Magic Numbers: PHARMA-2020 Strategy’s Target Indicators

PHARMA-2020 strategy recently developed with the Industry Ministry of Russia contains a set of target indicators for each of two major scenarios (innovative and inertial) for year 2020; these indicators will be used by officials to estimate the strategy’s success – as well as the indicators may be used with analysts to see what scenario is being realized in the country’s pharmaceutical market.

Target indicator

Indicator value, 2020

Innovative scenario

Indicator value, 2020

Inertial scenario

Market value CAGR 2009-2020

13.5%

10.1%

Domestic drugs – share in value

50%

15%

Domestic drugs – share in volume

55%

40%

Share of domestic drugs made of domestic API

30%

3%

Export of drugs in % to domestic production

5.3%

4.9%

Innovative drugs (domestic and imported) – share in

value

60%

56%

Domestic innovative drugs – share in value

50%

1%

Number of drug producers

100

100

Number of drug R&D firms

825

<100

Share of GMP-certified plants

100%

100%

Number of domestic drugs in pre-clinical expertise stage

590

<100

Number of domestic drugs in clinical trial stage

212

<10

Number of domestic innovative drugs

217

<10

 

 

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High Safety Factor: Extruded Polystyrene Capacity in Russia

Currently Russian XPS market is in overcapacity, with current level of demand in XPS solutions resulting in only 35% capacity utilization. Russia will remain self-sufficient in XPS (without increase in imports) as and when the market returns to pre-crisis growth rates. It’s seemed that in the next 4-5 years the same players will dominate the market – in capacity and production terms.

The current level of capacity utilization allows to triple production without adding new capacities; market players know about the overcapacity and will rarely invest in new capacity or capacity increase. 

However regional start-ups are probable – i.e. launch of new XPS capacity to supply some specific region (and to reduce logistics costs at transportation from other regions). The sample of such approach is a launch of 600 thousand m3 capacity with Bashkirsky Brick in 2009 – to satisfy local demand in Bashkortostan region (one of top regions in terms of construction area).

Probable launches in Eastern Siberia and Russian Far East (Penoplex planned to launch XPS facility in Irkutsk – to supply these regions – but declined the project due to financial problems; but probably any of the existing players or new investors will want to fill the gap).

Due to a fact many of XPS plants face financial problems now the M&A processes in the industry are probable. Existing players with stable financial situation (such as TekhnoNIKOL) may want to expand capacity not with new launches but with acquisitions; for instance, in the recent past TekhnoNIKOL acquired AKSI plant (rock wool producer) in Russia – so it has successful experience of M&A integration.

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Under Pressure: Major Trends in Russia’s Air Compressor Market

During the USSR period, large and mid-size industrial plants in Russia were equipped with centralized air-supply infrastructure based on large centrifugal and piston compressors, and air-distribution networks.

At the beginning of the 2000’s, when compressor international suppliers began to penetrate the Russian market, decentralization of air-supply infrastructure began to take hold, and a number of large plants being modernized replaced centralized centrifugal infrastructure with decentralized rotary compressors. Demand for rotary compressors by both large and smaller plants gained momentum thanks to new-found benefits, such as smaller size and weight, high reliability, lower pressure fluctuations, no need in basement, much easier maintenance, possibility of long continuous work, and low loss of oil.

Decentralization was not appropriate for all large plants, however, and it was rethought around the beginning of production boom in 2002-2003 (in metals, cars, cement, etc.). Fast-growing production was not supported by decentralized compressors’ capacity, so decentralized plants needed to replace many compressors and to modernize piping, while those who used centralized schema just added several more centralized compressors.

Currently compressor users in Russia try to implement more balanced” strategy – that assumes use of centralized and decentralized systems schemas in the same facilities.

The largest customers try to avoid “only centralized model” or “only decentralized model” and use high-capacity piston or centrifugal compressors in main facilities, while rotary compressors (for decentralized supply) in auxiliary facilities or distant sites.

In 2005-2006, the popularity of decentralization lost momentum and since then large plants have increase purchase of large compressors for centralized air-supply. In addition to traditional centrifugal and piston compressors they try to use large rotary compressors combined in cascades or equipped with the compression second stage. As such, demand for rotary compressors by large customers decreased, which demand for piston and centrifugal compressors grew.

