VSMPO-AVISMA is ready for its financial and economic "take-off"

26.05.2011 — Analysis

Corporation VSMPO-AVISMA, OJSC, is one of the titanium "pillars" of the domestic and world economy. In the next few years, a number of international companies intend to implement ambitious projects that can hardly be successful without "airborne metal". As the "RusBusinessNews" columnist has found it out, the Russian manufacturer is ready to meet market requirements, conquering new production summits.

In the first quarter of 2011, VSMPO-AVISMA supplied 4,182 tons of titanium rolled stock in exports and 1,870 tons of rolled products to the Russian home market and to CIS countries. In the next few years, these numbers can demonstrate a multiple increase.

Awing to the titanium future

The aerospace industry accounting for about 70% of products of VSMPO-AVISMA, OJSC has always been the basis for its development.

According to the IATA, International Air Transport Association, the year of 2010 was one of the most successful for airline companies over the past decade. The industry is back in the black - the segment of passenger service showed a 7% gain, while the cargo traffic volume increased by 19%.

The production output of Boeing and Airbus reached the historic high - last year they supplied 972 aircraft to the market. In the near future, airline companies will receive flying machines of a new generation. At the end of Q 3, 2011, the first titanium-intensive aircraft, 787 Dreamliner, will hit the skies. Rough mechanical machining of forged parts for the new Boeing is done at the joint venture of Boeing and VSMPO-AVISMA - Ural Boeing Manufacturing. New Airbus A350 jetliners will become available to consumers in the mid of 2013.

Boeing Company expects that by 2029 the world aircraft fleet will add 30,900 new jetliners for the total cost reaching 3.6 trillion US dollars. Among these, 960 aircrafts for the amount of 90 billion US dollars will be supplied to Russia and CIS countries.

From golf to nuclear power engineering

Today's key partners of VSMPO-AVISMA include businesses operating in the chemical and electric power industries as well as manufacturers of seawater desalting plants.

It is expected that by 2020, the world will increase the number of operating NPP units by another 30%. The most intensive construction of nuclear power plants is expected to take place in China and India. Titanium is used in their heat exchange systems.

In the next few decades larger amounts of oil, gas and gas condensate will be produced at subsea fields. Titanium that is highly resistant to corrosion in a salt water environment is indispensable in manufacturing of drilling rigs and production platforms, risers and piping systems.

VSMPO-AVISMA will continue to appease titanium hunger of companies manufacturing medical equipment, which demonstrates annual average growth equal to 15%. In addition, the corporation makes its contribution to sports development. Its consumers include golf club manufacturers that purchase up to 5 thousand tons of metal annually. Furthermore, titanium is required for manufacturing of bicycles, tourist and rock-climbing equipment, hand tools.

Insurance against risks associated with raw materials

The main feedstock for VSMPO (Verkhnyaya Salda, Sverdlovsk Region) is titanium sponge, which is produced by AVISMA (Berezniki, Perm Region) from ilmenite and carnallite ore. Until recently, the main supplier of ore was Ukraine. However, the executives of the corporation use their best endeavors to diversify risks, establishing relationships with suppliers from other countries.

In 2006, the corporation launched trial deliveries from Sri Lanka. Vietnam has all chances to become another partner in raw materials.

Mikhail Voevodin, General Director of VSMPO-AVISMA, says that the authorities of this country consider a possibility of development of a rich ilmenite deposit and construction of a sponge manufacturing factory that will be located in its vicinity. "The corporation is ready to participate in implementation of this program, acting as a research and technology adviser, equipment supplier and manufacturing partner", - he stated.

In addition, in 2011, the corporation is going to start purchasing ilmenite ore from India and Africa. It will also continue small trial deliveries from Trans-Baikal. According to M. Voevodin, raw materials from the new sources match the Ukrainian raw stock in quality and are completely suitable for the production process.

The corporation intends to continue its carnallite purchases from Uralkali, OJSC, which in 2014 will embark on development of a new layer at the potassium deposit, thus being able to increase carnallite output. Nevertheless, VSMPO-AVISMA still prefers to avoid putting all the eggs in one basket, and has found an alternative ore supplier whose name is kept in secret. "I am sure that the Berezniki site will not be left without raw materials", - noted M. Voevodin.

Cut the transportation knot

Within the recent years, the corporation has been investing heavily in titanium sponge production at AVISMA. The output is expected to increase by 7-8% annually. However, the corporation's plans knocked against an unexpected barrier represented by Russian Railways, OJSC.

"All the volumes, that AVISMA was to supply to VSMPO, have been produced and shipped. There is no doubt that the Berezniki factory will be able to fulfill its obligations to Verkhnyaya Salda. However, the sponge shipment schedules do not match the operating schedule of Russian Railways. The railcars with raw stock are put on hold, waiting for their turn", - explained Mikhail Voevodin.

The corporation's representatives have entered into negotiations with the railway company concerning the establishment of a system that will allow just-in-time delivery of cargoes from Berezniki to Verkhnyaya Salda.

At the same time, the corporation is using its best efforts to organize uninterrupted supply of titanium sponge to VSMPO using alternative methods of transportation. For example, in April 2011, the corporation commenced transportation using freight trucks that service the corporation's facilities located in neighboring areas, delivering reserve amounts of raw materials.

"Cosmic" power

Security of energy supply is an essential component of the VSMPO-AVISMA strategy. The 220 kV Cosmos substation put into operation at the Berezniki production site gave the corporation independence of energy generating companies.

"By acquiring our own access to the federal energy ring, we will be able to avoid regional charges payable for transportation and purchasing. Rough estimations show that Cosmos will cut electricity costs for AVISMA by 20%. It will turn into our savings totaling minimum 200 million rubles a year", stated Mikhail Voevodin.

According to him, the corporation started to receive cost advantages from the project implementation in May 2011, after finalization of the documents required for connection to point of power delivery.

Besides, the Cosmos substation contributed to security of energy supply of the Perm Region, lessening the load on the regional networks (having released more than 100 MW of capacity). Due to this, the Kama Region will be able to meet the growing need in electric power, while providing environment for development of new businesses.

Shares of VSMPO-AVISMA are getting ready to "take off"

The growth prospects of VSMPO-AVISMA were noticed not only by consumers of its products, but also by experts. For example, analysts of Investment Company Grandis Capital recommended buying the corporation's shares. In their opinion, in the foreseeable future the securities of the titanium manufactures are going to rise by 42% - from 128 to 180 US dollars.

"The demand for titanium is recovering. The price trough in products of largest manufacturers of titanium for the aircraft industry was overcome in quarters I-III of 2010. At present, we can witness an upward trend", they noted.

The analysts were also impressed by the corporation's performance report for the first quarter of 2011. The RAS-based EBITDA indicator increased two times, the titanium output went up by 22%, and selling prices rose by 12.5%.

The experts think that in 2011, VSMPO-AVISMA revenues will increase by one third - reaching 1.2 billion US dollars, whereas EBITDA are expected to double - up to 299 million US dollars at profitability equal to 24%. The net profit of the corporation is expected to increase more than 7 times.

VSMPO-AVISMA is ready to conquer higher production summits. The experts from Investment Company Grandis Capital anticipate that establishment of a special economic zone in Verkhnyaya Salda - the Titanium Valley - will give another impetus to the corporation's growth. "Due to its operation within the special economic zone, VSMPO-AVISMA will be able to increase significantly its growth rates in the segment of manufacturing of the high value-added products and will reinforce its integration with the largest manufacturers of aircraft and related components", states the investment company.

Konstantin Dzhultaev