Natalia Vasilenko , En+ Group
Release Date: 2011-04-01Natalia Vasilenko, Director of En+ Downstream, Chairman of KraMZ and DOZAKL, has been interviewed by RussianAvia.net for a special report on Russia's special metals, alloys and composites for aerospace to discuss the challenges that En+ Downstream, a new player on the Russian metallurgical market, encountered on its way to becoming one of the Big Four Russian aluminum product manufacturers.
En+ Downstream was formed in 2009 on the basis of Krasnoyarsk Metallurgical Works (KraMZ) and Dmitrov Pilot Plant for Aluminium Canning Tape (DOZAKL). What objectives did En+ Group pursue when forming this new structure and what were the main challenges that it had to face?
En+ Downstream was formed on the basis of assets that were not included in United Company RUSAL (UC Rusal). While UC Rusal’s strategic priority is production and sales of primary aluminum on the domestic market and for export, the priority of En+ Downstream is production of semi products from UC Rusal’s primary aluminum for sale in Russia and internationally.
Our first and foremost priority was to gain stable profits by optimizing our costs and introducing new production technologies to increase the income and reduce the losses. This process took quite some time but now it is one of our key competences.
What were the main stages of optimizing the costs and increasing the profits?
Cost optimization started with KraMZ – the largest asset of En+ Downstream. We put the focus on the key advantages of KraMZ over other metallurgical works. Firstly, KraMZ is located very close to UC Rusal’s Krasnoyarsk Aluminum Works that supplies liquid burden to KraMZ. As a result, we have smaller costs as compared to those who produce ingots and semi products from aluminum ingots. In general, saving each ton of raw is very productive because the raw accounts for up to 70% of the production cost of aluminum semi products. Secondly, using raw cuts transport costs and using liquid raw that does not require stocking saves turnover assets. Moreover, using liquid raw allows En+ Downstream have one of the highest yield ratios in the industry. Each percent of the yield ratio affects the production cost.
As for the increase of profits, we have optimized our product groups in terms of profitability and market demand and now we concentrate on the most demanded products with the highest added value. KraMZ has a few production activities: casting - including sheet ingots (for production of slabs and rolls) and cylindrical ingots (for production of profiles and bars) and aluminum wire rods that initially accounted for nearly 90% of the entire production volume – and forging. In total, KraMZ has 42 presses that produce profiles, tubes and vertical stamping for aviation and defense. We plan to consistently reduce ingot production and increase forging production with higher added value. Today, the ratio of ingot production and forging production is already 70 to 30. Similar optimization of the products has been done at DOZAKL.
As a result, we managed to close 2009, a difficult year for metallurgy, with a small profit and how our key objective is to develop the facilities and provide their synergy.
Are the results of 2010 for En+ Downstream known already?
Production volume increased 21% to 148,000 tons; increase at KraMZ was over 18% (from 111,000 to 129,000 tons); increase at DOZAKL was about 10% (from 7,300 to 8,100 tons). Growth of the total volume of production was a result of buying Mosmetalconstruction (MOSMEK) that has produced 6,500 tons of products in 2010. Profit of En+ Downstream grew 60% and reached 12.59 billion rubles as a result of general growth of production, a larger share of products with high added value and a higher price of end products due to the growth of primary aluminum prices.
I should say that the demand for aluminum products in Russia in 2010 grew about 40% according to our estimations whereas aluminum consumption per capita is still very low in Russia as compared to America, China or Europe, and the potential for further growth remains great. This is why we expect a 10% increase of production volume in 2011. However, it is not only about increasing the gross volume – we are based on efficiency of production, which means we will try to increase the share of value added products in order to increase the profit and the income and eventually implement an extensive investment program.
Last year, En+ announced plans to create the largest rolling facility in Russia on the basis of KraMZ, focused on providing aluminum products for aviation and shipbuilding. How is the project advancing? What are the main challenges? Is there understanding of the required amount of investments?
