Rusmet reported that Zaporozhstal is probably the only large steel works in the world working on open hearth furnaces while the others move to oxygen converter and electric arc furnaces.
A move to new technologies means great investments but at Zaporozhstal do not remembered when was the last modernization. It is natural that products produce by old equipment is less competitive profitability falls year by year. Moreover, open hearth process means loss of steel up to 20%.
However it has been done nothing but talks about construction of converter mill and continuous casting mill. Last year Zaporozhstal has set a deal with Siemens for construction of 2 oxygen converters, 2 desulpherization stations, vacuum degasers and 2 continuous casting mills for thick slabs.
As experts estimate, the cost of the project is around 2 billion dollars. Zaporozhstal has no such financial resources. That is why there were two ways in expert opinion to merge with strategic and financial partner or to take a credit.
The owners chose to take a credit. The credit of USD 250 million has been granted by the Citigroup. So if Zaporozhstal succeeds to construct oxygen converter project by 2012 as it has proclaimed before, it will get increase in crude steel production to 5.5 million tonnes annually while the last year it was 4.4 million tonnes. Moreover, it will increase profitability as new technologies provide smelting of higher quality steel with fewer costs as well as to merely avoid losses of steel.
1. Raw Material Problem
Modernization does not solve all the problems of Zaporozhstal. The basic problem of the works is raw material. Zaporozhkoks, Zaporozhogneupor Zaporozhye Iron Ore Complex which work in gear with Zaporozhstal do not constitute vertical integration chain. The works nevertheless needs coal, ore and concentrate. In the end of 2007 the owners provided coal. They acquired coal preparation plant Sholokhovskoe and the concession for Bystryanskoe coal deposit in Rostov region of Russia. The problem of iron ore might have been solved by Priazovsky GOK which is in joined concession of Zaporozhstal and Mariupol Ilyich Steel. However, there is no money for its development neither in Zaporozhye nor in Mariupol.
As experts estimate the constructions of GOK costs around 1 billion dollars where USD 70 million from them to be invested in the infrastructure. Even back in 2003 Zaporozhstal and Ilyich Steel decided to start construction of the new mining and concentrating mill in Zaporozhye region. There is Kuksungur group of iron ore deposits here basic Kuksungur and also Korsakskoe, Sergeevskoe, Novoukrainskoe and Pavlovskoe. It is attractive for the ore banks lay very close to the surface here which enables open or opencast mining. If it put in operations the Priazovsky GOK might completely solve the iron ore problem for both steel giant. However it has been invested as less as USD 10 millions only from that time!
2. Steel Assets Sales
At a glance it may seem that acquisition of coal deposit and reconstruction of steelmaking facilities means Alex Schneider and Edward Shifrin made their minds to substantially develop the works. But there is the other side of the coin. In experts opinion those steps may also mean a preparation for sale of the works. Last year experts estimated Zaporozhstal by USD 2.3 billion to USD 2.5 billion. In case of sale the price could be even much higher. The deal for reconstruction project essentially contributes to the works’ price. Moreover it should be included in the sales deal also 40% stake of Zaporozhkoks and 15% stake of Zaporozhye Iron Ore Complex as well as coal preparation plant and coal concession in Russia. Concession for Priazovsky GOK is also an attractive enclosure to the perspective deal.
Why is it meant the sale? The matter is the rumors in the market turn for a long while already as well as talks that owners often receive offers to sell the works. There were really plenty of acquirers especially among Russian steelmakers before crisis who desired to gain it. As well as the owner financial disability to reconstruct it means the owners soon or late have to have sale the works to prevent complete run out of the facilities and absolute non competitiveness of its products. However it is not correct to speak about financial instability of the owners, because the main owners Mr Edward Shifrin and Mr Alex Schneider cannot be considered so.
The turnover of their Midland Group in 2006 made USD 3 billion total value of developer projects in Moscow USD 2 billion. Moreover, the group owns a hypermarket network in Ukraine and also a number of other assets. And in the beginning of 2007 Midland has been already remarked for steel asset sale the company has sold 100% of the shares of “Red October” steel mill which produces guns, cars and titanium, to Rosoboronexport FGUP. The “Red October” steel mill is one of the largest Russian producers of special steel grades for automotive and aircraft manufacturing for chemical, power, oil and gas industry equipment manufacturing.
In accordance to the deal, Russpetsstal JSC has acquired all shares constituting 100% of the registered capital of “Red October” mill. Both Midland and Rosoboronexport have rejected to disclose the sum of the deal referring to commercial secret. And Eduard Shifrin joined the Board of Directors of Russpetsstal which is a part of Rosoboronexport FGUP. At this moment Canadian sources in Midland Group started to talk that the negotiations for sale of Zaporozhstal and Zaporozhkoks has been started. (Rusmet.ru)