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Coal Industry 2000-2004
Results for the Russian mining industry in the last four years have been mixed. The industry began to emerge from a prolonged depression in 1997, but in certain years, including 2000 and 2002, there were downturns in its expansion. For example, iron ore production started with a record figure of 86.8 million tons in 2000, dropped to 82.8 million tons in 2001, and then rose to 91.8 million tons in 2003. Overall, growth in the iron ore sector, as in many other mining sectors, was driven by increased demand for raw materials from industrial consumers and often failed to keep up with it. The situation in the coal industry looked a little better: the rise in coal production coincided with intraindustry redistributions of property. However, coal producers maintain that today's growth is akin to stagnation for them: owing to imbalances in energy resource prices and limited export possibilities for coal, the industry's resources are greatly underutilized. This situation may change in future. Growth in other mining sectors was directly related to the successes of its consumer partners.
However, numbers are not the most important result of the past four years. The realignment of forces that took place in the mining industry theoretically opened the door to investments in new sectoral projects. What the first four years of Vladimir Putin's presidency actually meant for Russian mining companies will not become clear before the end of his second term at the earliest. The mining business is very ponderous and conservative, and there are no instant results.
History: 2000-2004
By the start of Vladimir Putin's first presidential term, nearly all attractive mining industry assets in Russia had been integrated into the production chain of industry-specific holdings. Four years have shown that in many respects this system is artificial.
History of Integration
The situation where Russia's mining industry nearly stopped being considered an independent sector did not develop overnight. In the 1990s, Russian mining companies were probably in the most difficult position compared to the majority of industries. The system of vertical integration of mining and processing companies with strict obedience to the top of the production chain of primary producers was an axiom even in Soviet times. Norilsk Nickel separated mines, concentrating plants, and metallurgical plants in its structure in 1992 and 2002. But the idea of regarding mining raw materials for the Zavenyagin Norilsk Mining and Metallurgical Complex (GMK imeni Zavenyagina) as an independent business that might have other owners seems preposterous even today, like separating the head from the feet.
At first glance, there would seem to be few objections to integrating raw material producers and processors. Out of the entire mining industry, only coal, diamond, nonmetallic mineral, and to some extent precious metal producers escaped integration, either because the circle of potential consumers was too large and attaching a coal producer to a specific power plant made no sense or, as in the case of gold and diamond producers, the processing market was dispersed all over the country and around the world.
Privatization processes that did not always or everywhere proceed according to the “mining and processing complex” structure established in Soviet times introduced a certain diversity. Many of the country's mining and concentrating combines (GOKs) were privatized separately. But in practice, the combines' territorial and production ties to metallurgical and other companies appeared to be stronger than property relations.
Under the “one GOK, one consumer” conditions in the mid-1990s, failure to pay raw material producers was considered not so much acceptable as natural: where would they go? The bankruptcy level among mining companies was considerably higher than the average for heavy industry. And given the extremely high capital intensity of mining operations, owners and partners in the chain, or shareholders, if the companies were independent, relegated investments in expanding GOKs to last place. Mining companies that have started up in Russia is the last ten years can be counted on the fingers of one hand.
A certain amount of growth in the mining industry after 1999 was not directly related to the effect of devaluation but was probably governed by increased demand for raw materials from processors. But this demand allowed mining to make a new bid for existence as an independent sector of the economy. The implicit opposition of the two trends – integration processes and the drive for independence – has defined the picture in the industry in the past four years.
History of Coal
The most interesting episode in this struggle was the restructuring of the coal industry, the largest subdivision of Russia's mining industry. It was almost impossible to predict back in 1999 whether the most depressed economic sector of the early 1990s would exist independently. On the one hand, there was demand for coal from power companies, the availability of export markets for coal producers, and historical tradition. However, at the end of the 1990s, chairman of RAO UES of Russia (RAO EES Rossii) Anatoly Chubais proclaimed a policy of setting up coal and power complexes – the LUTEK holding was formed in Primorye Territory, and a similar structure based on Gusinoozerskaya and a number of other thermal power plants was planned for the Transbaikal (Zabaikalye) area. On the other hand, there was the traditional dependence of coal producers on coke consumers and metallurgical companies, organizations that were immensely wealthy compared to coal companies. In perspective, the coal industry should have had a high probability of being divided among power companies and metallurgists: coal companies, which had been privatized later than metallurgical companies, did not look like an independent force.
