Urals Modernization Will Feed Everybody

04.02.2010 — Analysis

Since the end of 2009 the Urals market of engineering work for the modernization of industrial enterprises has livened up again. Leading European engineering and machine building companies are hoping to expand their operations in the Urals. The RusBusinessNews observer assessed the level of competition and prospects for alliances in this sphere. 

The global financial crisis has affected the course of modernization of industrial enterprises in the Urals in an extremely negative manner. This was immediately sensed by engineering and machine-building companies implementing projects in the reconstruction of old production facilities or establishment of new ones.

Valeriy Ghilyov, the Director of the branch office of Danieli Russia Engineering (a subsidiary of the Italian company Danieli) told RusBusinessNews that "2009 was very difficult. Many Urals enterprises had to give up on planned projects altogether, some had to postpone them. The Ural Mining and Metallurgical Company, for instance has postponed the construction of the rolled section steel plant in Tyumen. All process equipment for this plant has already been delivered from Danieli a year ago. We do hope that in 2010 the construction will start again and we will start the equipment installation. The timeframe for the implementation of contracts at the Serov and Chusovoy metallurgical plants has also been changed.

According to Fulvio Michelutti, the Regional Director of the SMS Siemag Service branch (a subsidiary of the German company SMS Siemag) in Chelyabinsk, during the 3-4 years preceding the crisis Russian metal makers had been actively investing into the development of technologies, improvement of the quality of products, and increasing production capacities; new plants were built, large scale renovation projects of existing enterprises were carried out. "The situation today is different, many projects have been suspended, the demand for metal has dropped, many producers have seriously cut down their production volumes. It is obvious now that the key goal and the new strategy of all metal makers now is not the increase of production capacities but rather the optimisation of work of the existing equipment and increasing its productivity under the condition of quick investment return," Mr Michelutti told RusBusinessNews.

After a quiet year the experts note a certain movement on the market today. "Now everything is getting back to normal, we are talking about the revival of previously frozen projects. This has happened closer to the end of 2009 - beginning of 2010," Arkadiy Kudryashov, the Director General of the Ekaterinburg engineering company Chemical Systems confirmed for RusBusinessNews. "The interest and demand from metal making and chemicals companies is gradually restoring. While before their key goal was to get to completion the projects started earlier, now they started developing new programmes as well.

Several enterprises have not ceased modernizing even during the crisis. For instance, during 2009 Danieli was carrying on with the joint work with Mechel (installation of machines in the electric furnace shop), Kamastal (starting up the forging press and steel processing vacuator), Ashinskiy Metallurgical Works (installation of 120 ton steel smelting furnace).

Of course, we are not talking about reaching the volumes of work comparable to the pre-crisis figures. Nevertheless engineering companies have sensed the revival of the Urals market of industrial modernization and started to act. SMS Siemag Service, for instance, in order to be closer to the key customers, i.e. metal makers, has opened an office in Chelyabinsk covering all of Russia and the CIS in 2009. The Ekaterinburg branch office of Danieli Russia Engineering next month is planning to raise its status and become a Danieli representative office.

Valeriy Ghilyov admits that competition between engineering companies is very strong. Arkadiy Kudryashov agrees that quite a lot of players (mainly Russian and European) have gathered in this market but each one of them will always be able to find a niche according to its specialization.

Experts split engineering companies into the three large groups by activity type. The first use the integrated approach and specialise in the "turn key" solutions. They combine the functions of the general designer and the general contractor. For these companies it does not matter which model has to be implemented, if they do not have some particular technology they involve a partner company specializing in this particular type of work as a subcontractor.

The second group is the highly specialized companies which design and manufacture a product line of some sort, offering, for instance, evaporation plants.

The third group is those engineering companies which specialize not in particular equipment type but in technological processes such as separation, drying and calcination, evaporation, gas purification etc. In order to implement these processes they select an optimal equipment type for each individual case.

In the Urals market of industrial modernization European companies dominate in the first group. In the second and third - domestic and European engineering are equally represented.

The main shortcoming of Russian engineering companies is the lack of good track record, experience, absence of business processes finely tuned by decades of use. In contrast to foreigners they cannot demonstrate to the customer many projects implemented in various corners of the world.

European companies also have a serious disadvantage. While working with a Russian customer company it is difficult for them to take into account in the project the whole host of problems in production inherited from Soviet times, as well as obtain necessary approvals from Rostechnadzor.

This is why Russian and foreign engineering companies are simply fated to work hand in hand in the Urals market. One option for such cooperation is subcontracting some of the work, this model is already widely used. For instance in the construction of the sulphuric acid processing facility at the Sredneuralsky Copper Smelter the Canadian SNC Lavalin was the general contractor while the large weight equipment design and installation work has been done by Urals companies.

Another option is the adaptation of foreign technical projects to Russian standards by domestic companies.

The peak of cooperation, however, can be achieved by the establishment of joint ventures, engineering centres and machine building production facilities in the Urals. Mr Michelutti pointed out, "At the moment our key partner in the Urals region is the Urals Engineering Centre. We actively cooperate with them, we also have established the joint venture SMS Cheltech, a facility for the repair of moulds for steel concast machines".

At the same time experts admit that so far Russian engineering companies and machine building plants are not ready to establish JVs. Valeriy Ghilyov said, "Our company has engineering centres in Italy, Thailand and China. In the Urals we are considering the option and are in negotiations regarding the organisation of a joint engineering centre and production facility, for instance, with the Machine Building Corporation Uralmash, there is no result so far. The key cause of this is that the Russian machine building sector is too far behind the foreign competition in terms of materials, technologies, and equipment."

The Urals market of industrial modernization has been brought back to life. According to experts local machine building enterprises have the opportunity to get a significant share of internal Russian orders for making equipment, especially that of large size, transporting which from abroad is rather difficult. This requires living up to the requirements of engineering companies.

Pavel Kober