The head of the leading pipe manufacturer talks about undersea pipeline projects, the construction of a plant in the U.S., and high-speed railways.

– Mr. Markin, what was especially memorable for the company in 2012?

– First of all, in 2012, we participated in major pipeline projects of our time. We were the first of the Russian steelmakers to have confirmed our readiness to produce large diameter pipes for the gas pipeline South Stream. OMK is already supplying pipes for the project’s overland sections. Also, last year, we produced and delivered new kinds of pipes for oil pipeline Arctic-Purpe. The products meet the most stringent quality requirements, as they are put to use on permafrost. The start of the second line of Nord Stream in October 2012 was also memorable for us. We became the first and the only Russian pipe company whose products were used in this large international project. For the two strands of the Nord Stream pipeline we have so far shipped more than 460 tons of pipes, some of which in their characteristics are absolutely one-of-a-kind in the world. The successful fulfillment of contractual obligations for Nord Stream has contributed to our victory in tenders for other major offshore projects. This includes the Baidarata Bay underwater passage from Sakhalin Island to the mainland project, the Sakhalin-Khabarovsk-Vladivostok pipeline, the Dzhubga-Lazarevskoye-Sochi pipeline, and the Varandey offshore terminal in the Barents Sea. I am proud to say that today OMK is the most successful underwater pipe producer in the country. Last year, we finished another big project, the installation of main pipelines Bovanenkovo-Ukhta from the Bovanenkovo oil and gas field. This was the beginning of commercial production in Yamal, which is a completely new large gas-bearing region of the country.

From 2008, OMK delivered for this project about 400,000 tons of pipes capable of withstanding the harsh Polar climate.

 – Besides the pipeline projects, what other events important for the company happened in 2012?

 – In terms of our other achievements, one of the most important is the completion of a new pipe plant in Houston, Texas in southern United States. It will produce casing and tubing. In the next few months, the company will produce the first product batch at that facility. The North American market is familiar to us. OMK has been delivering pipes to the U.S. since 2004. The pipe plant of OMK will have production capacity of 200 thousand tons per year and will allow us to expand substantially the company’s presence on the North American market. What could be more remarkable?

The company is also beginning the construction of a pipe and steel complex in Chusovoy. OMK also continues equipment upgrades at our mill-5000. We are constructing a new line for the manufacturing of railroad wheels for high-speed transit. Our high-tech products, including pipes, railway wheels, and rolled products, are in demand all over the world. We are constantly working on improving our positions. OMK has always been an innovative and a pioneering company.

– What were the production results for last year?

– Our overall results are such that the output of pipes is more than 1.6 million tons. The production of large-diameter pipes (LDP) was 656 thousand tons. This is a third less than what we had in 2011. The decline is not unusual for the domestic pipe industry, and it is explained in large measure by the fact that our strategic partners moved the start of several major projects to a later period. In 2012, we produced 850,000 railway wheels, which was a record in the history of the Vyksa Steel Works (VSW). The growth rate was 14 percent in relation to the results for 2011. The key to success here were the results of our efforts to improve the efficiency of production and business processes in the performance of long-term contracts with the Russian Railways, which is our key partner.

– What was the performance of the metallurgical complex mill-5000 in 2012?

– The primary objective this year was bringing mill-5000 to full capacity and perfecting the technology of producing rolled slabs of a particular size. Because of the lack of a loading mechanism for the production of LDPs, the mill’s designed capacity has not yet been reached. For most of 2012, smaller sheet were rolled through the mill. We started processing slabs in October. In the previous year, mill-5000 produced 220 thousand tons of rolled products. Today, the facility continues additional testing operations to produce sheets of different sizes and grades. We are already processing pipe sheets of strength class X80. Soon, we will master the production of the X100 class.

– Have you assessed the needs of the Russian market of pipe production this year? When will the demand dynamics be restored to normal?

– According to our data, the total domestic consumption of steel pipes in Russia in 2012 was less than in the previous year by 12 percent, dropping down to 9,000,000 tons. Imports totaled about 760 thousand tons, which was less than half the results reported in 2011. I believe that in 2013, the demand for pipes in the domestic market will grow slightly. The necessary conditions for this trend are the uninterrupted development of the gas projects previously launched, as well as the gradual start of new projects. As for the foreign market, we do not expect significant changes this year.

– Is it OMK’s long term strategy to increase production? 

– Of course. Our priority is the domestic market, and its development is entirely connected with the implementation of projects by the national oil companies. In January, together with other Russian pipe manufacturers, we participated in a special meeting organized by Gazprom. The questions discussed were related to two major gas pipeline projects, namely South Stream and Sila Sibiri (Power of Siberia). The Russian producers expressed full readiness to supply the necessary volumes of pipes for underwater sections of South Stream, as well as pipes for its overland sections crossing the E.U. Based on our data, while in 2011 the share of imports in the procurement scheme of Gazprom was about 12 percent, in 2012, it was only one percent. This is good news for the Russian pipe producers. We have progressively developed our capabilities in terms of volume and product mix, and we can now meet the needs of Russian pipe consumers 100 percent. I would add that this year we hope to increase the production volume of casing and tubing for the oil and gas industry with the launch of the OMK Tube production facility.