An initiative of MDM Group, a structure with close connections to MDM Bank and its owners, literally blew the industry away. Over a three-year period starting in 1999, MDM Group and its coal division, Siberian Coal Energy Company [SUEK; later Baikal Coal (Baikal-Ugol)] consolidated nearly all the power-generating coal production assets in Western Siberia and the Far East. The first to fall to SUEK's onslaught was Krasnoyarskugol, and new acquisitions followed nearly every month (Chitaugol, Khakasugol, Vostsibugol, and ten other companies). Oleg Miserva, the head of the company, quickly announced SUEK's goal: to become the largest player on the coal market while preserving its independence, restructure its assets, and then operate as an independent force on the power-generating market.
Another “outside” coal industry consolidator – Russian Coal (Russky ugol) – appeared at almost the same time. The company headed by Vadim Varshavsky had originally been set up on a parity basis with Rosneft and Mezhprombank. It was trying to rival SUEK in growth even at the stage of buying Krasnoyarskugol. However, Russian Coal was unable to reach an agreement with its shareholders: despite all the efforts of Sergey Veremeenko, Mezhprombank's managing director, Rosneft began a gradual withdrawal from Russian Coal in 2001; and Mezhprombank quit the company in 2003. Hired managers headed by Varshavsky bought out the company. By that time it had managed to cause quite a sensation and even acquire a fair number of power-generating coal production assets in Rostov Region, Kemerovo, and the Far East.
In spite of the sharp conflicts between SUEK and Russian Coal, the only thing that stopped MDM Group's expansion into the coal sector was the fact that metallurgy, which had apparently not expected any major events in the coal industry, had recovered from the shock by 2001. Granted, there were few unshared assets left by that time.
An alliance of Severstal and Magnitogorsk Metallurgical Plant (Magnitka) managed to acquire a controlling block of shares in Kuzbassugol (Magnitka sold its shares to Severstal structures in 2003), but the Russian Steel (Russkaya stal) alliance formed by Novolipetsk Iron and Steel Corporation (NLMK), Evrazholding, the coal trader Belon, and a number of other structures consolidated nearly all remaining assets. Severstal also ended SUEK's bids for Vorkutaugol and Pechoraugol. The parties initially agreed on parity control of Komi's coal industry; then in summer 2003, SUEK and Severstal divided the Kuzbassugol assets of greatest interest between them.
If SUEK (now Baikal Coal) continues to stand up for independence of the coal industry, sooner or later it will probably be drawn into the process of interbranch integration. Baikal Coal's owners do not conceal their interest in reforming RAO UES of Russia, that is, in implementing Anatoly Chubais' “power-generating coal” projects through their own efforts. But whereas in the 1990s, integration of the mining industry at the property level proceeded along lines similar to those of Baikal Coal, Russian Coal, and other players (which could be described as “buy everything we can and get rid of what we don't need”), in 2000-2004, active restructuring of existing mining companies was observed in resource subindustries that already owned mining assets.
History of Iron Ore
The fate of Russia's iron ore industry could have been considered decided ten years ago. Despite the fact than iron ore mining and concentrating combines had been privatized separately from iron and steel corporations, by the mid-1990s they existed as independent business units only in the plans of “red directors”. For more realistic players like Russian Credit Bank and Trans World Group, GOKs were components of a large metallurgical structure.
The internal crisis in metallurgy in 1998-2000, multiplied by the financial crisis of 1998, reduced Russia's iron ore industry to a state of profound uncertainty. Metallurgical companies controlled all its assets, but in the iron ore and pellet trade, personal relationships of various metallurgy market players sometimes played the deciding role. And something had to be done about that. The story of Dzhalol Khaidarov, ex-general manager of the Kachkanar Mining and Concentrating Combine (Kachkanarsky GOK), is especially revealing. He got into a dispute with the combine's actual owner, Iskander Makhmudov, founder of UGMK; and this threatened raw material supplies to the Nizhny Tagil Iron and Steel Works (NTMK) owned by Evrazholding (set up by Aleksandr Abramov and partners).