Fight for share by piston vs. centrifugal compressors is expected to continue over the next five years and will manifest itself at that time. However, rotary compressors will effectively compete with piston and centrifugal only in <1.5 MPa segment. In >1.5 MPa piston and centrifugal will continue to dominate over the next five years in Russia; several international suppliers provide rotary compressors that can overcome 1.5 MPa limit (like Atlas Copco’s GR 110-200 models), but currently they hold a very little share in >1.5 MPa segment and share will grow insignificantly over the next five years.

Knowing the preference of low capacity compressor customers to purchase new units, and higher capacity compressor customers to rebuild or upgrade, Russian compressor producers are honing their production programs to:

  • Focus on production of small/mid-capacity rotary compressors;
  • Implement modernization programs for large capacity centrifugal and piston compressors

Many of the Russian producers begin to actively think about development of their services; they understand it’s possible to gain sales not only selling equipment (compressors) but also spare parts, repair and maintenance services and engineering consulting as well. Most of the plants started with increase in spare parts production, repair and maintenance while only few could introduce engineering consulting in their service portfolio. All Russian plants produce now spare parts for their own compressors, while few also produce spare parts to compressors made with other Russian/FSU producers - it’s possible as many parts are standardized within CIS, and thus different compressor producers use the same fashioned parts. There is growth of spare part sales with domestic producers; moreover such sales grew faster than sales of compressors.

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Another Step in Making Emerging Markets More Predictable: Blog Summary 2010

Year 2010 comes to its end – and it’s time to analyze the annual results.  This year Ignatov & Company Group began its activities in social networks – and launched the corporate blog, that one you are reading now.

We published 35 posts since July 2010, when the blog was first presented. In average it was 5 blogs per a month - the number that will be doubled in 2011.

Almost half of all posts (45%) related to Russia – and it’s clear why: that country presented the largest market among those covered with us. Posts over markets in Central & Eastern Europe (i.e. such countries like Poland, Ukraine or Czech Republic) provided 25% of the publications – the same as with post about Central Asian “Stans”.

In 2011 we plan to increase the number of publications over the markets in Latin America (in particular for Brazil, another member of BRIC), Africa and Western Asia.

Top-10 most popular posts in 2010:

  1. Russia’s leading business groups in Who Owns Russia: 32 Largest Business Groups Make 51% of GDP
  2. Russian coal export shift from the EU to Asia-Pacific regon in Brave New World for a Sleeping Giant: Russia On a Threshold of APAC Coal Export
  3. Construction permitting process in Russia in The Road to Calvary: Permitting for Industrial Plant Construction in Russia
  4. Fire safety regulation in residential and non-residential construction in Russia in Fire-Safe House: Regulation in Russia
  5. The market for dietary supplements (known as “biologically active supplements”, or BADs) in Russia
  6. Seaport strategies with the Russian steel-makers
  7. The history of competitive intelligence in Russia in 1991-2010
  8. Сar purchasing patterns with the Russians in Hard Habit To Break: Why Russians Do Not Buy Hybrid/Gas Vehicles
  9. Business activities with the Koreans in Russia in One Folk, Different Destiny: Korean Diaspora in Russia and Kazakhstan
  10. How Kazakh largest corporations self-supply with electricity in Power-It-Yourself: Corporate Power Plants in Kazakhstan

Other posts published in 2010 contained valuable information about:

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“Organized” vs. “Occasional”: Equipment Import in Russia

About 1/3 of the manufacturing equipment import in Russia is attributed to:

  • Chinese compressors and
  • “Occasional” Western brands (i.e. those sold time-to-time, mainly directly; such suppliers are not presented with offices or subsidiaries in Russia);

As this share was stable enough in the past years it’s seemed the Russian manufacturing equipment market consists of two unequal segments:

  • “Organized” market – made up of customers who have clear requirements to manufacturing equipment, know well “who-is-who” among the equipment suppliers and may make more or less “deliberate” choice of supplier and equipment
    • Such customers represent industries that are characterized with at least two major features: a) they have “regular” demand in manufacturing equipment (like machinery manufacturers, O&G operators, food plants, etc.) and b) located in urban areas where they have access to modern telecom infrastructure (broadband Interned, etc.) and professional media (where they may read articles and advertisment)
  • “Occasional” market – made up of customers who need equipment time from time (“occasionally”), who do not know “who-is-who” among the suppliers and buy manufacturing equipment based mainly on the lowest price
    • Such customers represent either less-developed industries like forestry as well as facilities located in rural areas or in small towns, with limited or absent access to Internet, far from large cities with qualified distributors, etc.
    • Another category of “occasional” clients requires “customized” equipment – mainly in industries having special requirements even for small machinery (such industries as chemical, where almost each plant has some ”unique” manufacturing process)

