Magnitogorsk Iron and Steel Works

Industry overview

The Russian metallurgy industry is considered to be relatively strong, with companies such as Evraz continuing to be profitable despite the harsh economic environment.

This industry is highly cyclical, receptive to general economic conditions and reliant on the condition of a number of other industries, including the automotive, appliance, construction and energy industries. As these industries have experienced a downturn so too has ferrous metallurg, thus negatively impacting the industry.

The price increases are being driven by rapidly rising input costs for iron ore, typically 100%, and coking coal, typically 70%, due to heavy demand for steel in China and India. Mining giants supplying the steel industry with necessary raw materials, iron ore and coking coal, have very strong bargaining power.

Thus, backwards integration is a much forayed strategy by metallurgical companies. Currently, many leading companies are looking to pursue mine investments as rising costs for metallurgy products ingredients squeeze margins.

Some of the major consumption sectors like automobiles, oil & gas, shipping, consumer durables and power generation enjoy high buyer bargaining power and get favorable deals. However, small and retail consumers who are scattered and consume a significant part do not enjoy these benefits. Metallurgy has very low barriers in terms of product differentiation as it does not fall into the luxury or specialty goods and thus does not have any substantial price difference.

Entering the the industry requires significant capital outlay which tends to discourage newcomers with insufficient capital. High fixed costs ensure a certain degree of rivalry, as companies are subsequently committed to a certain scale of operation in order to remain profitable. Substitutes exist in the form of aluminum, plastics and composites pose a threat, particularly in automotive manufacture, but the use of substitute materials may be inferior in buyer industries. Finally, as the market is cyclical and highly affected by macroeconomic conditions, rivalry tends to increase, particularly in a declining market that is hard to exit.[1]

Now let’s consider the internationalization patterns of the major player of ferrous metallurgy and see what similarities their strategies, target markets and entry modes they may have.

EVRAZ Group

EVRAZ public limited company is a large vertically-integrated steel, mining and vanadium business with operations in Russian Federation, Ukraine, Europe, USA, Canada and South Africa. EVRAZ is among the top 20 largest steel producers in the world with 16.8 million tons of crude in 2011. EVRAZ is largely self-sufficient in respect of its iron ore and coking coal requirements with the majority of its internal consumption covered by its mining operations.

EVRAZ’s manufacturing facilities produce a wide range of products with a major focus on infrastructure related products.

EVRAZ accounts for 90% of rail sales in Russia and ranks second in the country’s rail wheel market. In the USA EVRAZ is the No 1 producer of rails, one of the largest producers of plate being the largest producer of armor plate and is acknowledged as the No 1 North American producer of tubular products, particularly in respect of large diameter pipes. Also EVRAZ is a prominent player in the European plate market.

The company is an important player in the world vanadium market[2].

Ownership structure[3].

Severstal

OAO Severstal is a fully vertically integrated steel and steel-related mining company with assets in Russia, the USA, Ukraine, Latvia, Italy, and Liberia as well as investments in Brazil. Since becoming a private company in 1993, Severstal has been actively growing and expanding globally. The company’s strategic priorities include increasing its presence in Russia and on other high growth emerging markets and developing products with high added value.

Severstal comprises three business divisions: Severstal Resources (mainly mining – Russia, Brazil and Liberia), Severstal Russian Steel (steel production in Russia, metal ware products: Russia & Italy, scrap processing - Russia) and Severstal International (steel production in North America). Their full-production-cycle operations include iron ore, coal and steel enterprises, downstream production, distribution, scrap collection and other operations. All in all, Severstal holds assets and operates on four continents: Eurasia, North and South America and Africa. [6]

At the year 2011, Severstal’s sales had the following division by domestic and foreign sales[7]:

Principal export products were pellets and coking coal concentrate. The main shipping destinations were Europe, China and the CIS (Ukraine). International expansion of Severstal is achieved through the acquisition and development of new greenfield and brownfield projects and organic growth by leveraging the company’s vertically integrated structure. Its internationalization started in 2003 with the acquisition of an integrated steel-making production facility in the U.S.A. (Michigan). The company followed aggressive international strategies by acquiring underperforming steel producers or the stakes for resources’ deposits ion different continents. Such internationalization strategy was very different from other Russian EMNEs. Who preferred to gradually enter new markets, usually such as CIS countries. Its FDI strategy via acquisitions has significantly increased Severstal’s competitiveness due to its access to some large steel markets, such as the US and EU.[8]

One of most recent Severstal’s international expansion modes:

