abramovich and partners to consolidate moribund Urals steel mills, i.e., Nizhny Tagil, Kuznetsky, and Zapsib, has bought up a number of small mining companies [OAO Baikal Mines (Baikalskie rudniki), Sheregesh Mining Company (Sheregeshkoe rudoupravlenie), Irbit Mine (Irbitsky rudnik), and Krasnoyarsk Mining Company (Krasnoyarskoe rudoupravlenie)]. But this supplied them with no more than 40% of their raw materials. In summer 2003, Evrazholding lost the battle for the Korshunov Mining and Concentrating Combine (Korshunovsky GOK) to Mechel, which had also entered the race for raw materials. However, Abramov is expected to get the Kachkanar Mining and Concentrating Combine (Kachkanarsky GOK), which he set his sights on five years ago – UGMK has already announced plans to sell this asset to Evrazholding. After this deal, Evrazholding, which has the least available raw materials of any metallurgical holding, will be able to meet 60% of its ore requirements.
A little later, metallurgical companies switched over to product users. Severstal was the most active company in this area, setting up two holdings - Severstal Auto [Ulyanov Automobile Plant (UAZ) and the Zavolzhsk Motor Works (ZMZ)] and Severstal Trans (transportation assets). Nonferrous metallurgy companies also got involved in the process. For example, Rusal bought the Gorki Automobile Plant (GAZ), all of the country's largest bus plants, the Ural Automobile Factory (UAZ), three Yaroslavl engine-building plants, and a number of other auto-industry companies. They became part of the Ruspromavto holding, which along with Rusal's companies, is controlled by Oleg Deripaska's company, Base Element (Bazovy element).
This process was not confined to Russia, and the main reason for this was that by acquiring companies in Eastern Europe, Russian ferrous metallurgy companies could get around European restrictions on imports of rolled products. Thus, in October 2002, Jysk Stalindustri, which is affiliated with NLMK, acquired a bankrupt Danish steel-rolling company, Danish Steel Works A/S, for about $30 million. Mechel acquired the Romanian company COST in Tirgoviste and a small Croatian pipe mill, Zeliezara Sisak. Mechel also bought another Romanian company in its business – S.C. Industria Sarmei steel mill, which manufactures wire products and special steels. Mechel paid about 27 million euros for 74% of the mill's shares.
Practice shows that metallurgical companies are not planning to stop here. For example, Severstal is participating in a tender to privatize the Polish company Huty Czestochowa, one of Eastern Europe's largest competitors. A Mechel subsidiary, the Swiss company Conares Trading AG, which is part of the Uglemet Trading holding, has applied to take part in privatization tenders for the sale of a controlling interest in the Petrotub pipe mill (Romania).
The History of the Pipe Empires
The first ambitious project in the pipe industry started in 2000, when Anatoly Sedykh and Andrei Komarov united the Vyksa Metallurgical Plant (VMZ) and Chelyabinsk Tube-Rolling Plant (ChTPZ) into the United Metallurgical Company (OMK) holding. OMK later included nearly 20 companies: Almetevsk Pipe Plant (Almetevsky TZ); the Chusovoi and Shchelkovo steel mills; OAO Gubakha Coke (Gubakhinsky koks), Metallinvestbank, and a number of financial, insurance, and research organizations. The holding accounted for 36% of Russian pipe production.
Former general manager of the Volzhsky Pipe Plant (Volzhsky TZ) Vitaly Sadykov, who was left without a job after the MDM Group bought the mill from Rosprom in 2000, came to work at OMK. The holding's main objective was to win a contract from Gazprom to build a facility for turning out 1420-mm pipe.
When it became clear that there would be no order from Gazprom, the holding broke up – in October 2002, Komarov announced that ChTPZ was leaving OMK to form its own holding, United Pipe Mills (Obedinennye trubnye zavody). However, this project was also unsuccessful – ChTPZ was able to consolidate only its own pipe-marketing network, OAO Special Fitting Plant (Zavod spetsialnykh montazhnykh izdelii) and ZAO Magnitogorsk Mechanical Fitting Blank Plant (Magnitogorsky zavod mekhanomontazhnykh zagotovok).
The formation of pipe holdings reached a peak in 2001. The Pipe Metallurgical Company (TMK), in which MDM Group united the Volzhsky and then the Seversky and Sinarsky pipe plants, was essentially set up as a counterbalance to OMK. TMK had the same objective – to fight for a large-diameter pipe order from Gazprom.
In 2002, the Nizhny Tagil Iron and Steel Works (NTMK) was chosen for the Pipes-1420 project. The most realistic candidates for participation in the grandiose project besides NTMK were considered to be Severstal and the Oskolsky Electric and Metallurgical Combine (OEMK). Severstal offered to complete the project faster than its competitors, but OEMK was a Gazprom affiliate (through Gazprominvestholding). When the government commission chose NTMK, Gazprom's managers were nearly kicking themselves, since the company could have dispensed with the government commission and given the job to OEMK, except that in 1998, Rem Vyakhirov, who was head of Gazprom at the time, had conceded to the cabinet's demands in the confidence that the commission would ultimately choose OEMK.
