Acquisitions power Russian progress
Metallurgy became
Russia's third largest industry volume wise in 2004. The country's steel
production increased 5% during the January-October 2004 period to reach 58.9 million tons.
Merchant bar stock
production during the same period reached 44.7 million tons, an increase of 4%.
Excluding ferroalloy and
pipe manufacturers, the consolidated income of the industry rose 63%, reaching Ruble 904.1 billion ($32.14 billion). Earnings after taxes increased 2.2 times to a total Ruble 175.2 billion. The industry's rapid growth is expected to continue, with some forecasting that the sector's profits could surpass that of the country's petroleum industry.
The explosive growth of the Russian metallurgy industry began when current president Vladimir Putin came to power in 2001.
Investments commenced in the lesser developed regions of
Russia rapidly increased
production to 59.9 million tons in 2002.
After the fall of the USSR, six independent (or semi-independent) companies have emerged as the key players in
Russia: YevrazKholding,
MMK,
Severstal,
NLMK, Steel Group of
Mechel, and Mikhailovsky GOK. These companies found the opportunity to make new
investments and undertake both vertical and horizontal integrations in the country when Viladimir Putin came to power.
Almost all of these companies have acquired carbon and
iron ore facilities, and many have established their own means of logistics. For example, in 2002-2003
Severstal bought Karelian Pellet (Karelsky Okatish) and Olenegorsk Mining and Concentrating Combine (OLKON). Servestal then established its raw materials division,
Severstal Resources.
YevrazKholding, established by Aleksandr Abramovich and partners in order to consolidate the moribund Ural steel mills of Nizhny Tagil, Kuznetsky and Zapsi, bought up a number of small mining companies (OAO Baikal Mines, Sheregesh Mining, Irbit Mine and Krasnoyarks Mining) and rehabilitated them. These mining companies now supply more than 40% of the holding company's raw materials requirements.
MLMK purchased two ports and Stoylenskiy GOK. Steel Group of
Mechel and
MMK fought for the carbon layers of Kuzbass.
While Western companies follow the trend of returning to their core-business and outsourcing their secondary needs due to high labor costs, Russian companies continue to perform inauguration ceremonies for their newer acquisitions. The reasons that vertical integration is so highly preferred are simple: First of all, the major companies have the ability to transform these minor companies that project losses in their balance sheets into highly profitable plants. This is especially true during times when the prices of raw materials are high, such as they are now. This is also an underlying reason for the success of Russian companies, as well as the Indian company Mittal. Another reason that vertical integration is highly preferred is because the prevailing distrust among the mining companies means that contracts do not provide an assurance for their parties.
The major Russian companies are also interested in forward integration.
Severstal has been the most active company among the product users, setting up the
Severstal Auto and
Severstal Trans holding companies. Furthermore, the companies continued their integration beyond the borders of
Russia.
NLMK acquired Danish Steel Works in 2002.
Mechel acquired the Romanian company COST in Tirogivste, as well as a small Croatian
pipe mill, Zeliezara Sisak.
Mechel also bought the S.C. Industria Sarmei steel mill in
Romania. As far as the global market is concerned,
NLMK and
Severstal have already become two major players.
The listing of the major Russian metallurgical companies is as follows:
No in first Sales vol. Growth
400 Ru.Co's Company in 2003 (mio.$) rate%
18 MMK 3047.00 44.40
19 Severstal 2663.30 35.40
20 NLMK 2468.00 41.20
21 YevrazKholding 2308.70 49.70
39 Mechel 836.70 37.40
88 MGOK 404.80 56.90
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