· 61.5% subsidiary Severstal Liberia Iron Ore Ltd – Putu Range iron ore deposit; 2008

· 25% stake acquisition SPG Minerasao (Amapa, Brazil) – iron ore exploration licenses; May 2011,

· A 33% stake in Iron Mineral Beneficiation Services (Proprietary) Ltd (IMBS) (South Africa), developer of the Finesmelt technology, and a 51% stake in International Iron Beneficiation Group Ltd (IIBG),owner of exclusive rights to global commercialization of technology that converts waste fines into iron feedstock for steelmaking; 2011.[9]

· 50/50 Joint venture with the Indian company NMDC. Severstal built 3mn tons a year steel mill the Indian state of Karnataka. The JV will produces steel for the car manufacturing and electrical engineering industries. October 2011.[10]

All new deposits and production facilities are located in emerging markets with high growth potential – Russia, Brazil, Liberia and India – and are aligned with Severstal’s strategic goals. Developing a global raw materials base, securing access to new high potential markets and ensuring its leading cost efficiency position are all encompassed in the Severstal expansion strategy.

Ownership structure.[11]Since 1993 Severstal has been a fully private company. 21% of its stake belongs to the free market, the rest indirectly (through offshore company on Cyprus) is owned by Alexey Mordashov. [12]

Mechel

Mechel OAO, founded in 2003, is one of leading global coal and steel producers. Mechel’s fully integrated business consists of four segments: mining, steel, ferroalloys and power. The company has production facilities in 13 of Russia’s regions, as well as the United States, Kazakhstan, Romania, Lithuania, Bulgaria, United Kingdom and Ukraine.

Mechel is comprised of over 30 production enterprises, producing coal, iron ore concentrate, steel, rolled products, steel downstream products, ferroalloys, heat and electric power. All of the group’s enterprises work within a single production chain — from raw materials to high value-added products. The holding also owns three trade ports, a transport operator and international sales and service networks. Mechel’s products are sold in Russia and abroad. The company has about 93,000 personnel.[13]

Mechel is one of the world’s top seven metallurgical coal producers (excluding Chinese producers), Russia’s top coking coal concentrate producer. The company controls over a quarter of Russia’s total coking coal washing facilities. Mechel is Russia’s second long steel manufacturer as well as the largest and the most diversified producer of specialty steels and alloys in the country. In 2008 their market share was about 22%.

Mechel is the first and still the only coal mining and metals company in the region of Eastern and Central Europe and Russia having its shares placed on the New York Stock Exchange. Starting in May 2010, Mechel’s preferred shares are also traded on the New York Stock Exchange.

Financial results of 2011 set Mechel’s net revenue at some 12.5 billion dollars, with net income at 728 million and EBITDA at some 2.4 billion dollars (in accordance with US GAAP).

Ownership structure. Mechel is a joint stock company with the following major stakeholders: Igor Zyuzin, CEO – 71.62%, Vladimir Iorich, chairman of board’s directors – 23%[14].

Table #3. Internationalization of Mechel

NLMK

NLMK is a leading international steel company strategically designed around a vertically integrated business model. Its production facilities are concentrated in the Central District of Russia. In addition, NLMK’s rolling mill assets are located in close proximity to its consumers in Russia, the USA and the EU. NLMK produces a wide range of steel products.[15] In particular, NLMK produces pig iron, semi-finished products (slabs and billets), hot-rolled and cold-rolled steel, galvanized steel and pre-painted steel, electrical steel, as well as long products and metalware.[16]

NLMK has three core divisions: NLMK Russia (three business units: flat & long steel, raw materials), NLMK Europe and NLMK USA. Each division includes assets in the corresponding geographical regions of the company’s presence.

NLMK was created in 1931 as a state-owned company. In 1992 it was transformed into an open joint stock enterprise and then in 1993 began the process of privatization by distributing company shares to its employees. Its internationalization started in 2002 with an acquisition of DanSteel, a Danish steel rolling company. The acquired company uses NLMK’s resources to provide North-European region with steel products.[17] NLMK’s international expansion continued in 2009, when together with Duferco Group (Italian metallurgical company) it created a joint venture which had included 6 companies and a network of metal service centers both in Europe and the US - Steel Invest and Finance. With this step NLMK moved closer to its customers, as well as balanced its product portfolio. And since Duferco paid its stake in the new JV by control shares of its owned companies (in Belgium, France, Italy, Czech Republic etc.), NLMK got control over them as well.[18] To attain further product and geographic diversification, NLMK/Duferco JV acquires Sharon Coating, an American galvanized steel manufacturer. In 2011 NLMK would buy out Duferco’s stake in the JV.