– What about the production of railway wheels?

– As to the market segment of railway wheels, it is important to mention that we have been working at maximum capacity at the wheel-rolling production plant VSW last year and early this year. In recent years, domestic railcar builders have worked with great intensity. In this regard, on the one hand, there might occur a reduction in the production of railcars in the second half of 2013. On the other hand, the railroad considers decommissioning outdated rolling stock to improve traffic safety. In this scenario, and also in view of the fact that there will be a steady demand for wheels for routine maintenance, it is possible that the production of railway wheels in 2013 will remain at record levels seen in 2012.

– What are the financial results of the company in 2012 and what is the forecast for 2013?

– According to preliminary data, the revenue for the OMK group in 2012 will exceed 110 billion roubles. The final results will be announced later. In 2011, revenues amounted to about 119 billion roubles. The slight decrease in 2012 is due to the postponement of a number of large pipe projects in Russia. We expect a slight increase in results for 2013. I want to emphasize that the key financial results of OMK in recent years have been stable.

– Does the company contemplate taking out new loans? How did the debt burden of the company change last year?

– We plan to continue implementing our investment program. This, of course, will require additional funding. However, we do not expect that the ratio of net debt to EBITDA will change much. We expect that the ratio will be at no more than 1.8 at the end of 2013. At the end of 2012 it was 1.6. In 2012, we managed to reduce net debt, which currently stands at 48 billion roubles. At the beginning of 2012, net debt was equal to 51.3 billion roubles.  

– What are the financial instruments that you are considering – for example, the issuance of bonds or new loans? 

– We do not plan to issue bonds, since the bulk of funds for our investment program is already provided for under the credit agreements signed last year. The most significant financial transaction in 2012 was the execution of a credit agreement with Sberbank of Russia to finance the construction of an integrated steel pipe complex at Chusovoy, which was secured by a state guarantee.

 – What did you spend on production development in 2012?

– In 2012, the total investment in the development of production at OMK exceeded 15 billion roubles. Of these, about 10 billion roubles went to VSW projects. Of the total investment, more than 5.6 billion roubles was invested in the development of production at mill-5000. Another one billion roubles was allocated to the reconstruction of  electric welding shop no. 3, including for the substantial modernization of mill-203-530. These capital expenditures have allowed us to expand our range of products, improve quality, and enhance the plant’s capacity.

After taking the modernized mill to full capacity, VSW will have the latest high-tech manufacturing equipment for oil and gas medium-diameter pipes. Full capacity is expected at 650 thousand tons per year. The new production techniques will allow for the manufacturing of pipes with a wall of 12.7 millimeters, including durable high-strength pipes.

Additionally, we are continuing to upgrade and expand facilities for the production of casing at welding shop no. 5 and the production of small-diameter pipes at shop no. 2. The implementation of these projects will allow us to master the production of new generation pipes that match the best international standards. In 2012, VSW continued improving wheel production processes. Today, the plant is installing a new processing unit for the production of wheels for high-speed railcars.

Around one billion roubles in 2012 was earmarked for the construction of a scrap shredding facility at the rolling mill. This will improve the quality of scrap, and, as a result, enhance the efficiency of the steel plant as a whole.

At the OMK Tube plant in the U.S., investments reached more than 1.7 billion roubles in 2012. Almost 800 million roubles were invested in projects to increase capacity at the Trubodetal plant in Chelyabinsk, so that it could produce products that are high in demanded on the market.

– With your key projects completed, will the year 2013 see a reduction in investment?

– Indeed, in 2011-2012, we completed a number of large investment projects. Now we need to ensure that these facilities reach target capacity and operate with a high degree of efficiency. The company’s investments in 2013 will be about the same as last year. Soon, significant projects will be completed at the Vyksa plant, including the construction of a new conditioning coating line for large diameter pipes and the reconstruction of the electric welding shop no. 3. We will also expand the facility for cutting casing and will replace the mills for the production of underwater gas pipes. Also, we will realize another promising project, which I have already mentioned, namely the construction of the steel tube-melting facility at Chusovoy. It will produce up to 500,000 tons of seamless oil and gas pipes. Today we started recruiting pipe production specialists in advance of our negotiations with equipment suppliers. We are also ready for selecting the general designer and the general contractor for this project.

– Tell us about your new venture in the U.S.?

– In accordance with the strategic goals of OMK to achieve geographic and product diversification of business, we have set up a manufacturing facility in the U.S. The concept itself involves the reorientation of our operating model from exporting finished products made in Russia to building new production capacities in the regions of foreign countries where there is strong demand. The plant in Texas was a logical step for us to enter the market of casing and tubing pipes from low-alloy steel. Texas is the largest oil- and gas-producing state, and almost half of the U.S. refining capacity is concentrated around Houston. This makes oil and gas pipes a significant market segment in Texas. Close to 40 percent of the casing and tubing used in the U.S. is supplied in the form of imports. Future prospects are quite good here, as the growth in demand for pipes is bound to occur with the implementation of shale projects. The construction of the OMK Tube factory began in April 2012 and was completed in December. Also in December, we received permission from the authorities to operate the plant and produced our first pipes. Today, the company is working on developing production. The ceremonial opening of the plant is scheduled for the end of February. Total investment in this project from its start through 2015 will be about three billion roubles. The capacity of the plant will be achieved by the end of 2013.

