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Ilyich Iron and Steel Works

Igor Syry on changes in the Group’s Strategy: "We intend to utilize the whole volume of captive raw materials"

4 February 2011 // Kommersant-Ukraine

In the middle of January, Metinvest adopted a new Investment Program having announced that this year the Group’s investments will increase 2.4 times, to reach $1.18 bn. Igor Syry, the Group’s CEO, has shared the highlights of the new Strategy, including what these funds will be spent on, with Oleg Gavrish, Kommersant (Ъ)’s correspondent.

– Could you, please, tell us about the changes in Metinvest’s Strategy?

–Last year we performed fundamental analysis of the market situation, and the end of November saw the initial approval of our strategic goals and priorities. It is not a secret that thanks to vertical integration our positions are strong in the segment of raw materials. Although steel prospects for the nearest future seem not too bright, which was also confirmed by the World Economic Forum 2011 that took place in Davos, Switzerland, lack of investments will simply put the sector on its knees. Therefore we revised our priorities and amended the Group’s Strategy till 2020.

– What exactly does your strategy envisage?

– Our strategy is based on vertical integration and improving steel production efficiency. Our long-term goal is to strengthen vertical integration to process in-house as much of available raw materials into steel as possible using most efficient methods. In order to achieve this, during the next 5 years we are willing to invest around $6 bn.

We will also strengthen our footprint in our strategic markets – in Ukraine and the CIS, EU, the Middle East and Northern Africa. Our presence will grow by means of product portfolio diversification, reduction of the semi-finished products share down to 10% in favor of such products as hot and cold rolled coils, coated coils and heavy sections, as well as through clear customer segmentation and development of long-term mutually beneficial relationships with the key accounts.

– Since steel-making is much less profitable today than iron ore mining, why would Metinvest not focus on raw materials business?

– Figuratively speaking, steel makers are currently caught between a rock and a hard place. On the one hand, there are highly consolidated resource companies: the Big Three control 70% of the world iron ore market. On the other hand, there are customers with strong bargaining power. Therefore, steelmakers’ margins are under downward pressure. However, from the viewpoint of consumer properties steel is a basic product and so far no real alternative to it has been invented. Steel will be in demand in all sectors. But with current profit margins, efficient development of the steel industry is challenging.

In my opinion, consolidation processes in the steel sector will accelerate, and, against the background of increasing supply of raw materials, this will help to restore the normal margin distribution in the value chain. Accordingly, for a steelmaker it is of strategic importance to build the conditions for sustainable development. For Metinvest such condition is vertical integration. In the long-run, our goal is to reach 25 mtpa of steel. This will take us to around the fifth place in the world.

– This figure is based on…?

– In the future, we intend to utilize the entire volume of captive raw materials ourselves. We will expand our steel-making capacities both by М&А, and by pursuing organic growth. Today Metinvest produces around 35 mtpa of iron ore materials, and we do not plan any serious changes in the ore business because our asset configuration is optimal. There is potential for volume expansion, however, at his stage this is irrelevant. We are focusing our efforts and investments on improving quality of our raw materials. We are finalizing our technological strategy, including the configuration of blast furnaces and requirements for incoming raw materials, as well as working on improving quality of our steel products..

– What kind of technologies are you talking about?

– First of all we are planning to introduce the Pulverized Coal Injection (PCI) technology. Our high-grade coking coal needs will increase to 13 mt., coke – to 8 mt. The share of high-quality coking coal in our blast furnace charge will need to increase, while, unfortunately, there is a lack of such coals in Ukraine. Additional volumes can be imported, and naturally, we will be sourcing them from United Coal (UCC), our own coal mining company in the USA. We have approved capacity expansion projects at Affinity and Roaring Creek mines, and we are planning to increase the supplies. In order to produce good coke, at least 80% of high-quality coking coal is required, with 20% being charged from domestically available coals. This will enable us to reduce coke consumption considerably.

– Ukrainian steel has historically been low-cost. How long domestic enterprises will be able to retain this advantage?

– We are in the first quartile of the Global Cost Curve, and we think that in the long-term it will be profitable to produce crude steel in Ukraine. In order to retain this position, the sector requires radical changes, including elimination of all inefficient technologies. Ukrainian metals and mining, and we are not an exception, lags behind the leading regional companies by 25% on average in terms of energy efficiency and labor productivity, and the top manufacturers are virtually two times ahead of us.

– Are you talking about investments in energy efficiency? What return, in principle, is achievable?

– Preliminary estimates show that the positive effect from the planned energy efficiency projects will amount to around $1 bn per annum. This estimate is conservative.

– What distribution of own and external financing is foreseen in the Strategy?

– Even in view of a very conservative price forecast, we are planning to finance all investments with our own cash. Of course, there is still potential for dividends. It is possible that we will be raising sporadic external financing in order to optimize the loan portfolio, but, most likely, we will continue adhering to a conservative approach to raising funds and keep the existing leverage. At the same time, we are finalizing our Financing Strategy, and we do not exclude the opportunity of IPO in the future.

– Please comment on the domestic market potential for the next 10 years.

– If we look at steel consumption per capita, we can see the opportunity for twofold growth. There is potential for development in individual segments. Most likely modern construction technologies will become standard in Ukraine, placing stricter requirements on quality of the products and strength properties. This will happen sooner or later, which will increase the market capacity considerably. For example, there is a very interesting product – coated coil. The volumes are not too big, and the segment is narrow, but promising.

– Does Metinvest’s Strategy envisage M&A or Greenfield projects?

– We consider all steel capacity expansion opportunities, including by pursuing a Greenfield project. We are planning to continue implementing penetration strategy for our target markets with expansion of our rolling capacities. It is possible either to acquire or construct rolling capacities in those markets, especially, should we face tariff or legal restrictions on finished product imports from Ukraine.

– Could you please tell us about the global trends in steelmaking? What do steelmakers expect in the following years?

– According to the analysts, world demand for steel will increase by 5-6% per annum on average on the back of emerging economies growth fuelled by industrialization and urbanization processes. Average steel-making capacity utilization in the world is still at a low level, however, it will gradually rise to reach 80% in the mid-term. Steel prices are likely to be determined mainly by the level of production costs due to high raw material prices, including iron ore and coking coal. However, tightness in the raw material markets is expected to abate and prices are forecast to drop due to increased supply, which, probably, will diminish the effect of cost in market pricing for steel in favor of supply and demand factors.

It is quite obvious that in the next few years steelmakers will encounter increased price volatility due to short-term pricing development in the iron ore and coal markets, which will push them towards adopting similar short-term pricing methods with their customers. This process will be accompanied by active development of financial instruments to hedge against price risks, I believe. The margin in the steel-making value chain will likely remain in raw materials for several more years, but in the mid-term we anticipate gradual redistribution of the margin towards steelmakers due to both rising supply from the new raw material projects and falling raw material prices and increasing world steelmaking capacity utilization.