In 2008 NLMK acquires Beta Steel (later it became NLMK Indiana), a US-based steel manufacturer. By this step NLMK began to diversify its product portfolio in the US market. In the same year, NLMK bought several non-core businesses (international trading companies) in Cyprus and Switzerland. This step showed that NLMK was ready to become a truly global company. It increased the access to core export markets and the establishment of better control over its export operations. One of the last purchases of NLMK was an electrical steel service centre in India, which were to enhance NLMK’s position in the Indian market.[19]

With such extensive geographical expansion, the distribution of domestic and foreign sales of NLMK[20] is the following: the majority of company’s sales accounts for foreign operations, e.g. foreign sales.

Ownership structure. As mentioned above, NLMK is a completely private company, although it’s controlled mostly by one person. Nominally, 85,51 % of all shares belongs to V. Lisin through his offshore company Fletcher group Holdings Limited on Cyprus. Other 3,2% is owned by managers and BOD, and 11,29% is floating on London Stock exchange.[21] Thus we can’t say there was a specific government participation in this business in the last two decades when NLMK was excessively expanding its international operations.

Table #4. Internationalization of NLMK

METALLOINVEST

METALLOINVEST is a leading global iron ore and HBI (hot briquetted iron) producer and supplier and one of the regional steel producers. It extracts and exploits iron ore from the second largest measured iron ore reserve base in the world with approximately 14.9 billion tons of proven and probable reserves on a JORC equivalent basis and about 150 years of reserve life.

METALLOINVEST is a global player in the production of beneficiated iron ore products, processing the majority of its primary iron ore concentrate production into value-added products, such as high-grade iron ore concentrate, iron ore pellets and HBI/DRI.

METALLOINVEST main production facilities at LGOK, MGOK and OEMK are well-positioned in the European part of Russia with ready access to an established infrastructure network and key domestic, regional and international markets, including Russia, CIS, Eastern Europe, the Middle East and Asia. Ural Steel is located in the Ural region of Russia in close proximity to Russian pipe producers.

In 2011, according to Rudprom, the Company accounted for the output of 39% of iron ore concentrate and sintering ore, 58% of iron ore pellets and 100% of HBI/DRI in Russia. The Company is also a leading regional and domestic producer of niche steel products. In 2011, the Company accounted for approximately 8% of crude steel and steel products produced in Russia.

METALLOINVEST comprises of leading iron ore production facilities in Russia – Lebedinsky GOK and Mikhailovsky GOK; steel mills – Oskol Elektrometallurgical Plant and Ural Steel; a ferrous scrap enterprise – Ural Scrap Company; and a rolling steel mill in the UAE. METALLOINVEST also supplies raw materials to production facilities, provides maintenance services, and has sales, logistics and leasing facilities.

METALLOIVEST traditionally maintains the highest degree of social responsibility. Being the cities’ major employers and taxpayers, the enterprises of the Company play the crucial role for the regions’ economic prosperity. One of METALLOINVEST’s basic operating principles is integrity that will allow the development of a sustainable social environment in the country, in the region and at the enterprise. On the other hand, the expansion of social programs is impossible without concurrently increasing profits but without decreasing productivity. Therefore, METALLOINVEST is steadily working at improving its operating and financial results, as well as actively developing its infrastructure and participating in the solution of social issues in the regions where the company is present[22].

Ownership structure.USM Steel & Mining (Alisher Usmanov) – 20%, Seropaem Holdings (Vladimir Skoch) - 30% and VTB - 20%[23].

Table #5. Internationalization of Metalloinvest

Magnitogorsk Iron and Steel Works

Magnitogorsk Iron and Steel Works ranks among the world's largest steel producers and as well as one of the leaders in Russian steel sector. MMK is a fully vertically integrated company that encompasses the entire production chain, from preparation of iron ore to downstream processing of rolled steel.[24] OJSC MMK runs its operations in the Russian Federation (Magnitogorsk, Belovo, Bakal, St. Petersburg and Moscow) and the Republic of Turkey (Istanbul, Iskenderun). The company’s key suppliers are located in Russia and Kazakhstan. MMK sells its products to 70 countries worldwide. The key shipment destinations include CIS, the Middle East, Europe, and Asia.[25]