Each of two segments has its specific suppliers:

  • Domestic suppliers and those Western suppliers who have any regular presence in Russia (office or distributors) work in “organized” market
  • Chinese suppliers – with their cheap prices and emphasis in sale of equipment via retail channels – are “best” choice for “technically-illiterate” clients in less-developed industries
  • Western “occasional” supply targets mainly “customized” sub-segment

It’s seemed suppliers from one segment rarely supply in other segments:

  • Large “regular” customers usually do not buy Chinese equipment
  • “Technically-illiterate” clients in less-developed industries usually do not buy from known Western suppliers (as they do not know about such suppliers at all)
  • Clients with “customized” needs do not buy Chinese equipment, and usually do not buy from “regular” Western suppliers (as they think the “regular” suppliers may ask a very high price for “customization” of their “regular” equipment)

Thus “occasional” market, representing 35% of total import, looks as a good target for any equipment supplier. But to work with clients in this segment it’s necessary first to “accustom” them to “regular” purchasing patterns and only then to promote specific brands. I.e. first they need to understand that it’s beneficial to buy equipment from regular suppliers (no matter if its Western or Russian supplier) and only then they may think why equipment of brand A is better than of brand B or C.

Need to remember many of such clients have limited access to Internet and professional media, and thus wide distribution network (with presence even in small locations) is the main supply channel. Not necessary to build controllable network – i.e. that consisted of own sale offices or subsidiaries; it’s enough (at least at the initial stage) to sign agreements with non-affiliated Russian distributors.

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Antimony Fallen Giant: Mining in Tajikistan

At the USSR period Tajikistan was the largest producer of antimony ore in the country. After the USSR crush antimony ore and other metallic ore mining was stopped in Tajikistan – due to economical crisis and absence of demand from the side of Russian metal plants.

Since 2003 all metal ore mines and enrichment plants were sold to foreign investors – who started modernization programs and began to extract ores in 2005. Currently Anzob GOK (Sugd region), a JV with the US investors, produces a small volume of antimony ore.

Gold is the key mining segment – there are 5 gold-mining companies in Tajikistan now, from which 3 are the leading players with 99% share. At the USSR period they extracted precious and semi-precious stones in Tajikistan – but after the USSR crush all mines were closed.

Domestic production in Tajikistan’s mining industry was about $35-37 mln in 2009 (in comparable global prices), from which the country exported products at $33-34 mln (i.e. 95% of sales were provided by export); Tajikistan imported mining products at $120-130 mln (import of coal and import alumina for Tajik Aluminum Smelter – due to a fact Tajikistan has no own bauxite deposits).

Gold-mining ore is the largest segment in the industry (81% of domestic production value, 88% of export). Alumina is the largest in import (95%) and in domestic consumption (94%). Other sub-industries (including antimony) are small segments with domestic production about $1 mln per year.

As it can be seen Tajikistan has export-oriented gold-mining and import-oriented non-ferrous ore mining.

Currently there are almost 30 mining companies in Tajikistan: 8 companies are the largest players, 3 companies are mid-size players, and others are small miners.

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Food, Not Drugs: Dietary Supplements Market in Russia

Definitions: Dietary supplements (known locally as “biologically active supplements”, or BADs) are counted to be part of “food” not of “drugs” in Russia. Vitamins and fatty acids (like Omega-3, etc.) including those in capsules are counted to be “drugs”, not BADs in Russia.

Market size: BAD segment counted for RUB 18.8-19 bln ($593-600 mln) in 2009; BAD market is shared between domestic supply (70% in volume and 30% in value) and import (25% in volume and 75% in value). Evalar is the largest producer of dietary supplements in tablets/capsules; other BAD domestic producers are small entities with out-of-date technologies and low production/ sales volume. BAD import is mainly solid dosage forms, including coated tablets and capsules. U.S. suppliers (i.e., GNC) dominate in BAD tablet import in Russia.

Regulation: The BAD segment is regulated not with pharmaceutical rules but with special rules applied to diet food and food supplements. BADs are not being registered as “drugs” in Russia; instead of drug registration process (with pre-clinic and clinic trials, etc.) BADs have to be certified (with “conformity certificate” – issued with BAD producer itself); certificate proves that BAD conforms sanitary rules (that are being applied to food); such regulation is valid since Feb 2010.