– Which of the Russian and international projects OMK plans to take part in during 2013? Which markets and consumers are the most promising for the company?

– One of the most important projects in 2013 will be the Central Asia – China – 3 (SAC-3) pipeline. Through the first half of 2013, we have produced and delivered to the customer 125 thousand tons of pipes with diameter 1,219 mm, wall thickness 17.5 millimeters, strength class H80M, and internal and external anti-corrosion coating. Moreover, the pipes for the project will be made from our own sheets produced at mill-5000. Our partners will be able to fully appreciate the benefits of the OMK Vyksa production chain that allows us to go from a wide steel plate to a large diameter pipe, reducing delivery time and providing products of consistent high quality. I also would like to remind you that we were actively involved in the first two SAC projects with good results. In 2008-2009, VSW shipped for construction of the first two lines of the Central Asia – China pipeline for the segments of Uzbekistan – China and Kazakhstan – China some 260,000 tons of pipes of 1,067 mm diameter with a wall thickness of 15.9 mm, as well as internal and external corrosion-resistant coating. OMK’s participation in all three projects of the gas pipeline Central Asia – China is indicative of the successful experiences we had with our partners.

Another breakthrough for us this year will be our participation in the very complex South Stream project. We believe that we have gained unique experience through our participation in five subsea pipeline projects. The tender for the supply of pipes for the underwater section of South Stream is expected later this year. The Power of Siberia pipeline is another promising project implemented by Gazprom. Within its framework, the company plans to create a transportation system that will ship the gas extracted in Yakutia and Irkutsk via Khabarovsk to Vladivostok. This project will establish a new outlet for the export of Russian gas in the Asia-Pacific region. The tender for the supply of 200-300 thousand tons of pipes is expected in the second or third quarter of the current year.

– If OMK wins these tenders, how will you increase your production volumes?

– If OMK is selected to participate in the major projects to be implemented from 2014 to 2016, the production of large-diameter pipes can go up to 1.5 million tons of pipes per year. I’d like to add that we have experience in delivering large diameter pipes for other foreign projects. In 2009-2010, the company has supplied pipes to Africa for the construction of gas pipelines OML58 and NOPL. In 2007, there was a shipment of pipes to Oman for a subsidiary of Shell. In 2002-2005, we have supplied pipes for Sakhalin-1 and Sakhalin-2. At that time, OMK was the only Russian supplier of line pipe for companies such as Shell and Exxon. Now we continue our participation in supplying the Sakhalin projects. In October 2012, we supplied two-layer pipe with epoxy coating for the OPF field at Sakhalin. It should also be noted that in the past few years we have successfully delivered medium-diameter pipes to the E.U. market.

– Do you plan any mergers or acquisitions in the current year?

– It has historically been the case that OMK created new enterprises on its own initiative. Over the past five years, the companies we created include the Casting & Rolling Complex, mill-5000, and the plant in the U.S. These enterprises are equipped with the most modern equipment and technology in the world. They produce products conforming to the highest international standards. This is a part of our strategy. However, we are open to different proposals and would consider purchasing certain assets. We are first and foremost interested in our traditional products, which include pipes, railway wheels, and metal fasteners. The geographic interests of OMK are quite broad and are not limited to the boundaries of Russia. However, this does not mean that we plan to go to the largest possible number of foreign markets as a local manufacturer. We are looking at opportunities and will make decisions only on the basis of a cost-effectiveness analysis and the availability of synergies with existing business entities.

– The decrease in revenues last year will not affect your social projects?

– No way! This is a part of our strategy. The company pays great attention to developing the social and cultural environment in the cities where our businesses are located. Because OMK’s steel mills today use unique and advanced equipment, we need people that are not only highly qualified, but also have an expansive worldview. Besides, many of our leaders, myself included, have grown up in cities, where the mainstay enterprises were metallurgical plants. From our childhood, we have felt the care and support of these enterprises. Therefore, we believe that this is definitely the right approach that we have to continue. In recent years, the company has earmarked more than five billion roubles for social and cultural projects. In 2010, when a fire engulfed the Vyksa district and injured thousands of people, we were the first to help them through our charitable foundation OMK-Participation. We not only gave money to help the victims, but also offered moral support to the people. The OMK-Participation fund has been collecting donations from corporate shareholders and employees for more than four years. In Vyksa, the fund is implementing an extensive cultural and educational program for children and teachers in city schools, working closely with the Moscow Institute of Pediatric Oncology and Hematology, helping to purchase medical equipment for tens of millions of roubles. Every year, we also organize charity performance in theaters and concert venues in Moscow. They are open to children receiving treatment at the oncology center, as well as to children from low-income families and orphanages. For 10 years, we have also sponsored the New Year’s party for children at the Tsvetnoy Boulevard Circus. Altogether, the fund OMK-Participation is very significant, and we are not going to cut it.