In 2007 MMK started to internationalize: it set up a 50/50 joint venture with Atakas, Turkey, for the construction of a steel making complex in Turkey (MMK Metalurji).[26] Turkey was chosen because of its favorable geographic position (growing markets of Turkey and other Middle East countries), good logistics opportunities (own sea port and plant’s compact size), state-of-the-art equipment available. The construction of the Turkey steel project started in March 2008. The complex, with an annual capacity of 2.3 million tons of flat steel products, is located on two sites: Iskenderun and Istanbul. Investments in the project totaled approx. USD 2.4 billion.[27] At the present moment the complex operates under its full capacity and sells steel products to Middle-East countries. In 2011, MMK bought out the stake of its partner in the JV and became the sole owner of these production facilities.[28]

On the charts below you can observe in exports volume share in the total sales of MMK in 2011[29], along with the distribution of MMK’s exports across the regions in the world[30].

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Demand from the Middle East was a major source of export growth in 2011. Shipments increased by 44 %, and as a share of MMK’s total exports the region increased from 48 % to 64 %. Key countries for MMK in the region are Iran (47 % of total export volumes) and Turkey (11 %).[31]

Ownership structure. MMK is an open joint stock comapy. Actual control (over 78% of MMK in 2012) of the company for the year 2011 belonged to Viktor Rashnikov[32], owner of the Cyprus companies Mintha Holding Limited (37,1% shares of MMK) and Fulnek Enterprises Ltd (41%). The rest is owned by some other Cyprus company Mordoraco Holdings Limited and to the stock market (stocks & GDRs).[33]

Table #6. Internationalization of MMK

TMK Group

OAO TMK (TMK) is Russia’s largest manufacturer and exporter of steel pipes and ranks among the global top three pipe producers. TMK was founded in 2001 and has production plants in Russia, the United States, Romania and Kazakhstan. TMK includes the Volzhsky, Seversky, Sinarsky, and Taganrog plants in Russia and TMK-Artrom and TMK-Resita in Romania. TMK IPSCO, the Company’s US division, includes eleven assets in the Eastern and Central United States. Kazakhstan-based TMK-Kaztrubprom specialises in finishing and threading operations.[34]

In 2008, TMK consolidated Orsky Machine Building Plant, Truboplast, TMK Central Pipe Yard and TMK Pipe Maintenance Department into a specialised division - TMK Oilfield Services

In 2008, TMK sold over 3.2 million tonnes of pipe products. Total consolidated net sales in 2008 grew to U.S. $5.69 billion, and EBITDA stood at U.S. $1.01 billion, compared to U.S. $4.18 billion and U.S. $908 million, respectively in 2007.

In 2009, TMK became the world’s leading supplier of steel pipe products as sales volumes surpassed 3 million tonnes.[35]

The return in demand observed in 2010 highlighted TMK’s success in North American unconventional drilling activity and its strategic investments in longitudinal large-diameter pipe production in Russia as large pipeline projects were given the go-ahead.

Following a difficult 2009, the company had a solid performance in 2010, with sales of 4.0 million tonnes of pipe products, U.S. $5.58 billion in revenues and U.S. $942 million in EBITDA.

Through the consolidation of its production assets, TMK has created an up-to date technological complex based on advanced scientific research, manufacturing high-quality competitive products. Its unique production and service capabilities allow it to meet the orders and demands of a wide range of customers and provide effective solutions to their operational and production needs.

On the following chart there is sales value distribution by different markets:[36]

Ownership structure:TMK Steel Ltd. – 69.68%, subsidiaries of OAO TMK – 0.01%, TMK Bonds S.A. – 7.63%, 22.68% - free float[37].

Table #7. Internationalization of TMK group

OMK

United Metallurgical Company (OMK) is one of Russia’s largest producers of pipes, railway wheels and other steel products for energy, transport and industrial companies. It was established in 1992 as a privately held company.

OMK unites six large metallurgical enterprises: Vyksa Steel Works (Nizhny Novgorod region), Almetyevsk Pipe Plant (Tatarstan), Trubodetal Plant (Chelyabinsk region), the Casting and Rolling Complex (Nizhny Novgorod region), Blagoveshchensk Valve Plant (Bashkortostan) and OMK Tube plant (Texas, USA).

