Krasnoturyinsk is hoping to use rare earth to extract itself from a crisis

10.04.2013 — News

The largest industrial enterprises in Russia, which date back to the Stalin era, are in their last months of existence. Its extraordinarily expensive and uncompetitive plants would be almost impossible to upgrade. Officials are trying to replace them with industrial parks filled with mobile, high-tech companies. But, as the columnist for RusBusinessNews has determined, these changes might not be enough. Complex production facilities cannot survive in today's economy unless a comprehensive approach is taking to developing the surrounding area. And it makes no sense to invest in traditional industries because the market is so overheated.

The Sverdlovsk region contains 15 company towns that evolved around a single, major industry. Some of those are barely hanging on because the plant that employs their residents is rapidly disintegrating. For example, when united company RUSAL reduced its production of aluminum, this threatened the very existence of the city of Krasnoturyinsk. The Bogoslovsky Aluminum Plant that is located here is systematically shutting down its electrolytic baths and pot rooms, one after another, leaving hundreds of residents out of work. The authorities have decided to use the Bogoslovsky industrial park to help them find employment.

That park will encompass 100 hectares and, in addition to industrial sections, will include a logistics complex, a training center, and a research unit. Thirty residents should be installed there by 2015, able to produce 4 billion rubles' worth of products per year and provide as many as 2,000 jobs. The Energy Projects consortium will have an anchoring presence at the industrial park, where it intends to pursue two projects: producing aluminum car parts and extracting rare-earth elements.

Energy Projects plans to spend 6.7 billion rubles setting up the facilities to produce automotive parts. Approximately 50 thousand tons of aluminum alloys will be needed to manufacture the raw stock and, eventually, the molded parts. Investors intend to sell those products to the world's leading automakers. Over time, Sergei Guskov, a member of the board of directors of Energy Projects, CJSC, hopes that compression molds and even engines can be produced at the Bogoslovsky park.

The rare-earth elements will be mined from the over 40 million tons of red mud found in Krasnoturyinsk. According to Sergei Guskov, laboratory experiments have demonstrated that about 100 grams of scandium oxide can be extracted from a single ton of mud. Investors decided to launch a pilot project in 2013, spending 600 million rubles to obtain one ton of rare elements. If their hopes are realized, the production of scandium will jump to 10 tons per year. That's quite a lot. Annual global production is about 70 tons, 90% of which comes from China. Managers at Energy Projects believe that by producing scandium oxide it will be possible to attract other residents to the park, such as the manufacturers of high-purity materials, ceramic items, and components for nuclear reactors.

Experts consider this project to be very promising. According to Anatoly Sysoev, the chairman of the Sverdlovsk Regional Union of Industrialists and Entrepreneurs, the Bogoslovsky plant has already produced gallium and showed a good rate of return. The need for rare-earth elements is growing, and other products can also be manufactured from the mud.

For example, Palitra, LLC has learned how to produce iron-oxide pigments, which are used to tint concrete, polymers, and textiles. Mariya Rukhlyadeva, the company's director, claims that pigments of any color can be manufactured from the mud in Krasnoturyinsk for only 4 rubles per kilogram (by comparison, China sells those pigments for 7 rubles and Germany - 70 rubles). Demand is outstripping supply. Russian firms are practically hiding from potential customers because a lack of working capital prevents them from filling all the orders. And this is one of the paradoxes of modern Russia: it's not possible here to develop even what would be a very competitive business. The reason is that small businesses have no collateral and banks are only willing to lend them money against security worth four times the size of the loan.

Because of this, A. Sysoev thinks that targeted financing should be provided to single-industry towns in order to resolve this backlog of problems in a comprehensive way. Money is needed not only to establish modern production facilities, but also to promote products on the market. For example, several residents of the Bogoslovsky industrial park are planning to manufacture structures and building materials of reinforced concrete. But even several existing brick-making plants in the northern part of the Sverdlovsk region are only operating at 50% capacity. Nor are businesses that make reinforced concrete products and insulation materials working at full scale. Therefore, it's not only necessary to create a cluster for building materials in the industrial park, but also to establish a logistics corridor leading to the main sales markets to the north, in Yamal.

Denis Pasler, the chairman of the Sverdlovsk region, has his doubts about the feasibility of supplying materials to other Russian regions, much less abroad - the transportation costs are too high. He believes a product will have to be at least 40% cheaper to find a place on the market. The chairman foresees no demand for equipment that processes wood waste, which one of the residents of the Bogoslovsky park is preparing to manufacture, because it is more expensive to produce heat from wood than gas.

Nonetheless, D. Pasler told investors that 707 million rubles will be allocated from the public budget to construct infrastructure at the industrial park. It's true that this won't be enough - 1.4 billion rubles are needed to construct off-site utility lines, 700 million of which will be spent to build a water pipeline.

Regional officials plan to get the rest of the money from the state corporation Vnesheconombank. Irina Makieva, the deputy chairman of VEB and the head of the Russian government's working group on single-industry towns, takes a fairly cautious view of the idea of targeted financing for Krasnoturyinsk. She recalled how three single-industry towns in the Sverdlovsk region received assistance in 2010, and Vnesheconombank now has questions about the effectiveness of those expenditures.

I. Makieva noted that in Russia there are 68 towns at risk (!) that were built around a factory, and many of those towns aren't lifting a finger to establish new industries and thereby ensure their own survival. The federal authorities have no intension of blindly trying to save them all. "We will help the ones that are already doing something to help save themselves," she emphasized.

Vladimir Terletsky