Urals Boeing Supplier Stuck In Mid-Air

28.10.2009 — Analysis

The Russian maker of aluminium semi finished products OAO Kamensk-Uralsky Metallurgical Works - KUMZ (MC Aluminium Products) has managed to reach agreements on trial batch shipments to Bombardier and Boeing. However, the RusBusinessNews observer found out that entering the global market might bring multimillion losses to the company instead of profits, as the plant cannot assure the required quality.

The crash of the domestic market forced the company to enter foreign markets. According to Andrey Kurganskiy, the Commercial Director of KUMZ, twenty years ago the five leading soviet plants were making 1.5 million tons of aluminium semi ready products annually. The Kamensk-Uralsky plant was making 200-250 thousand tons. The market has gone down later, even during the construction boom in 2007-2008 the domestic machine building sector was consuming no more than 215 thousand tons of semi finished products, 34 thousand tons out of which was imported.

In the meantime the world's leading aircraft manufacturers need aluminium slabs with the thickness of 24 to 152 millimetres. Some years back Boeing offered OAO Kamensk-Uralsky Metallurgical Works to become one of the company's suppliers.

This new window of opportunities, having opened, demanded the production to be modernized. In 2006 KUMZ purchased state of the art slab casting equipment in USA and in a year's time KUMZ has built the Chkalovsky plant for further processing of the rolled slabs - thermal processing, flattening, tensioning. The slabs, however, are still made on the old mill which does not conform to the requirements. German companies suggested to upgrade it but the preference has been given to a Ukrainian company. Having spent 13 million dollars Kamensk-Uralsky Metallurgical Works did not manage to resolve the problem: the upgraded mill does not give the needed quality. The Chkalovsky plant, in which about a hundred million dollars was invested, is virtually idling.

The company's proprietors decided to build a new rolling complex with the capacity of 166 thousand tons of rolled aluminium per year. The 300 million dollar project has been approved by the Ministry of Industry and Trade of the RF and the Ministry of Economic Development of the RF. China has agreed to allocate the credit resources needed for its implementation: The money, according to Alexei Filippov, the Managing Director of KUMZ, is already in Vnesheconombank that has approved the project at the preliminary meeting of the Credit Committee.

The time to get the credit has not turned out the most fortunate, Alexei Filippov expressed the concern that with 16% annual interest and the profitability of the production at 6-7% the plant might not manage to pay its debts. According to him the credit line must be subsidized by the state and the company should be given tax concessions on customs duties and VAT for the equipment purchased abroad. Representatives of the Ministry of Industry of the Sverdlovsk Oblast expressed doubts whether federal or regional authorities would be prepared to give tax concessions in the situation of deficit budget.

KUMZ's main problem, however, is not in the expensive credit. Experts claim that the plant still cannot make slabs with the needed set of characteristics. According to Viktor Zamyatin, a professor at the Ural State Technical Univesrity - UPI, the technological modes have not been stabilized yet: sometimes it is the constructional properties that do not conform to the requirements, sometimes it is mechanical or corrosion properties. The surface quality leaves a lot to be desired as well as the geometry, markings, and tolerances.

Prior to the crisis the plant had been trying to establish the causes employing specialists from USTU-UPI which has the state of the art scanning and transmission electron microscopes. Certain changes to the chemical composition of the ingot have been introduced but with the onset of the financial crisis the cooperation ceased.

Prof. Zamyatin reckons that it will be extremely difficult for the plant to manage the situation on its own because, first of all, it does not have the necessary equipment, and, secondly, today the requirements to the strength of metal structures are very high, they can only be reached in the process of an integrated scientific research. KUMZ management is aware of this but the company is in a very difficult economic situation and has difficulties even in finding money to pay wages to its staff.

The lack of established technologies will turn into losses of orders from aircraft manufacturers for Kamensk-Uralsky Metallurgical Works. In this case the company will cease to exist: United Aircraft Corporation will not be able to use slabs made at Chkalovsky plant. Continuing to work with foreign companies with the existing level of technology threatens bankruptcy altogether: Boeing and Bombardier have already told KUMZ that failure to fulfil the contract will lead to penalties worth millions of dollars.

Reports from global aluminium semi ready products markets give the company's managers some optimism. The Norwegian Norsk Hydro announced that according to the results of the third quarter 2009 the demand for rolled aluminium has started growing. Metal trader ASMP, the company representing KUMZ abroad, is expecting a 20% growth in sales to the South-East Asia in 2010. Experts recon, that the US market will become more lively quite soon as well.

Friedhelm Schluter, ASMP representative, however, pointed out that competition amongst aluminium semi ready products suppliers to aviation, space, and ship-building sectors is growing. Up to ten companies are willing to supply rolled metal to Europe, and up to a hundred - die stampings. KUMZ's competitors are dropping their prices and cutting down lead times in order to get a share of the market. Also, companies in the European Union do not pay customs duties when trading within the EU. This is just the right time to remember the unfortunate fact that not all airplanes which have taken off land safely.

Vladimir Terletski