The process of “regrouping” iron ore assets is still going on, although it began with attempts by iron and steel corporations to finally get the industry's main companies under property control. For example, in 2002-2003, Severstal bought Karelian Pellet (Karelsky okatysh) and the Olenegorsk Mining and Concentrating Combine (OLKON). And in the past three years, Evrazholding 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)] and has started the process of acquiring the long-suffering Kachkanar combine.
Then supporters of integration (Evrazholding) and independence (SUAL) clashed over the Korshunov Mining and Concentrating Combine (Korshunovsky GOK). The confrontation was so fierce that it led to attempts to seize the company by force. In the end, however, Korshunov went to structures belonging to Mechel.
The biggest surprise of Putin's first term was the independent existence of the Metalloinvest Holding, a structure that represented the interests of Russian Credit Bank in the metallurgical industry. Metalloinvest refuted the theory that an independent iron ore business could not exist in Russia – the holding, which now controls 34% of the national market in raw materials for ferrous metallurgy (Stoilensk and Mikhailovsk mining and concentrating combines), has no plans to dispose of its assets, but on the contrary, is expanding their production.
An independent raw materials business has become the norm in other mining industry subdivisions in the past four years.
Investment History
In principle, there are very few examples of investments in the mining industry that are not connected with the investor's own production cycle. The exceptions are investments in the mining of precious metals. Polymetal Interregional Scientific and Production Association (MNPO Polimetall), for example, made a major breakthrough on this market. After several years of a well-planned expansion into deposits in the Far East, it became one of the world's largest silver producers. Polymetal owes its rise to the investments of its principal shareholder, IST Group of St. Petersburg [controls AO Baltic Shipyard (Baltiisky zavod)]. Mining industry investments are generally the business of industry-specific investors; however, a “secondary” business quite often turns into an independent one.
Thus, a project to build an aluminum smelter and alumina plant at the Srednetimanskoe bauxite deposit is gradually taking on the features of something quite independent of SUAL's business. Despite the fact that SUAL initially regarded development of the Timan bauxites as a means of providing raw materials for its aluminum plant, negotiations to attract outside partners to the project, i.e., Aluminium Pechiney, ALCOA, Russian Aluminum, and financial investors, show that SUAL is quite prepared to regard ZAO Komi Aluminum, the project's management company, as an independent business unit whose interests will not necessarily be subordinated to the interests of the principal owner.
The expansion of Moscow construction companies onto the nonmetallic mineral market followed the same plan. Crushed rock and sand production in Russia was traditionally under the control of road builders or existed as an independent business. In 2002, investments of structures like the Moscow-based PIK Group in crushed rock production in Karelia were oriented towards internal requirements. However, the crushed rock boom in Karelia fairly quickly led to the appearance of a completely independent business: total investments in the republic's granite-gneiss quarries in the last two years have exceeded $30 million. And sooner or later, projects of structures closely associated with Elena Baturina's Inteko Group [Elena Baturina is Yury Luzhkov's wife] to quarry marble in Karelia and Altai will probably claim the status of an independent business.
The appearance in the near future of an increasing number of would-be independent mining projects is probably inevitable during President Putin's second term in office. Especially since the previous model of mining industry development exclusively within vertically integrated holdings has not proved to be very effective.
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People Who Have Left the Scene
Sergey Veremeenko
Former managing director of Mezhprombank Sergey Veremeenko was present at the start of one of the coal industry's most ambitious projects – Russian Coal. Unlike Rosneft, which never joined Russian Coal, Mezhprombank and Sergey Veremeenko managed to earn nearly $10 million from the project, although it was a failure for investors. However, it is unlikely that this sum exhausted the former banker turned politician's ambitions in the mining industry.
Sergey Generalov
Sergey Generalov's resignation from the position of deputy minister of energy in Sergey Kirienko's government for a job in the coal industry was quite unexpected. Generalov's structures in Krasnoyarskugol were considered the main contenders for ownership of the company, but expansion of Baikal Coal interfered with this. Today, Industrial Investors, a company with close ties to Generalov, is involved in a number of projects in the coal industry. However, he is unlikely to quickly win back the influence he had in the sector five years ago.
Oleg Miserva
Former president of Baikal Coal Oleg Miserva quit the mining industry in February 2004, apparently only because there was nothing more for him to do there. Miserva's career Russian industry seems like a fairy tale to any manager in Russian industry. When he arrived in the coal business in 2001, the still-unformed Baikal Coal had nothing but money and intentions and Miserva himself had nothing but promises. The amount of Oleg Miserva's severance pay has not been disclosed, but no one doubts that the work he did at Baikal Coal was very, very expensive.