Since Feb 2010 each “conformity certificate” for BAD must be registered in a special Register of conformity certificates for BADs; this register is being maintained with the Federal Service on Technical Regulation and Metrology of Russia. Registration in a Register is being done not directly with the producer (who issues certificate) but with any of the accredited certification authorities (i.e. certification authority/test lab has to confirm that the conformity certificate has been issued with a producer in proper way and then to provide documents to the Federal Service on Technical Regulation and Metrology for registration in the Register).

Components: 

BADs may contain:

  • Herbal components
    • However there also may be “drugs” made of herbal components (they must be registered as “drugs)
  • Honey and other bee products
  • Seafood
  • Mineral component
  • Synthetic substances

Difference between BAD and drug

  • BAD is not for treatment but only for feeding
  • BADs do not contain API, i.e. substances that are usually not contained in food and that are used for treatment; BADs contain only those substances that are components of food (however they may be in higher concentrations)
  • BADs do not change the human organism’s functioning (while drugs do it)
  • BADs contain only so-called “physiological” dosage of substance, while drugs contain “therapeutic” dosage; daily “physiological” dosage of any substance in BAD can’t be higher than single “therapeutic” dosage; daily “physiological” dosage of any substance in BAD can’t be higher than 60% of daily “therapeutic” dosage
  • BADs may be sold in drugstores an d in food stores, while drugs – only in drugstores
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More Houses, Less Offices: Construction in Russia per 9M2010

Residential construction became the main driver of the market in 2010 in Russia. After 2009 decline in housing construction, residential sector began to recover in 2010, mainly due to state support programs.

Office construction suffered in 2010; for instance in Moscow only 50,000 m2 of office space was constructed in Q3/2010, compared to 250,000 m2 in Q3/2009; change in the city’s government (new major, etc.) may lead to change in “rules of the game” in residential, commercial and office construction in Moscow. In the first 1-2 quarters the market may even drop, due to uncertainty around new “rules”, due to expulsion of previous “favorites”; after this adjustment period, Moscow market may resume growth – due to clearer “rules”, entrance of new construction companies, etc.

Industrial construction suffered due to slow down in investment. Investors (including foreign) launched construction of a number of large facilities in 2007-2008 (targeting fast-growing markets that existed that time in Russia), and completed them in 2009. By end of 2008 and in 2009-2010 there were only a few new launches in industrial construction, so 2010 had fewer completed projects.

Contraction in retail trade has lead to deceleration of commercial construction; recent legislative limitations for retail prices (for a set of so-called “most important social products”) also pushed down the market. Most of largest retailers are now focusing on “optimization” of existing structures (in logistics, procurement, etc.) and M&A (as acquisition prics are well below levels at the retail boom’s peak in 2007-2008); bew construction is not among the priorities in retail business now.

Figure 1. Construction area, thousand m2 

Building segment

January-September 2009

January-September 2010

% change

Residential buildings

35002,4

40348,1

15%

Offices

2252,3

1549,7

-31%

Commercial buildings

4616,9

3390,7

-27%

Industrial buildings

1857,9

1342,4

-28%

Public buildings

1859,9

1514,1

-19%

Agricultural buildings

2186,8

1669,8

-24%

TOTAL

47776,20

49814,80

4%

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Fire-Safe House: Regulation in Russia

On July 22, 2008 the Federal Law # 123-FZ “The technical rules on fire safety” was authorized in Russia. The new Law is in force since May 1, 2009.

The new Law in total is consistent with previous standards – and mainly summarizes rules from many documents in a single place; also the legal status of the Law is much higher than of national standards or other by-law documents. The new Law will replace all existing rules (GOST, SNiP) in building and fire classifications and fire safety, in particular:

  • SNiP 21-01-97 “Fire safety of buildings and works”
  • ST SEV 383-87 “Fire safety in construction”

The Federal Law “The technical rules on fire safety” defines:

  1. Classification of industrial and warehouse buildings by fire and explosion-fire hazard (Article 27)
    • This classification is applied only to industrial and warehouse buildings, but not to residential, public, office and agriculture buildings
    • Applicable only to buildings in industrial and cold store/food processing segments
  2. Classification of fire-technical properties of all buildings that covers ( applicable to buildings in all market segments, including industrial and cold store/food processing)
    • Classification of buildings by their functional fire hazard (Article 32)
    • Classification of buildings by their constructive fire hazard (Article 31)
    • Classification of buildings by their fire-resistance level (Article 30)
  3. Classification of construction materials by their fire safety (Article 13) – applicable to materials used in all market segments:
    • Flammability
    • Combustibility
    • Flame spread over surface
    • Smokability
    • Toxicity of the burning products
    • Fire hazard
  4. Classification of building constructions (elements) – applicable to building constructions used in all market segments, including industrial and cold store/food processing
    • Fire-resistance property (Article 35)
    • Fire hazard (Article 36)

Classification of buildings by functional fire hazard, as defined with Article 32 of the Federal Law “The technical rules on fire safety”

Class of building
Definition

Market segment
F1.1 Kinder gardens, elders care buildings, buildings for disabled persons, hospitals Public
F1.2 Hotels, motels, sanatoriums Residential
F1.3 Residential houses with > 1 apartment Residential
F1.4 Residential houses with 1 apartment Residential
F2.1 Close-air theaters, cinemas, concert halls, clubs, circus, stadiums, libraries Public
F2.2 Close-air museums, fairs, exhibitions, dance halls Public
F2.3 Open-air theaters, cinemas, concert halls, clubs, circus, stadiums, libraries Public
F2.4 Open-air museums, fairs, exhibitions, dance halls Public
F3.1 Retail outlets Commercial
F3.2 Restaurants, cafes, fast food Public
F3.3 Rail stations, bus stations, airport terminals Public
F3.4 Clinics Public
F3.5 Hair salons, massage salons, spa salons, etc. Public
F3.6 Sport halls and sport clubs without tribunes Public
F4.1 Schools and colleges Public
F4.2 Universities Public
F4.3 Office buildings, governmental buildings, R&D facilities Office
F4.4 Fire guard stations Industrial
F5.1 Industrial buildings Industrial (except food processing)l Cold store/Food processing
F5.2 Warehouses Industrial (except cold store); Cold store/Food processing
F5.3 Agriculture buildings Agriculture

Classification of buildings by constructive fire hazard, as defined with Article 31 and Appendix 22 of the Federal Law “The technical rules on fire safety”

  Buildings constructions used in these parts of building have to be classified with fire hazard class not less than the following K value
Class of constructive fire hazard Beams External walls Interior Ladder walls Ladder floors
C0 K0 K0 K0 K0 K0
C1 K1 K2 K1 K0 K0
C2 K3 K3 K2 K1 K1
C3 Not defined Not defined Not defined K1 K3

Classification of building elements by fire hazard, as defined with Article 36 and Appendix 6 of the Federal Law “The technical rules on fire safety”

Class of fire hazard Allowed size of damage, cm Presence of Class of fire hazard
for materials, at less
Vertical Horizontal Heat effect Burning Flame Combustion Smoke
K0 0 0 No No No flame - -
K1 ≤ 40 ≤ 25 Not defined No G2 V2 D2
K2 >40 but ≤ 80 >25 but ≤ 50 Not defined No G3 V3 D2
K3 Not defined Not defined Not defined Not defined Not defined Not defined Not defined
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Hard Times for Sputnik Makers: Machinery Manufacturing in Russia

With this post about machinery manufacturing we begin a series of publications containing analysis for Russia’s major industries. It’s not a “quantitative research” targeting market size, growth or competition – but a “qualitative analysis” of business environment and challenges existing in each industry as well as description of the major strategies implemented with the Russian manufacturers to develop their business.

The first industry we want to analyze is machinery production – that covers such activities as aerospace, shipyards, automotive, electronics, energy equipment, engineering machinery, etc.

Business environment in machinery manufacturing is characterized with the following features in Russia:

  • Capacity utilization decreased a lot in the beginning of the 1990s; now they increase production but meet a problem of out-of-date capacities and technologies
  • They meet a problem with old-age staff while young generation prefer to work in other industries
  • By now Russia has used an “import-replacement” resource provided with 1998 devaluation
  • Prices for commodities, energy and transportation grow faster than for industrial products
  • Import of machinery and equipment grows faster than domestic production; there is a process of replacement of domestic equipment with imported
  • Export of machinery and equipment is presented only with CIS
  • There are many state-owned ineffective companies in machinery
  • Ineffective organization within value chains in machinery, etc.
  • Low financing of R&D activity with state and corporate players
  • Manufacturing business requires high investments, so ROI is lower than in many other businesses
  • Russian manufacturers meet global competition not only in the international markets but also in domestic market
  • Territorial location of the Russian companies is presented with 2 models: a) concentration of production within a single location; in such model the plants play the role of so-called “settlement-forming entity” that is responsible for all inhabitants of the location (as most of them work in the plant) – that increases costs; b) large holdings have distributed organization – with assets all over Russia; such regional organization increases costs for inter-plant logistics
  • Many manufacturing facilities are located in a long distance from seaports and state borders (to prevent a new “summer 1941 catastrophe” scenario they were built in distant locations)
  • Territorial location of the plants defines: a) dependence of manufacturing plants on railroad infrastructure in all stages of value chain (from commodity supply to export of final products); b) high transportation costs; and c) possibility to state to indirectly influence manufacturing industry (via state-owned railroad monopoly)
  • There is no organized market for machinery in Russia – all deliveries are being done only by direct contracts with customers or via intermediates; there are no exchanges or e-business facilities
  • Manufacturing business most of all meets a problem of deficit of financial resources for modernization and innovations
  • Taxation policy towards manufacturing business doesn’t support investments and self-financing

Machinery and equipment producers meet many challenges – from which the following are the major ones:

  • Production problems – lack of labor force or materials, delays in materials and equipment delivery, mistakes in design, weak coordination, incorrect supply strategy, staff with insufficient qualification, etc.
  • Customization of production processes to requirements of the specific client
  • Warehousing stock optimization
  • Development of own (controlled) distribution networks
  • Use of few delivery and pricing models (export – long-term contracts; domestic deliveries – no price indicators, some prices are limited with state authorities; deliveries to affiliated parties by lower prices, etc.)
  • Problems in relations with transport operators, railroad agents, etc.

To survive in such hard business environment and to develop their business the Russian machinery and equipment manufacturers implement different strategies, but few of them are the “common” ones for almost all players:

  • Business concentration – 3-5 holdings for each large segment (like automotive or aerospace), 3-7 holdings for each mid-size segment (like engines), and 1-3 large players in each of small-size segments (like hydraulic equipment)
  • Modernization of technologies and production assets, use of automated equipment and machines
  • Reorientation of Russia’s universities to engineering-technical specialists (instead of numerous “economists” and “managers”); financing of R&D in universities
  • Cost reducing strategies – transportation cost optimization, use of modern machinery and technologies, commodity and final products stock optimization, reducing of non-production expenses, etc.
  • Development of corporate risk management systems
  • Joint programs of state and private companies in development of new territories and products (“private-state partnership” concept)
  • Restructuring of value chains – with engineering firms at the head; reorientation from delivery of components and products to delivery of final solutions (including services, technologies, support, etc.)
  • Development of own design schools and bureaus
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We Are Plastic: Ukraine’s Market of Common Plastics

Plastic market in Ukraine is presented mainly with 5 types of so-called “high-tonnage” plastics – such as PE, PP, PVC, PS and PET; other types of plastics are either not been used there or have a very small share in consumption.

At the USSR period Ukraine was not among the plastic-producing Soviet republics – the key idea was that Russia and few Central Asian republics with their developed petrochemical plants would supply Ukraine with plastics. Later – in the end of the 1980s – they decided to start development of the plastic production in Ukraine, to reduce transportation costs at delivery of plastics from Russia and Central Asia to Ukraine. Few projects for construction of plastic plants were developed for Ukraine – but because of the USSR collapse they have not been realized; now private investors (including the Russian oil companies) are implementing few plastic projects, and these projects are really those old projects that have not been realized at the end of the Soviet era.

Currently Ukraine produces LDPE in only 1 plant; there are no HDPE and LLDPE production in Ukraine now. One plant in Ukraine produces PP, while import provides almost 40% of domestic consumption. One plant produces small volumes of PVC in Ukraine, and Russia’s LUKOIL plans to launch a new PVC plant in Ukraine. One producer manufactures PS in Ukraine; there is no PET production in Ukraine.

The PE market growth is provided mainly with flexible packaging segment; currently HDPE replaces LDPE in plastic bag segment; LLDPE replaces LDPE in multi-layer film segment.

Three sectors provide 93% of PP processing in Ukraine: fibers and filaments, films and injection molding. The sectors of PP containers and injection molding have been the leaders in terms of investments into polypropylene processing for the recent years.