Thus, when the decision was made in favor of NTMK, Gazprom did not start paying for its share of the project. The foreign investors attracted by NTMK (Duferco, Voest Alpine, and others) were in no hurry to do this either. Today, construction is essentially frozen, although in 2003 Evrazholding and Severstal announced their intentions to implement the project together. TMK and Magnitka announced a similar project several months later. The long drawn-out struggle for large-diameter pipe production continues to this day; however, Gazprom now prefers to deal with the Khartsyz Pipe Plant in Ukraine. Even in Soviet times this company was oriented towards production of pipe for gas mains.
The history of megadeals in the pipe sector can be summarized as follows: the formation of Dmitry Pumpyansky's empire, the present-day Pipe Metallurgical Company, which is one of the five largest pipe producers in the world, and the creation of a true competitive environment in the industry. In 2000, the most popular prediction for the industry's development was the purchase of pipe mills by oil and gas companies. That pipe manufacturers succeeded in showing the self-sufficiency of their own business and the effectiveness of competition is one of the most important results of the past four years.
The History of the One-Day Wonders
It is interesting that natural selection left only those owners who regarded the metallurgical industry as an object of long-term ownership. Between 2001 and 2003, several large financial and industrial groups that might have entrenched themselves in the metallurgical industry for a long time simultaneously came and went. But their empires were just as short-lived as they were brilliant.
In early 2003, MDM Group got out of the pipe business after selling TMK to Sinara's owner, Dmitry Pumpyansky. These assets were kept at MDM as a pledge for quite a while, but immediately after Vladimir Putin's inauguration Sinara structures began the process of loaning up this debt to Western banks. MDM successfully left the industry, preferring the coal and fertilizer industries to it.
Alfa-Eko, a structural subdivision of Alfa Group, was less effective in getting into the industry. In summer 2000, Alfa-Eko bought about 42% of the shares of OAO Tagmet from small shareholders and the Alfavit Group. A two-year-long war flared up between the new shareholder and the plant's management headed by Sergei Bidash (he initially controlled 35% and then 54% of the shares). Alfa never got to the plant, but Bidash was forced to sell his shares of Rinako Investment Company (IK Rinako), which was affiliated with MDM Group. Next, MDM bought up Alfa's block. Like MDM, Alfa-Eko had been counting on forming a large metallurgical holding around Tagmet, especially since it had experience of working in the industry, albeit not very successfully – at Zapsib and smaller companies. However, nothing came of it: in November 2003, Alfa-Eko sold its last ferrous metallurgy assets – a controlling interest in OAO Sibelektrostal (Krasnoyarsk) – and left the business. And MDM sold Tagmet to none other than Pumpyansky.
Roman Abramovich, who shone in the metallurgical business, has also de facto left it. Recently, at least according to official reports, he handed over full control of Russian Aluminum (Rusal) his largest asset in Russia after Sibneft, to Oleg Deripaska, who is gradually increasing his stake in the company. It may be that Abramovich's final
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| Main indicators of the Russian metallurgical industry in 2000-2003 |
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exit from metallurgy will occur as the result of Rusal's negotiations to sell a large block of its shares to its most important international competitor, Alcoa.
The scheming of large Yeltsin-era financial and industrial groups present in the industry lasted to the end of privatization. However, by the beginning of Vladimir Putin's second term, the only ownership maneuvers still going on were around Magnitka. An auction to sell 23.7% of the state-owned shares of Magnitka were once again (the government first wanted to sell them in 1998) was postponed indefinitely. Today, Viktor Rashnikov controls 57% of the shares, and 16.5% are Mechel assets. Mechel and UGMK have announced they will participate jointly in the auction, but Rashnikov has no intention of surrendering.
Nevertheless, whatever the results of privatization of the last large state-owned metallurgical assets, in the first four years of Vladimir Putin's presidency, with the exception of a number of experiments with tariff policy and the Ministry of Economic Development's struggle with discrimination against Russian metallurgical companies abroad, the state conducted a unique experiment on getting out of one of the country's key industrial sectors. Whether this experiment was deliberate or forced is unknown, but the results are impressive.
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People Who Have Left the Scene
Roman Abramovich
Has Roman Abramovich left nonferrous metallurgy or hasn't he? There are already a dozen opinions on this question, but there is still no certain answer to it. The appearance of Sibneft's owner in the aluminum industry was short-lived but sensational. Abramovich is evidently one of the few high-powered entrepreneurs in the world who doesn't care where his money comes from: for him, aluminum smelters are not buildings with electrolytic cells but a stream of numbers. His exit from the market obviously shows that there are more attractive numbers in the world.
Anatoly Bykov
Krasnoyarsk entrepreneur Anatoly Bykov was only one of a group of businessmen thrown out of the business by the founders of Russian Aluminum, but he proved to be the most vulnerable and persistent of them all. Bykov's arrest, his trial, the accusation that he headed an organized crime group, and subsequent bargaining – none of this had any effect on his desire to get the money owing to him for his share in KrAZ. After Vladimir Putin's second inauguration, Bykov had already outstayed Rusal in the literal sense of the word: the company was forced to sign an amicable settlement with him and pay a compromise, but still fairly large amount (more than $120 million according to unofficial reports) for the selected block of shares.
