South Urals responded to the signal from the metal market

26.07.2013 — Analysis

In summer 2013, the Chelyabinsk Region had two significant events. In July, Mechel, a metallurgical company, launched a new rolling mill in Chelyabinsk for manufacturing long-length rails. Shortly before that, the Zdorovaya Ferma Group of Companies had opened a showcase poultry factory farm in the Kunashak District.

These projects were implemented within a very short time due to support received from the regional government. The policy of economic diversification adopted by the South Ural authorities a few years ago has started yielding positive results: The investment in the industrial and agricultural sectors is almost equal in the amount. Governor Mikhail Yurevich has no doubt that this policy helps to build a more balanced economy in the Chelyabinsk Region.

The launching of the rail and beam rolling mill in Chelyabinsk has drawn a line under the large-scale renovation of the metallurgical industry of the South Urals, which started a few years ago.  By M. Yurevich’s estimate, the total investment in the steelmaking sector amounted to more than 100 billion rubles. The most sizeable amounts have been invested by the Magnitogorsk Iron and Steel Works, which built Mill 5000 for heavy plate production, a cold rolling complex and completed a number of projects of smaller-scale. Other significant projects include the construction of the Vysota 239 electric-weld pipe facility at the Tube-Rolling Plant (CHTPZ), OJSC, as well as the revamping of the steel smelter at the Ashinsky Metallurgical Plant and the oxygen-converter facility at the Chelyabinsk Metallurgical Plant (CHMK), OJSC.

The upgrading of obsolete facilities will, undoubtedly, continue, though it will not involve heavy investment similar to the above projects. It will basically be aimed at manufacturing of new products, for example, heat-insulated pipes at the Chelyabinsk Tube-Rolling Plant, reinforcing steel products at MMK-METIZ, OJSC, etc.

After the completion of the large-scale projects, the investment activity of metallurgical companies has decreased for well-justified reasons: The investors have to repay their loans given by lenders and recover investment costs. However, the situation on the world markets is far from being favorable. The dropping prices for metals, coupled with the reduced metal consumption, wash out profits of metallurgical companies and, consequently, affect the amount of payable taxes. Furthermore, since taxes are paid in advance, the treasury has to return excess amounts when the estimated profit goes down. However, these amounts have already been included in the planned expenditures of the regional budget.

Such unforeseen deductions are very painful to the budget of the Chelyabinsk Region, which highly depends on the well-being of the metallurgical industry. In 2012, the budget had to return 5 billion rubles of excessively paid tax amounts to the metallurgical companies; in 2013 the Magnitogorsk Iron and Steel Works alone claimed a refund of excess 2.4 billion rubles.

The situation compelled the regional authorities to boost their efforts in the diversification of economy. At one of the meetings of the regional government, Mikhail Yurevich said: "We have other growth opportunities: mining production, construction, electric power, food and processing industries, agriculture. The revenue from the metallurgical sector must be gradually replaced with tax deductions of these industries."

From the perspective of investors, the most promising industries in the Chelyabinsk Region are agriculture and food industry. Heavy investment in these sectors has been made for several years. The amount of 733 million rubles was invested in the pig production complex that was built in 2009; the compound feed factory (760 million rubles) was built in 2010; the renovation of the poultry farm was completed in the Argayash District in 2012 (1.6 billion rubles), the poultry factory farm worth 7 billion rubles in investment started operating in the in the Kunashak District in 2013.

At the moment, the Nagaibaksky integrated poultry farm (5.3 billion rubles), the Rodnikovsky pig production complex (4.4 billion rubles) and a number of greenhouse facilities are under construction. The future projects include construction of several pig production complexes and poultry factory farms, a rapeseed oil plant, etc. By 2016, when all these agro-industrial projects are completed, the Chelyabinsk Region will receive 4,330 new jobs and will rank among the three flagship regions in meat output in Russia.

The results of the diversification are already visible. According to the data of the Regional Ministry of Finance, from 2008 till 2011, the share of the metallurgical sector in the tax revenue shrank from 27 to 16%, while the contribution of the food industry increased from 5 to 10%. The new trend gained strength in 2012: the food industry outperformed the metallurgical sector in the number of employees and the amount of taxes, and the positive trend will continue.

In 2013, the agro-industrial sector of the South Urals will catch up with the heavy industry in the amount of investment. The agro-industrialists would have outperformed the basic industry, but for heavy investment in the mining operations (the Russian Copper Company, CJSC, is commissioning the Mikheevsky Mining and Processing Integrated Works this year; the Bakal Mining Group, LLC, is starting development of the Techenskoye iron ore deposit) and in the electric power sector (INTER RAO-Electrogeneration, OJSC, is launching Unit 1 and 2 of the power-generating complex at the Yuzhnouralskaya GRES-2; Fortum OJSC is finishing the construction of two gas turbines equipped with waste heat recovery boilers and life-support systems at the Chelyabinskaya TPP-1).

At the same time, medium-sized businesses that can invest maximum 1 billion rubles in their production operations are coming to the fore as main participants in the investment market of the Chelyabinsk Region. Banks tend to give them loans more willingly, knowing that investment, say, in the food industry is paid back much faster than investment in the metallurgical operations. Consequently, the tax contribution from medium-sized companies is also more substantial.

The achievements of agricultural businesses showed that the Chelyabinsk Region "grew a second foot" that will support the economy of the region. It did not "grow" by miracle; the region has it due to coordinated efforts of the business community and government authorities. For example, to bring the project of the Kunashak poultry factory farm to life the regional government allocated about 600 million rubles to the Kunashak District for preliminary works on the construction site and provided government guarantees for 3 billion rubles to the Zdorovaya Ferma Group of Companies.    

Metallurgical companies cannot complain that they are neglected by the regional government. Thanks to the government support, the project for construction of the rail and beam rolling mill at the Chelyabinsk Metallurgical Plant was introduced by the Russian delegation at the Business Council of the Shanghai Cooperation Organization and was successfully completed within a short period of time by China Minmetals Corporation. It is not surprising that in April 2013 Mikhail Yurevich was awarded a badge of honor of the Russian Union of Industrialists and Entrepreneurs.

By supporting the business community in implementation of investment projects in different sectors, the governor pursues a well-defined objective – he aims to change the former mono-industry structure of the regional economy. And he is going to achieve it: The reduction in the tax revenues from metallurgical companies has been offset almost by half by the tax revenues coming from taxpayers of the food, construction and transport industries as well as of the banking sector. It is just the beginning.

According to the governor, the investment flows are gradually changing their movement vectors, coming to medium and small-sized businesses with high growth potential. "Therefore, it is important," M. Yurevich pointed out to RusBusinessNews, "to attract large banks, insurance and consulting companies to the region and provide assistance to investors in development of infrastructure. It will result in further growth of our manufacturers and will help them move into international markets."

Andrei SMIRNOV