There are only few manufacturers of PVC products in Ukraine:

  • 2 producers of granulated PVC plasticate
  • 10 producers of PVC floor covering
  • 10 PVC door/window element manufacturers
  • 3 PVC film/foil producers
  • 2 PVC pipe/tube plants
  • 17 PVC cable plants in Ukraine

The main growth in PS processing was driven with construction industry (EPS panels), while lower growth was in refrigerators and thermoformed products.

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Frozen Steel Wire: Cables for Permafrost Areas in Russia

The total square of permafrost areas in Russia is equal to 10.8 million km2 that is almost 63% of the country’s territory (Map 1). Accordingly the level of density of permafrost rocks, there are continuous permafrost areas (density > 90% of square), discontinuous permafrost areas (density = 50%-90%), and insular permafrost areas (density = 10%-50%) – and it’s possible to differentiate these areas.

Being covered with permafrost areas that occupy almost 2/3 of the country’s territory Russia strongly depends on cable special solutions for frozen grounds. The melting processes occurring in the permafrost areas lead to the dramatic changes in surface relief and, as the result, to numerous damages in cable network.

Map 1. Permafrost areas in Russia

Map 1. Permafrost areas in Russia

Currently the country’s cable industry provides few solutions for permafrost areas, but various types of cables for frozen ground are presented irregularly in portfolios of the domestic manufacturers. Thus the power and control cables with Steel Wire Armoring (SWA) are the most used type. At the same time only few plants produce cables with tailored polyethylene insulation. The manufacturing of optical-fiber cables for permafrost areas is presented in Russia with only few plants (most of which are small facilities).

SWA and special methods of cable installation (like piping or use of artificial mounds made of dry soils from other locations) are the main solutions used currently for permafrost areas in Russia. However cables with tailored polyethylene isolation have the best perspectives in the future.

Russia’s manufacturers of cables for frozen ground (Map 2) meet different problems in their activity: most plants are mid or small-size entities with limited financial strength; lack or absence of innovative products in portfolio; limited distribution networks and out-of-date capacities. As the result – Russia actively imports cable solutions for permafrost areas. Optical-fiber cables for permafrost areas present most of the import.

Map 2. Russia's major producers of cables for permafrost areas

Map 2. Russia’s major producers of cables for permafrost areas

The local manufacturers are actively trying now to close market for foreign solutions, at least in competitive segments (power and control cables).

Foreign producers of the cables for permafrost areas who want to enter the Russian market have two possible strategies – to import cables made outside Russia, or to launch manufacturing inside Russia. Currently the most of the global manufacturers are at the “importation” stage, however few of them have launched (or have plans to launch) joint ventures or subsidiaries in Russia for cable production.

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A Battle Begins: An Article In World Coal Magazine

World Coal magazine (Issue October 2010) published an article “A Battle Begins” written with Mr. Ignatov, the president of our company; he analyzes the coal market in Ukraine in this publication. It became Mr. Ignatov’s second article in the series of publications about the coal industry in the former Soviet Union and Eastern Europe (the first article – “The Bear Look East”, about the Russian coal export shift from EU to Asia-Pacific – was published with World Coal at March 2010).

In his current research Mr. Ignatov presents a view over the future privatization of coalmining assets in Ukraine; it’s one of those “tasty” pieces of the Ukrainian economical pie that are interesting both to local and international players. Producing coal in a 70-80 mtpa range, Ukraine possesses total reserves in 117.5 bln tons.

Three major players will definitely compete in coalmine privatization – SCM, ArcelorMittal, and the Russians – while China may also enter the game. Mr. Ignatov analyzes coal strategies with each of these “pretenders” – from SCM’s “I want it all” game targeting 100% self-supply with coking and steam coal, to ArcelorMittal’s CIS coal interests.

The article contains a lot of insights about the coalmining in Ukraine – from why they produce more steam than coking coal now, to who of the steel-makers have succeeded in coking coal self-supply.

