The Russian metallurgical industry dreams of a titanium valley

27.08.2010 — Analysis

In three months the Sverdlovsk region will send an application to the federal authorities to create a free economic zone called the "Titanium Valley." The plans are for this project to work with the Verkhnyaya Salda Production Association (the VSMPO-Avisma corporation) to manufacture titanium and aluminum alloy products for the domestic and foreign machine-building industry. But, as a columnist for RusBusinessNews explained, the company's managers fear that the corporation will not be able to able to achieve world-class productivity, since they must also finance community and sports facilities in the Sverdlovsk region. And the governor, Aleksandr Misharin is not yet ready to release VSMPO from its public social obligations.

The "Titanium Valley" project has been discussed for years. Several years ago, Eduard Rossel, the governor of the Sverdlovsk region at the time, proposed the idea to create a free economic zone in the city of Verkhnyaya Salda. The regional government even approached the federal Ministry of Economic Development with this proposal. But their request was turned down. As a result, business sees no tax relief on the horizon and is thus in no hurry to invest in an increase in the advanced processing of titanium products at VSMPO. Only Boeing has shown any interest, organizing a joint venture with Ural Boeing Manufacturing, which specializes in machining titanium forgings for the Dreamliner aircraft.

In 2010, at the Farnborough Airshow in Britain, Boeing signed an agreement with the Rostekhnologiya corporation (the VSMPO-Avisma's primary shareholder) to establish a research center for titanium technology and materials. This research center will be in Moscow, not Verkhnyaya Salda, but VSMPO's management hopes that it will help facilitate the advanced processing of titanium. In particular, the center will be responsible for training specialists to able to coordinate the production of chassis parts and other Boeing components.

In preparation for this step, VSMPO approved an investment program until 2013. This year $105 million will be invested in equipment upgrades and next year the investment will grow to $200 million annually. The funds will primarily be spent on increasing the volume of production in the forging and stamping shop, which stopped fulfilling orders in 2008.

According to Nikolai Melnikov, VSMPO-Avisma's executive director, they produced 27,500 tons of titanium mill products the year before the economic crisis hit, but this fell to 19,700 tons in 2009. Now, orders for titanium slab have grown to 22,500 tons, and further increases in production volume are expected in 2011. "Judging by the orders coming from the United Aircraft Corporation and the defense industry, next year is looking more like 2007," a manager evaluated the situation. Purchases of new equipment will help increase the production of titanium mill products by 12,000 tons a year and improve product quality. VSMPO also plans to open their own foundry.

For years there have been issues with poor quality castings coming from Russian plants. According to the press office of the Sverdlovsk regional Union of Industrialists and Entrepreneurs, the foundry capacity is obsolete. The average service life of casting equipment at the plants in the region is over 23 years and more than 70% of the equipment is worn. The condition of the production facilities for casting processing means that precise, high-quality castings of complex geometric shapes and sizes cannot be produced. Thus, the production of castings operates at only 20-60% of capacity. Some shops only work a few shifts a month, due to the lack of orders. In connection with this, a program was launched in the Sverdlovsk region to encourage the growth of castings production until 2020, but industrialists note that the situation is not improving.

Tatyana Kansafarova, the vice president of the regional Union of Industrialists and Entrepreneurs, believes that it is necessary to change the legislative framework of the Sverdlovsk region and Russia, and to more actively lobby for the interests of the foundry industry in order to attract investment.

VSMPO's managers say that they aren't experiencing any problems with investment, but they are still counting on assistance from the government. According to Mikhail Voevodin, the general director of VSMPO-Avisma, it has been determined who is going to participate in the free economic zone, but before they invest, the candidates would like to know what incentives the government is going to offer them. "Investors want to be sure that the free economic zone will really be established. You can hardly count on someone coming and giving money unless there is a favorable tax structure," he emphasizes.

Aleksandr Misharin, the governor of the Sverdlovsk region, claims that the federal government is prepared to free investors from income tax, VAT, and customs duties obligations. According to him, the fate of the project depends on how quickly and ably the officials and businessmen can finalize the proposal. This will take at least three months and, as the regional head hopes, by the end of 2010 a decision will have been made on the Titanium Valley. Aleksandr Misharin expects that businesses in Verkhnyaya Salda that receive these incentives will be able to produce globally-competitive products and create new jobs.

Mikhail Voevodin told the governor that VSMPO will not be able to compete on the global market if must subsidize the housing and public utilities sector, sports facilities, dining, and other types of infrastructure. But Aleksandr Misharin let him know that VSMPO's public social obligations were only going to increase. According to Mr. Misharin, in 2010 the corporation will owe not only a billion rubles in taxes, but must help to finance a maternity hospital in Verkhnyaya Salda and also take part in a program to develop sports and community facilities.
And, of course, salaries for the corporation's employees must be increased and new jobs created, as well.

The questions remains - how will VSMPO compete on the global market against companies that do not have to build maternity hospitals?

Vladimir Terletsky