The key buyers of OMK’s products are major Russian and foreign companies: Gazprom, Russian Railways, Lukoil, AK Transneft, Surgutneftegas, Rosneft, TNK-BP, ExxonMobil, Royal Dutch/Shell, General Electric and Samsung. OMK’s products are delivered to 30 countries worldwide.[38]

Since the company is a private entity, the data on its foreign operations details are not publicly available. But there was quite a buzz around OMK and the US market. Let’s discuss it further. OMK has been supplying casing and line pipes to the US market since 2003 through its local office located in Houston. In 2011, the company acquired Tubular Solutions, Inc., a processing and finishing facility of OCTG pipe, which has been operating on the market since 2006. Having domestic tubing and casing production facilities allowed OMK to expand its presence in North America.[39]

In 2013 OMK announced the opening of a new pipe-producing plant in the US (OMK Tube), in Houston as well. The new pipe plant is located in the neighborhood of a pipe processing facilities (acquired before Tubular Solutions), what enables the cutting of transport expenses and prompt execution of orders. Having launched the plant, OMK is able now to satisfy demand of its US clients in full due to a common production chain from delivery of steel, pipe production (OMK Tube), their finishing and processing (Tubular Solutions) to sales to end customers through its own distribution networks (Vyksa-OMK trading company).

The largest oil and gas deposits are located in Texas, and almost half of all US refineries are concentrated around Houston. All this makes Texas an important consumer of oil and gas pipes. In the future, growth of demand in OCTG pipes is expected in the US due to shale development. This creates new and large-scale opportunities for OMK development in North America.[40]

Ownership structure. OMK is totally controlled by its BoD Chairman A. Sedyh and his partners.

Table #8. Internationalization of OMK

Magnezit Group

Magnezit Group's production facilities are located in Russia, Germany, Slovakia and China. Due to the wide geographical coverage, the Group can provide all necessary refractory products to the regions with an intense development of the end-use industries.

Magnezit Group offers the whole range of shaped and unshaped refractory and thermo-insulating materials for various thermal devices. The total production capacity of the Group exceeds 1,5 mln. tons per year of high-quality refractory products. Commitment to quality management systems in accordance with the ISO 9001:2000 standard ensures continual improvement of our products, processes and customer satisfaction.

Magnezit Group provides a complete cycle of production and sale of refractory materials from mining of raw materials up to furnishing of engineering and maintaining services. Constant study of the needs of customers, expanding product line, implementing new technologies allow the company to develop stably[41].

Sales by market:

Ownership structure: Magnezit is controlled by Sergei Korostelev and Vladimir Dunaev, holding equal stakes of 37.15% each[42].

Table #9. Internationalization of Magnezit

Koks Group

It’s a vertically integrated business in the metallurgical supply and production chain focusing on pig iron and coke production, including coking coal and iron ore extraction and processing. It was established in 2002 as private company. In 2009-2011 the Group was the largest exporter of merchant pig iron in the world (16% of the world export in 2011)[43], as well as the largest supplier of merchant coke and the largest exporter of coke in Russia. It has three operational divisions: the coal and coke division, the iron ore and pig iron division, and the powder metallurgy division. Koks Group’s key production facilities are located in Kemerovo, Belgorod and Tula regions of Russian Federation.[44]

Pig iron and coke are supplied to the international market through the Group’s own distribution company based in Switzerland. The company is specialized in trade finance and the provision of various services to the Group’s international customer base. Powder metallurgy products are supplied to the international market through its own distribution company, Polema (Switzerland) Ltd.[45]

In 2006 Koks acquired 61% controlling stake of Slovenian Steel Group, but it was sold in 2009. There’s no clear explanation of why it was sold, but we have found out that the stake was bought because of favorable conditions given by both Russian and Slovenian governments for this deal.[46]

The chart below shows the sales pattern of the Koks group in 2011.[47]

Koks group considers its revenue to be well-balanced between domestic and export sales. With its flexible sales policy and involvement in the market making process they are able to take advantage of all market opportunities and gain maximum benefits of the current moment.

Ownership structure.Koks group is a privately held company, it 100% belongs to Boris Zubitsky and two his sons – Evgeny and Andrey. The company tried to conduct IPO on London stock exchange twice but it failed because of unfavorable economic conditions.[48]

Table #10. Internationalization of KOKS Group

Further we are going to provide several examples of Russian ferrous metallurgy companies who have not started internationalization yet.

ChelPipe

It produces welded and seamless steel pipe products for use in the oil and gas industry and a variety of other industries at two main production facilities in the Ural region of Russia. The first, the Chelyabinsk Pipe-Rolling Plant is located in Chelyabinsk. The second, the Pervouralsky Novotrubny Plant is located in Pervouralsk (near Yekaterinburg). ChelPipe’s predecessor was a state-owned enterprise established in 1942 using the equipment and facilities evacuated from the former Mariupol Pipe Plant and relocated to Chelyabinsk[49].

Date: 2015-12-24; view: 2193