Russian steel producers have faced challenges this year that have seriously hit the industry - weakening domestic demand, strengthening of the ruble exchange rate, logistical and trade restrictions. Evgeny Chernyakov, the company's Deputy General Director for Sales and Operations, told Interfax how Severstal adapts to changes and tries to minimize operational losses.
- The company significantly increased sales in the third quarter due to demand from the construction and energy sector. Will these two industries also provide support in the current quarter?- This trend continues in the fourth quarter.
We continue to observe fairly steady demand from infrastructure projects and, if we look at it comprehensively, we see steady domestic demand in the medium and, possibly, in the long term.
- When you talk about infrastructure, what kind of projects are we talking about?- In the context of Severstal, infrastructure projects are construction projects, starting from roads and road infrastructure, energy and port infrastructure.
For example, when a pipeline is being built, related infrastructure facilities are being erected around it, so today we no longer single out pipes as a sector, but look at them as part of a general infrastructure construction.
There are a number of state projects, projects of natural monopolies that have already been announced, for which there is funding. And we are counting on them a lot - not only Severstal, but our entire industry. For example, Gazprom projects both on the development of a network of main gas pipelines and on gas processing. We are waiting for new large purchases from their side.
- Besides Gazprom, who else will support the demand for Severstal products from the oil and gas sector?- In my opinion, our natural monopolies have learned to effectively manage purchases by removing most intermediaries.
In addition, they began to buy "in the low phase of the market." Today, prices in Russia for basic raw materials and steel are at a minimum, companies are very successfully purchased by large tenders at current prices. It should be noted the effective management of natural monopolies in this part.
If we talk about the consumers of our products, then, for example, we are starting the production of large-diameter pipes at the Izhora Pipe Plant for Transneft.
Today, we have about two dozen projects on the radar in total. At the same time, we are ready to assume the role of a comprehensive, integrating supplier.
- What does it mean? Do you also undertake installation and maintenance?- First of all, we are talking about ensuring the customer's needs in the entire metal-containing nomenclature.
At the same time, we are also interested in projects where, in addition to the nomenclature produced by Severstal, it is necessary to supply other metal products. It is in such complex projects that, due to our operational efficiency, project management competencies and a reliable partner network, we are ready to provide the most effective, convenient and reliable solution. Such solutions bring maximum effect to the customer when our team connects at the early stages of the project and offers various options for technical and service optimization solutions.
- Have you already been able to understand whether the company will have to revise its grocery basket in the new realities? Despite the fact that steel production capacities in the Russian market exceed domestic demand, do you see promising industries that are not yet completely closed by Russian metal?- In a number of areas of products, we even see that there may be a shortage.
But this is provided that all the expected projects will be implemented taking into account the announced plans.
- What kind of products are we talking about?- We assume that on the horizon of 2023-2026 there will be a shortage of capacity at metal construction plants.
There is a shortage of high-quality heavy metal structures for large infrastructure projects. We see good demand in the market.
There are many metal structures factories in Russia, but those that are able to meet the requirements of large oil and gas companies can be counted on the fingers of one hand.
- Will Severstal have to "rewire" its production facilities to meet this demand, or maybe diversify production through the acquisition of new assets?- We are evaluating various possibilities.
We have a metalwork plant in Orel, and we see that its capacity is no longer enough. In this regard, we are actively developing a partner network, as well as considering other options for stitching bottlenecks.
- How much of Severstal's sales will be in this sector?- According to our preliminary estimates, about 1 million tons.
- Is the strong drawdown in demand from mechanical engineering in the last quarter due to a sharp drop in consumption by the automotive industry?- The passenger car industry and car building are the two segments that have sunk the most.
But here you need to understand that against the background of the departure of international companies, there will clearly be a different configuration on the market, since demand in most industries has remained. We rely on the demand for complex solutions, including motor, connecting parts and so on.
- Will diversification be needed? Do you already understand which one?- While evaluating the possibilities in this direction.
- Severstal, in addition to rolling for the automotive industry, also produced stamping, mainly for the international automotive industry. After all the foreign companies have left, are you betting on the domestic automotive industry or will the stamping for the automotive industry also have to be repurposed?- Yes, we continue to count on our automotive industry, although we had a small share of shipments in the sales basket.
Of course, this market has sunk. We are now closely monitoring how it is changing: there is a change of owners, Chinese manufacturers are starting to enter. Obviously, we can expect it to recover in the medium term.
- In 2021, according to the company's annual report, construction accounted for 60% of the shipped products in Severstal's sales basket, mechanical engineering and the automotive industry - 13%, energy - 5%. Can you outline an approximate breakdown in 2022?- This year, mechanical engineering will significantly decline, which is due to the fall of the market.
As for energy, as I have already said, we have begun to think differently, that is, we are not just looking at pipelines, but at the whole complex, taking into account the infrastructure. Therefore, it is difficult to talk about comparable figures. But this year, I think the share of the energy sector will increase. Construction is falling somewhat overall, but at the same time our share has grown markedly. To summarize: the share of the construction sector and energy will increase, and mechanical engineering will fall. The ratio will be approximately 70-15-5%.