Let’s make a small introduction in our history. KraMZ, same as Kamensk-Uralsky Metallurgical Works (KUMZ), was initially part of the Ministry of Aviation Industry in the USSR. KraMZ was constructed as a large metallurgical facility for the local aviation and defense manufacturers with the purpose of transferring the main aviation production from Central Russia to Siberia, closer to rich resources and low-cost hydro energy. KraMZ was designed as one of the largest facilities in Russia, with foundry production and extrusion production equipped with powerful presses for stamping, aviation profile and bars for the defense industry. The works also envisaged production of mill products with a special workshop of 145,000 sq. m with ready infrastructure and an assembly plan for new rolling equipment to produce a million of tons of products per year. To achieve this, it was planned to deliver an 8-stand rolling mill that is still unique in Russia. This mill produces slabs over 30 m long and 2.8 m wide for the Russian aircraft manufacturers. However, this plan was doomed after Perestroika when the Ministry of Aviation Industry was re-organized, the management was changed and KraMZ was cut off financing. Eventually, when En+ Downstream became a 100% shareholder of KraMZ in 2009, we focused on resuming creation of a new flat-rolled production facility.
At what stage is the project currently?
We have finished the technical part of the feasibility analysis and are currently in talks with banks for financing the project. The initial volume of investments was estimated at $US 500 million. The initial volume - $US 350 million – was increased after we decided to install additional equipment to expand the product range. Back at the stage of preparing the feasibility analysis, we were interacting with large potential customers to form a flexible product range that would correspond to the market demand.
Interestingly, the banks are very positive about this project which is extremely encouraging for us: on one hand, they witness growing demand for the corresponding products; on the other hand, our project has very strong competitive advantages against similar projects in Russia: low cost (construction of a similar rolling facility from scratch would cost at least $US 1.5 billion because part of the project has been done and part of the equipment has been purchased), geographical proximity to the main consumers and a lower production cost of the products thanks to the low costs. The payback period of the project, according to our estimations, will be around eight years.
We are expecting to arrange financing by mid-2011. In 2.5 years, KraMZ will produce slabs and in five years it will produce the entire product range.
Does that mean that the objective of En+ Downstream is to re-focus KraMZ on aviation industry?
Not just aviation: we see KraMZ as the Russian leader in production of virtually all types of aluminum semi-products for aviation, shipbuilding, construction, transport and packaging. For instance, today our share on the Russian extrusion market has reached 10% and we aim to increase it to 30% for extrusion and construction profiles. En+ Downstream’s face on the market of construction profiles is Mosmetalconstruction (MOSMEK) – manufacturer of profiles, constructions and assembly works. The objective of En+ Downstream is to be involved both in production and sales of construction profiles and production and installation of constructions for final consumers. MOSMEK’s current market share is about 5-7% which we plan to increase to 13% because it has profitable products. Straight after En+ Downstream purchased MOSMEK in 2010, we also purchased new equipment for production of bent facade constructions to ensure our competitiveness on this market. Currently, we participate in 12 large construction tenders such as reconstruction of Chechen Republic.
If the market of construction profile develops, we will become a competitor for large international brands that are present on the Russian market. We have recently bought an Italian construction profile system – a famous brand that will be produced at KraMZ and MOSMEK. The latter, apart from production facilities, has a strong engineering company that can design entire facade constructions and elements for hangars and stadiums which is our chance to work for Olympic sites in Russia. Production of long profiles is a niche that is quite hard for other manufacturers, and we are ready to take it.
As shipbuilding and transport machinebuilding is concerned, En+ Downstream and Siemens participate in aluminum car production program for railways on the basis of KraMZ (also, possibly, KUMZ). Now the question is what domain Russia and Germany will choose. Our competitiveness depends on how many opportunities we have, and the key point for us here is to declare what we can do. That is why our communication policy and maintaining relationships with the core media that are in the crossover of the supply and demand and form the market are essential for us. With sufficient information, both consumers and manufacturers will win.
Do you think there is a discrepancy between the available production capacity and the needs of the Russian aerospace industry?
We have closely studied aviation development strategy and the letter of Alexey Fedorov, ex-President of United Aircraft Corporation, where he forecasts a deficit of 5.5 mln t of aluminum roll by 2015. According to the production volumes announced by the Russian aircraft manufacturers in civil and military aviation, there is a possibility that the industry would face shortage of aluminum semi products. This is the reason behind our key investment project for creation of the largest rolling facility at KraMZ.