Sergei Popov
There were a lot of rumors about what senior MDM Group executive Sergei Popov wanted in the ferrous metallurgy industry. In fact, under his leadership, the group carried out one of the most successful “reorganization” operations: the forceful collection of semidepressed regional enterprises, minimal efforts to put them order, quick sale to a buyer in the same sector at the crest of a wave of interest the “collector” had raised in this business. MDM was called a ”predator” and “corporate raider” and a number of other unflattering names. However, in practice it turned out that this method of earning money was beneficial for the entire industry: in essence, Sergei Popov and his colleagues created the interest in the pipe industry, and MDM did not take this interest with it on quitting the market but merely received interest from it.
Mikhail Chernoi
Mikhail Chernoi, who is one of two brothers well known in the entire Russian business community, was already a co-owner of more than half of all of the country's metallurgy industry assets as early as 1999. He was the first Russian oligarch to emigrate to Israel without waiting for “equidistancing”. His brother Lev Chornoi stayed in Russia. Almost nothing remained of the former glory of the fabled TWG empire. However, memories of the Chornoi brothers' vast empire still excite the market: rumors that Mikhail Chornoi still secretly controls all of Russian metallurgy like a Mongolian khan to whom metallurgy oligarchs go to obtain a “charter for a princedom” are popular even today.
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People Who Have Arrived on the Scene
Aleksandr Abramov
In a sense, Aleksandr Abramov and his partners were present on the ferrous metallurgy market long before Vladimir Putin appeared in politics. It is hard to say exactly when Abramov became a key figure in ferrous metallurgy. This probably happened when it occurred to him that several partly collapsed former giants of the Russian ferrous metallurgy industry, which were seriously considered as candidates for complete closure, might fetch money in skilful hands. Evrazholding knew how to do this and became the country's largest ferrous metallurgy group, which suggests that Abramov has been entrenched in the Russian business elite for a long time.
Oleg Deripaska
In 2000, the actual owner of the Sayansk Aluminum Smelter (SaAZ) and the Siberian Aluminum (Sibal) Group, Oleg Deripaska, who had just succeeded in getting out of a partnership with the Chornoi brothers, was considered a prime candidate for being “gobbled up” by Roman Abramovich during the consolidation of Rusal's assets. However, Deripaska managed what many on this market failed to do – he became a partner, and based on the results of Rusal's development over four years, he controls the entire holding and according to various estimates, owns nearly 75% of its shares. His Siberian Aluminum became Base Element, and Deripaska confidently entered the circle of oligarchs as an equal.
Igor Zyuzin
In summer 2001, the trading company Glencore, the last Western player in Russian metallurgy, sold a controlling interest in AO Mechel to Igor Zyuzin's Yuzhny Kuzbass Group. In this way, the coal magnate, who was previously known only in narrow circles, achieved the status of one of the key players in ferrous metallurgy. It was assumed that he would combine Mechel's assets with the assets of Duma deputy Boris Zubitsky's Koks Group (Zubitsky owns Tulachermet and a number of companies connected with it), but this did not happen. The group formed by Igor Zyuzin and his partners in three years received the name Mechel Steel. It unites 19 companies in the industry, including OAO Ural Forge (Uralskaya kuznitsa), Beloretsk Metallurgical Combine (Beloretsky metkombinat), South Ural Nickel Association (Yuzhuralnikel), the Yuzhny Kuzbass open pit mine, Uglemet Trading, and foreign assets.
Mikhail Prokhorov
Mikhail Prokhorov, a banker from Rosbank and partner of Vladimir Potanin in the Interros Group, made an unusual entrance into the metallurgical elite: he became head of Interros subsidiary Norilsk Nickel (Nornikel) in July 2001, pushing aside general manager Dzhonson Khagadzheev, who was quite popular with the company's employees. On moving to Norilsk Nickel, Prokhorov announced his intentions to turn it into a world-class company, implying that the manager himself had the same lofty ambition. Three years later, it can be stated that both Norilsk Nickel and Prokhorov are well on the way. The company has successfully made acquisitions in the United States (Stillwater Mining) and South Africa (Goldfields); it completely controls the situation on the world nickel market; it is a force to be reckoned with on the precious metal market; and specialists rate Norilsk Nickel's corporate governance very highly.
Dmitry Pumpyansky
At the time of the deal with the MDM group of companies, it seemed to many that Dmitry Pumpyansky's Sinara was a victim of Sergei Popov's oligarchical games. However, it turned out that the object of the deal – the Pipe Metallurgical Company – was capable of advancing without MDM. Sinara was at least as competent in the pipe business as TMK's former owner. Dmitry Pujmpyansky's success is not the first career and image ascent of regional businessmen in metallurgy, but it is probably one of the most striking: seldom has anyone succeeded in getting into business at the federal level without outside support.
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Ekaterina Safarova, Dmitry Butrin
All the Article in Russian as of May 31, 2004
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