- Last quarter, according to operating statements, Severstal increased the shipment of semi-finished products. Do you already understand when you will be able to return to the pre-crisis sales format, when a significant part will fall on products with high added value?- The main blow that destroyed our sales structure was due to the loss of Europe as a key sales market.
It occupied a fairly large share with us, over 30% by the end of 2021. Severstal supplied galvanizing and thick sheet to the European market. I can only guess now, but it will probably take us three to five years to restore the share of exports of high-value-added products.
Now we have a continuous hot-dip galvanizing unit on idle, I hope that we will return it to operation next year. Capacities for the production of pipe products are underutilized. This year, after a sharp drop, we restored the output of cold-rolled products: it seriously sank in the second quarter, but we restored it at the expense of the construction industry. I am talking about restoring capacity to meet demand in the domestic market under the basic development scenario.
- What now with the direction of renewable energy, which until recently seemed so promising? Severstal was the largest supplier of metal for the Russian wind power industry, how is the situation now? Has the shipment of metal dropped significantly for this industry and can we talk about its imminent recovery?- The situation in the renewable energy segment this year is very difficult.
The withdrawal from the Russian Federation of major European manufacturers of wind power equipment (Vestas, Siemens Gamesa), who participated in the localization of equipment and the construction of wind farms, actually paralyzed half of the market.
The ongoing restructuring of the assets of energy generating companies also had a strong impact on the market. Sanctions, logistical problems and high volatility of financial instruments had a strong negative effect. All these factors have led to the suspension or freezing of many projects.
But there are also positive trends. One of the main ones is the commitment of the Government of the Russian Federation to plans to support renewable energy. This year, the total installed capacity of renewable generation in Russia has reached 6 GW, which is approximately 2.2% of the total capacity of all power plants in the country, there is a plan to introduce new capacities at least until 2035.
It also gives hope that despite serious challenges, limited market size and competition, investors are interested in developing renewable energy in our country. We cannot ignore technological progress and global trends in energy consumption. I think that next year the renewable energy market in the Russian Federation will stabilize, new technological solutions will appear - and we will continue to develop an already "independent" renewable energy.
- Are projects in the Arctic promising for Severstal and metallurgists in general?- yes.
For example, we had several deliveries of LDPE to NOVATEK for the construction of Arctic LNG 2. We also shipped a wide range of products for this project: fittings, hardware, the most complex unique equipment, replacing imported analogues.
Another interesting project from the point of view of implementation and significance is the supply of shipboard and bimetallic sheet for the construction of the icebreaker "Russia".
Severstal has become the main supplier of rolled metal for the construction of an ice-resistant platform designed for gas production at the Kamennomysskoye-More field in the waters of the Gulf of Ob. Structures made of cold-resistant steel grades will be operated in extreme conditions of the Far North at temperatures up to -60 ° C.
Such projects are promising and especially important, since Severstal fulfills a unique order, clearly tailored to the specific requirements of the client, and thanks to this improves its technical competencies, develops new schemes of working with consumers.
- You recently sold the Neva-Metal stevedoring company due to "changes in the company's logistics flows." How seriously has logistics changed after leaving Europe?- In our sales structure, over 30% accounted for exports, about 90% of which were shipped through Neva-Metal.
Today, our share of the export direction has fallen by a third, even more. Therefore, it became logical to get out of this business - the Baltic direction is not interesting for Severstal in the current realities. For us, it is most relevant to enter other areas, for example, we expect to increase shipments to the CIS countries.
- What is now with logistics in general, has it been possible to reduce costs, because of all the steel producers, Severstal is at the most disadvantage in terms of logistics leverage, if we are talking about shipping to the Asia-Pacific countries?- Against the background of all the perturbations, the lack of insurance, all international logistics companies have left Russian ports, rates and transshipment have increased dramatically.
This hit us hard against the backdrop of falling prices on world markets. It's better now, freight rates are more or less, and the flows have gone.
Of course, we have to look for new markets, and this lengthens the logistical shoulders. Previously, there were no such problems, since we sent our metal to Europe via St. Petersburg. Then, let's face it, we were not so much dependent on Russian Railways.
Now we are reorienting supplies to the south and the Far East, we have shipped products to the most remote region for us - Sakhalin. Of course, it is interesting and important for us to increase the volume of supplies in these areas, but the increase in railway tariffs hits the cost of our metal and, as a result, the final price of products. The question arises - how to change this situation? And the most obvious answer is to shift the costs to the end customer. But you need to understand that there is high competition in the domestic market. And if we raise prices due to increased logistics costs, it will hit our competitiveness.
- Is there an alternative to Russian Railways - sea transportation, an increase in the share of motor transport?- Of course, we will continue to develop alternative delivery methods: water and motor transport, interaction with ports, customers, and so on.
And, of course, we continue to conduct a dialogue on tariffs with Russian Railways.