Russian metallurgists can go to the wall

04.06.2012 — Analysis

The conference addressing prospects of the Russian pipe-making industry was held in Ekaterinburg at the beginning of June. The conference took place at the time when the industry encountered a highly unfavorable situation: The low demand and excess capacities can trigger a systemic crisis in the industry. Experts say that the maneuverability of pipe manufacturers is very limited: The markets for sought-after products were split long time ago. As the RusBusinessNews columnist has found it out, the competition is most likely to be won by those manufacturers who grow and capitalize on low-interest bank loans. Russian pipe-rolling companies are most vulnerable: High interest rates in this country and numerous loans previously taken from foreign banks can play a low-down trick with the companies during the financial crisis.

The Russian piping industry has leaped forward within the last five years: Multibillion investments in technical re-equipment helped to start manufacturing of new products highly sought by oil and gas companies. Most of the factories launched foundry and rolling facilities for manufacturing of high quality blanks for welded and weldless pipes. Several Russian companies started operating mills designed for manufacturing of large diameter pipes, thus allowing Gazprom, a gas-industry monopolist, cut substantially the import of such pipes.

The upgrading of the pipe-making industry led to tougher competition in the industry. According to Igor Pyshmintsev, the general director of RosNITI (Russian Research Institute for the Tube and Pipe Industries), six mills for large diameter pipes with the capacity of 3 million tons is too much for the country. Besides, the need in them is not stable and depends directly on development of new fields. Russia is still reluctant to venture into implementation of the Shtokmanovskoye and other extremely costly long-range projects, thus making pipe manufacturers feel edgy.

The experts assess the situation as alarming: The profitability is going down, the demand is weak, and the pressure from Chinese imports is increasing. The sales growth observed in 2011 has stopped and the production output is expected to decrease by the end of 2012. The Russian pipe companies that made heavy investment in new equipment will have to operate in extremely unfavorable conditions: Curtailed revenues may result in failure to perform their obligations.

The debt burden has been steadily increasing in the metallurgic industry within the last years. The Central Bank of Russia has estimated that in April 2012 the loan debt amounted to 208 billion rubles in foreign currency and 406 billion - in the Russian currency. Pipe making companies account for the lion's share in the above amounts: For example, the debt of the Pipe Metallurgical Company, OJSC, was 112 billion rubles in 2008, while going up to 150 billion rubles in 2010. In 2011 the situation remained unchanged, though the company was able to loan up.

The similar trend is observed in the Chelyabinsk Pipe Rolling Plant, OJSC, which, according to the accounting records, has built up its debt obligations to 80 billion rubles. Its short-term debt has tripled since 2009 and the situation is steadily deteriorating, as the company breaches its obligations to the banks.

Konstantin Selyanin, the head of the Department for Operation on Financial Markets, the Ural Interregional Bank, says that in 2012 the metallurgy sector earned the reputation of the worst sector of the Russian economy, having lost half of its value on the stock exchange. However, it is just the beginning: The stock market only presages negative events, giving the overall warning that investors anticipate the second wave of the crisis. Apparently, it will be more detrimental than the financial panic of 2008.

The entrepreneurs do not also harbor any illusions regarding the ongoing seasonal recovery of the metallurgical industry. According to one of the metal traders, the Chelyabinsk Pipe Rolling Plant has received enough orders and is now accepting orders that can be scheduled for the end of the summer. However, the current situation should not be overestimated: The second half of 2012 is going to be very difficult for metallurgists - the end of the year is expected to be even worse than the disastrous end of the year 2011. The flight of capital that has started in Russia and the Dow Jones "slipping down" in May are apparent signs that the economy will face problems in a few months.

Pipe companies are bracing themselves for the worst. For example, the Chelyabinsk Pipe Rolling Plant, according to the trader, laid off its elderly personnel back at the end of 2011, closed down one of its shops, cut some of its expenses and revised the production plan for 2012. In the meantime, in the sequester context, the market gives no rise to optimism: Warehouses are full, the demand is not growing, and the profitability tends toward zero. The economy needs liquidity, which is insufficient, thus evidencing the looming devaluation of the ruble. Pipe manufacturers will be very lucky if they can survive through it.

Today, expenses on interest payment account for the major part of the financial expenses of the Pipe Metallurgic Company. Half of the company's debts are denominated in dollars. The managers are concerned that the deterioration of the global financial situation will deprive the Pipe Metallurgic Company of the possibility to redeem its previous obligations and will shut off the access to new loans. The first alarm bell has already rung: The exchange rate of the ruble to the US dollar is plummeting. Pipe companies still cannot make it out what they should do in this situation.

The risk management strategy of the Pipe Metallurgic Company suggests that in the crisis situation the company should either widen the range of its products or increase the output of the high-demand products. However, it will be extremely difficult to implement this strategy. Nikolay Yezersky, a deputy of the RF State Duma, says that the Pipe Metallurgic Company, like the Chelyabinsk Pipe Rolling Plant, has its market segment. Under ordinary circumstances it would be sufficient for survival of the companies; however, taking into account the accrued payables and partially built facilities, the companies have to increase their sales. It means that they need an additional market, and it is not available, as it has already been divided. What to do further is not clear.

A number of experts think that Russia's joining the World Trade Organization and the subsequent increase in costs can result in bankruptcy of the Group of the Chelyabinsk Pipe Rolling Plant. Kirill Chuiko, an analyst of UBS, believes that it will not run to that: The major state banks will give money to change the owners. In the expert's opinion, the present-day owners of the Chelyabinsk Pipe Rolling Plant will sell the company, if the adequate price is offered to them. Right now, its assets are greatly undervalued.

Dmitry Smolin from the UralSib Financial Company is sure that the future of the Chelyabinsk Pipe Rolling Plant rests in the hands of Gazprom and Transneft. In 2011, the gas monopolist was not active in placing orders for large and medium diameters pipes: The sales did not even reach the level of 2009. The analyst anticipates the further decrease in the demand for large diameter pipes in 2012. The pipe company is pinning its hopes on the South Stream project; the project-related tender is scheduled for the second half of the year.

Vladimir Terletsky