However, I would like to draw your attention to the fact that all the big five Russian metallurgical facilities are more than 50 years old and are, in general, outdated. Unless we modernize the available facilities and construct new facilities, we will very soon be unable to produce competitive products for the Russian aircraft manufacturers that want to compete with Airbus and Boeing and need a good quality product with a lower price. If the market grows, it will be enough for En+ Downstream, KUMZ and Alcoa. The wider we make our offer, the more competitive we make our product because Russia is interested in selling aircraft and equipment and not just raw.
Are composites a potential threat for aluminum given that the composite market is starting to develop? Some players think it is possible to develop the market of composites and metals in parallel, while others are convinced that the era of “flying metal” is over.
It is impossible to stop the market. As soon as Russia starts to develop aviation, corresponding demand will emerge. Introduction of combined materials is possible in semi products for the aircraft body or for the landing gear. Manufacturers will always look for a product that best reflects their interests, especially in aviation, where safety is a top priority. Development of new materials goes in parallel with development of aluminum with improved technical characteristics. For instance, we cooperate with large institutes that improve the existing aluminum alloys for manufacturers who require certain characteristics, such as resistance, for a certain price. This is generally a slow process because development of a new material takes time.
We should also not forget about combinations of materials. DOZAKL, our aluminum can tape test works based in Dmitrov, combines new materials for products like aluminum foil or lamister, our new product – aluminum foil lacquered on one side and laminated with polypropylene tape on the other side. This is DOZAKL’s invention and monopolistic product. Once again, this proves that development of such materials is a constant and necessary evolution.
One of the counter-measures launched by the industry is stimulation of aluminum demand. What is your view of it?
This program witnesses the need to sell products on the existing markets and to form new markets. For instance, it was not immediately clear that the colossal market of aluminum cans was not always there and was formed at some point. This is top class playing - stimulating demand by creating new products and developing the market. The consumer should be the first to come to the manufacturer. To make it possible, creative people forecast and model potential needs of the market. The key point is to find a hungry market.
Is it challenging for KraMZ to attract new professionals?
To provide a flow of new professionals, we work with a few universities in Krasnoyarsk. En+ Downstream has developed a practice of inviting young specialists for a 1-2 months internship to cast a “fresh” look at our operation. As a result, many of them suggest original solutions for different operations such as optimization of logistics and transport flows. Besides, we run outdoor training sessions for sales managers, we have a system of incentives for our employees that allows us interact effectively with the labor market. As for the people involved in production, we highly value both our long-serving employees and our young stars. For instance, the Finance Director of KraMZ is a young and incredibly professional guy. Thanks to our Commercial Director, we have managed to optimize KraMZ structure and have joined the works and the trading house that has brought us higher efficiency.
In general, we have a very strong and professional team. These people are genuine Siberians, they are never afraid of challenges and it makes it so easy and pleasant to work with them. They energize me when I visit KraMZ. It’s a very rare phenomenon nowadays. They remember how KraMZ was built, they show real respect towards the veterans of KraMZ, they are aware of the drawbacks that they see now, they are open to discuss them, and we always listen to them.
Mrs. Vasilenko, what would be your final message to the audience of Russianavia.net?
I would like to talk about the development of metallurgy in Russia. Russian metallurgical facilities were launched 50-60 years ago. They are still operational but their equipment requires modernization. If we want to develop the Russian economy, we need to develop metallurgy. Russia is an enormous field for development of metallurgy: it has power resources and natural resources concentrated in Siberia, opportunities to reduce costs and increase the industry’s competitiveness. It is important that the government is aware of these opportunities, that it helps the industry and hears its needs. Most importantly, it should create a long-term strategy for basic production of components for thousands of aircraft and military equipment.
If we wait for the demand, it will be too late to do anything. You need to approach the demand with the right quality and an adequate price. The most important thing now is to build a basis to ensure a new leap of the economy. I hope that we can count with the support of the government. Now is the right time. If we lose it, we will be late.
|Position:||Director of En+ Downstream|