|Mittal tries to crack Russia open - again|
Despite several rebuffs this year already, and problems faced by other non-Russian putative investors into the country's steel sector, ArcelorMittal tries to set up new steel mill near Moscow.
Author: John Helmer
Posted: Friday , 21 Dec 2007
For the great Anglo-Indian families -- I mean, wealthy Indians who live in London -- it is galling to observe the contrast between the ease with which they draw passports and titles from the British government; and the difficulty they encounter arranging a cup of tea with the President of Russia.
But then it oughtn't to be so difficult for the Mittals or the Hindujas to appreciate the traditional Russian maxim -- never stand between a dog and a tree.
The Hinduja family has been less obviously engaged in currying Russian favour than the Mittals. However, following a tea-party in Bombay last year with Oleg Deripaska, the Hinduja's auto division, Ashok-Leyland, was tasked with doing due diligence on Deripaska and the bus, truck and automobile division of his Moscow holding company. Deripaska was also buying Indian Ocean beach frontage at the time. He proposed a joint venture to supply Ashok-Leyland with Russian engines and parts, and vice versa. The Hindujas then engaged a retired Indian Ambassador to Moscow to help them understand Russian business. So far, little has materialized. Compared with the Mittals, however, there have been no Russian embarrassments.
Last week, Lakshmi Mittal authorized a public relations display of his latest attempt to ingratiate himself in Russia. It is his third or fourth attempt this year, not counting the requests for a private audience at the Kremlin. All have failed.
The latest proposal is from the steel company ArcelorMittal to cash in on Russia's domestic construction and infrastructure boom, and build a new rebar and billet mill in the Tver region, near Moscow.
The logic is as clear to Mittal, as it is to the domestic steelmakers. Russia's steel consumption has been growing at one of the fastest annual rates in the world -- faster last year than India or China. But the centres of Russian steelmaking are thousands of kilometres to the east of the main consuming centres; that's where they were located by Stalin, close to the raw materials they require for smelting, and far enough away to preserve Russia's war-fighting capability out of range of Hitler's guns.
Between 1991 and 1998, former President Boris Yeltsin did more damage to the domestic steel industry than Hitler had done, destroying domestic demand, and forcing the big mills to depend for their livelihood on exports of low-grade steels at discount pricing. The European Union (EU) erected a penalty and quota wall against these imports, while insisting on unimpeded access to the Russian market for EU-made stainless and other specialty steels and pipes.
The steel boot is now, so to speak, on the other foot.
European quotas against Russian imports are of dwindling significance, because domestic steel sales are of far greater value and volume than exports. Russian pipemakers have expanded on the back of the oil and gas boom, and now have the cash to lift their metal quality, and counter-attack against the dumping prices of European or Ukrainian competition in the Russian market.
The newly obvious way to profit from the Russian steel boom is to build what is known as a mini-mill within a relatively short distance of the steel consuming centres. Unlike the vertically integrated combines in Siberia, which feed iron-ore and coke into open-hearth blast furnaces, mini-mills use electric arc furnaces, fuelled by steel scrap and, of course, electricity.
Russia happens to be one of the world's cheapest sources in the world for both scrap and electricity. They may be thought of the tree, in the Russian maxim. So why does Mittal think of himself as top-dog?
The logic for foreign steelmakers to build mini-mills in western Russia, and compete with the domestic steelmakers in Siberia, is spelled out by Igor Konovalov, whose Inprom group is one of Russia's leading steel processors and distributors. "In general, I positively assess the prospects of mini-mill construction in Russia. They are competitive in the current conditions, and they could create competition to the big-5 [domestic steelmakers], who are remotely located from the centres of metal consumption; they were originally constructed to be close to their iron-ore sources."
According to Konovalov, "the current transportation tariffs and the trend of their growth in the future lower the competitiveness of the metal produced by the big-5. So, from the strategic point of view, it would be correct to construct a mini-mill in centres of scrap generation and metal consumption. Besides, Tver is located between two capitals [Moscow and St. Petersburg], and is a very good region from the perspective of demand."
Naturally, the idea has occurred to Russian steelmakers of midsize as well, those without iron-ore or coal supplies of their own. And since there isn't an unlimited supply of scrap and electricity to go around, the question arises, both at the level of the regions, and at the Kremlin -- who should benefit?
According to the Mittal family, it should be them.
Their announcement of the Tver mill is backed by the regional government, but quietly opposed by rival steelmakers. Andrei Ivanov, spokesman for the Tver governor, Dmitry Zelenin, told Mineweb "We don't see any opposition to this project, and have the aim to start construction by the end of 2008."
Although supportive, the regional official's remarks contradict claims by ArcelorMittal's board member, Malay Mukherjee. He announced this week that construction will commence much sooner, in the second quarter of 2008. According to Ivanov, "all ecological and regional approvals should be resolved before the beginning of construction." The ArcelorMittal promise is to spend $100 million on a first phase, with an electric-arc furnace, and capacity to produce 1 million tonnes per year of crude steel, and 600,000 tonnes per year of rebar.
It is this gap between local government approvals and the plans of foreign steelmakers, which already this year has taken two foreign steelmaker casualties -- Turkish group Kurum, and more recently, Jindal of India. Both were chasing the domestic boom in rebar.
In September, Kurum's bid to build a new mill near Volgodonsk, in the Rostov region of southwestern Russia, was halted by the regional government, despite earlier agreement with the governor. Then in November, Jindal's stainless project ran into roadblocks, despite the endorsement of the Leningrad regional government.