Viktor Ekgardt
Former general manager of Vorkutaugol Viktor Ekgardt was the last of the prominent state managers in the coal industry to leave as a result of privatization. He quit as head of the subsidiary Ayach-Aga mine to become general manager of Vorkutaugol in 1997 and left in June 2003. In the five years under Ekgardt's leadership, Vorkutaugol, which had been considered the most difficult” Russian coal company with uncertain prospects, turned into one of the industry's most attractive assets. But Ekgardt did not want to go into private business as a hired manager. He became a deputy in the parliament of the Komi Republic.
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People Who Have Arrived on the Scene
Aleksandr Abramov
The career of mining magnate has not come easily to head of Evrazholding Aleksandr Abramov – at least his work as a top executive of the metallurgical holding appears much more successful. Something is always happening with mining assets that interest Evrazholding, but Abramov's status as one of the most influential people in the mining industry is quite stable – he is directly responsible for Evrazholding's influence in the metallurgical community.
Vadim Varshavsky
Head of Russian Coal Vadim Varshavsky might well claim the prize as the most sensational new player in the coal industry. The fact that Russian Coal was forced to compete with the much more powerful Baikal Coal (in the political, financial, and management sense) and survived as an independent structure can only be explained by Varhshavsky's energy and business aggressiveness. After both Rosneft and Mezhprombank left Russian Coal, there was no other possible explanation for the company's existence. Varshavsky himself maintains that despite all the misfortunes, Russian Coal's plans for becoming one of the largest coal industry players are still in place in principle.
Viktor Vekselberg
No one knows why Viktor Vekselberg, one of Russia's most prominent businessmen, wanted to get into the mining industry. It appears that Vekselberg saw nothing more in a plan for SUAL structures to get control over the Korshunov GOK than a way to earn half-decent money. However, SUAL has a lot of experience in the mining industry – unlike Russian Aluminum, its only competitor, SUAL was always well-supplied with raw materials from its own mines. And with the start of operations at the Timan bauxite deposits, SUAL should turn into one of the mining industry's largest players.
Dmitry Gindin
Ten years ago, Dmitry Gindin, a graduate of the Moscow Institute of Steel and Alloys and president and chairman of the board of directors of Metalloinvest, probably never thought about a career as a mining manager – all his work prior to Metalloinvest and Russian Credit Bank was connected with the Sapfir Plant in Moscow. Nevertheless, under Gindin's leadership, Metalloinvest managed to keep Russia's only large iron ore production and marketing business at the level of the industry's largest company. His predecessor, Oleg Kiselev, had quit as head of Metalloinvest for politics, agribusiness, and management of AO Sixth Channel (Shestoi kanal) – an unsuccessful project by a group of Russian oligarchs to revive TV-6.
Vladimir Lisin
Vladimir Lisin, head of the Novolipetsk Iron and Steel Corporation (NLMK), won a place in the coal industry, the most important component of the mining complex, out of harsh necessity: NLMK needed control over coking coal suppliers. Lisin showed that his style was a departure from the usual “box” of the Russian mining industry. NLMK structures became the first investors in Russia to announce the start of formation of a new coal company. They will invest about $100 million in it, which is ample for admission to the mining industry.
Aleksey Mordashov
Aleksey Mordashov, the largest co-owner of Severstal and head of a group of companies united by metallurgical combine, had no choice but to get into the raw material business – the combine needed a raw material base in order to expand. With its characteristic calm, Severstal quickly showd its objective need for a place in the mining industry. It is unknown whether Severstal will expand along this line in future: so far, Aleksey Mordahsov has shown no desire to go any further in this business than required for metallurgy.
Aleksandr Nesis
Head of IST Holding Aleksandr Nesis became known in the mining industry because of the successes of Polymetal, Russia's largest silver producer. It cannot be said that these successes came easily to IST: Polymetal mines most of its precious metals in Magadan Region. The company's main competitors at the remote deposits in Kolyma (part of Magadan Region) are local enterprises with Western capital. Nevertheless, Polymetal is still expanding faster than the industry as a whole, and the company produces 60% of the silver in Russia.
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Dmitry Butrin
All the Article in Russian as of Aug. 02, 2004
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