Kurum is trying again. On November 20, a press release by the President of the Russian republic of Adygeya, Aslan Thakushinov, reported that he had met with Kurum executives, and discussed the Turkish proposal to build a mini-mill, with annual capacity of 3 million tonnes; 1.5 million tonnes of construction rebar and 1.5 million tonnes of billets. The investment was estimated at the meeting at $150 million; job creation, about 2,000. Electricity generation and gas supply for the plant would have to be built from scratch, local officials said. Thakushinov reportedly expressed "readiness to promote realisation of the large investment project and has offered processes to push through the bureaucratic procedures, with construction to start in parallel." The announcement claimed the proposed mill would reach full capacity within three years.
The Adygeya project appears to be double the size of Kurum's initial proposal to build the Rostov mini-mill. In that affair, Mineweb sources say, behind a carefully orchestrated campaign on environmental and othert grounds, there was the Estar group, a Moscow based midsized steelmaker, which opened its Rostov mini-mill earlier this year; it is already producing about 1 million tonnes of billet per annum. Other steelmills in the region include pipemaker Tagmet, and there are plans for the Maxi Group, newly sold to Vladimir Lisin's Novolipetsk Steel group, to start a mini-mill there too.
It was their competition for scrap which doomed the Turkish proposal in Rostov, steel industry sources say. In Adygeya, an industry source told Mineweb, there is far less competition for scrap, and for market demand.
"I don't think there will be any problems for Kurum in Adygeya," said Lev Chesalov of Rusmet, a national steel consultancy. "The region doesn't have any steelmaking enterprises yet. I know they [Kurum] are planning to start from continuous casting of billet. There is only one problem in Adygeya -- its difficult location. It‘s in the mountains, and it also has railroad problems, but Tuapse port [on the Black Sea] is not very far away."
Kurum has been reluctant to concede what happened in Rostov, but it has acknowledged, according to one wire service report, that "we're now looking at alternative locations. It's not been finalised yet but we are negotiating with the administration in Adygeya."
According to Konovalov of Inprom, "the more producers, the better for Inprom and other market players. You always can build a railway line with such a volume of investment. As to the general market situation, the competition on the market will become even tighter. The demand for rebar, which was filled this year by imports, was a temporary situation. The domestic construction industry will grow dynamically for the next 5, maximum 7 years. Usually, after such a growth period, you have slump. For Kurum, it will take 3 years to build their plant. After that, it will work on peak market demand for a couple of years. But when the plant will get to its planned capacity, there will be market satiation. This can cause oversupply of rebar. You should remember that there are Severstal and its mini-mill projects, Maxi with Novolipetsk investment, and Varshavsky with Estar. And so my judgement from the viewpoint of market dynamics is that there are certain risks for [Kurum] in this project."
Maxi has told Mineweb that if its plan to build mini-mills in western Russia materialize, there will not be enough scrap to fill the traditional Turkish and other orders for Russian scrap imports. If Russian scrap exports begin drying up, domestic consumers have no intention of losing their supplies to interlopers like the Turks or Indians.
A plan by the Jindal group followed Kurum, and focused on the Baltic shore near St. Petersburg. Jindal, India's largest stainless steel manufacturer, proposed to build a mini-mill, with annual capacity of 400,000- 600,000 tonnes of stainless at the Kingisepp industrial zone, near the Estonian border, 137 kilometres from St. Petersburg. Between $60 and $90 million was the estimated capital cost of the project. In the initial company announcements, Jindal said it would install a 70-tonne electric-arc furnace and continuous caster to turn out slabs of 160-mm thickness and 1,500-mm width.
If implemented, the Jindal plan would dwarf Russian production of stainless steel. Leningrad region officials initially endorsed the project. But today officials at the regional government refuse to respond to questions from Mineweb, adding to the impression that domestic lobbying against the project has been effective. "We have decided to reconsider the whole project," a Jindal spokesman has been quoted as saying in the Russian media.
ArcelorMittal has also run into strong federal government opposition to Lakshmi Mittal personally. He has been refused several bids to meet President Vladimir Putin. The Indian group was also barred from the bidding this autumn for large coal concessions in the Russian Fareast. These were won by the Mechel steel and coal group, with backing from Japanese sources.
Someone told Mittal to sweeten his bid for the coal by promising to build a steel mill in the Sakha region. He was misadvised.
Leading Russian industry expert Victor Kovshenny of Rusmet told Mineweb he is convinced that foreign steelmakers will be barred from entering domestic steel markets, in which there is already strong Russian mill competition. "I don't think any foreigners will be allowed in the territory of Alexei Mordashov [Severstal] in the Leningrad region, and even this Mittal venture in Tver region may be blocked. Russian mills are now active in the mini-mill sector, and they will not cede the initiative to foreign companies. Maxi, which is now under Novolipetsk Metallurgical Combine, wanted to do something in Tver as well."
Who is telling Lakshmi Mittal to try again in Tver?
According to a leading Indian metals trader in Moscow, "this is baffling. The man seems to have developed a complex of invincibility. Maybe he takes only his own advice. And he does not believe in defeat. He has the Indian government on his side, and they will make a hue and cry when the Russians kick him out. Other than that, Mittal's is the arrogance of any western major. None of them has been sensitive to the Russian signals."