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Poor In Ores, Rich In Iodine: Mining In Turkmenistan

Major mining facilities in Turkmenistan

Figure 1. Major mining facilities in Turkmenistan

1. Coalmining

  • There is no coal production in Turkmenistan
  • There are 2 bituminous coal and 1 lignite deposits
  • They extracted coal there in 1940s but since 1950s the coalmining was stopped and mines were liquidated
  • Currently there are no coal consumers in Turkmenistan – all thermal power plants and boilers work in gas

2. Metal ores

  • There is no metal ore mining in Turkmenistan
  • There are no iron ore deposits in the country
  • There are small deposits of zinc and led ores in Eastern Turkmenistan; they extracted ores in 1940-1950s but then mining was stopped there
  • They want to exploit Zulpikar deposit of alunits (alumstone) in Mary region for supply of the future aluminum smelter
  • There is no gold-mining in Turkmenistan

3. Industrial minerals

  • There are 2 large deposits of native sulphur in Turkmenistan; they extracted sulphur there in 1930-1961 but then stopped the mining due to high costs (in comparison with sulphur extraction from oil)
  • There are 2 large iodine-bromine deposits in Western Turkmenistan; currently 4 chemical plants produce iodine and bromine products there
  • There are 5 large sodium chloride deposits in Turkmenistan, from which 2 are working now
  • There is a large deposit of fossil wax in Cheleken peninsula; they extract this product (used in medicine, painting production, cosmetics and paper impregnation) since 1930

4. Construction minerals

  • Bakharden deposit of quartz sands supplies Ashgabat Glass Plant with sand
  • Bezmeinskoye deposit provides Bezmeinsly Cement Plant with raw materials
  • There are 35 mid and small open pit mines with clays for brick production
  • There are 5 mid-size gravel open pit mines in Turkmenistan
  • There are 13 deposits of construction sands in Turkmenistan
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Power-It-Yourself: Corporate Power Plants in Kazakhstan

Currently there are 74 PP (power plants) and 1831 heat boilers (other than TPP) in Kazakhstan. 47 TPP are considered to be “national” by their importance, other TPP and heat boilers are considered to be “regional” or “local”.

Currently there are almost 350 energy operators – i.e. companies that own and manage TPP and boilers used for heat supply of external consumers:

  • 15 companies are large players (more than 100 MW of installed capacity)
  • 30 companies are mid-size players (with 50-100 MW of installed capacity)
  • Other companies are small players (with less than 50 MW of installed capacity)

Most of TPP are owned either with energy holdings (like AES Kazakhstan) or with municipalities

Currently almost all integrated mining-and-metallurgical holdings in Kazakhstan own corporate power plants – used mainly for self-supply with electricity and heat to the metal and mining facilities:

  1. Mighty Eurasian Natural Resources Corporation owns Aksu TPP, Aksu Ferroalloys Plant’s TPP-1, Aksu Ferroalloys Plant’s TPP-2, Sokolov-Sarbai TPP, Kazakhstan Aluminum TPP; all stations are being owned with this or that production company within ENRC; there is also Eurasian Energy Corp that provides maintenance & repair services to most of the power plants within the group – as well as sells the surpluses of energy to externals.
  2. Kazakhmys Corp owns Karaganda TPP-2, Zhezkazgan TPP, and Balkhash TPP.
  3. KazAtomProm – a national nuclear energy corporation – owns few power plants including the country’s single Mangyshlak NPP (now it’s being liquidated).
  4. Kazzinc owns Bukhtarminsky HPP, Tekeliysky Energy Complex, and Karatalskaya HPP.
  5. Arcelor Mittal Timertau – a subsuduary of AM in Kazakhstan – holds Karaganda TPP and TPP-PVS that supply Karaganda Steel Mill with electricity.
  6. KazSabton – an uranium operator owned with Israeli Leviev’s Group – holds a power plant that supplies its mining facility in Northern Kazakhstan.
  7. Yuzhpolimetall – a producer of led and other metals – also owns a power plant.
  8. Access Energo – a subsidiary of Access Industry (a part of Alfa Group/Renova/Access conglomerate) holds a power plant in Central Kazakhstan that supplies with energy the largest open pit coalmine in Kazakhstan (Bogatyr mine) with electricity using its coal as fuel.

Few largest O&G operators have own power plants – from which most are equipped with modern gas-turbine installations; in particular:

  1. PetroKazakhstan holds Kumkol gas-turbine plant
  2. Aktobemunaigas owns Zhanazhol gas-turbine plant and builds a new Kandyagash gas-turbine plant
  3. Atyrau Oil Refinery (a subsidiary of KazMunaiGaz national corporation) owns power plant for refinery self-supply
  4. Tengizchevroil has own gas-turbine power plant
  5. Karachaganak Operating Company has own gas-turbine plant (in outsourcing now)
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Between the River and the Sea: Freight Transportation in Bulgaria

Between the River and the Sea: Freight Transportation in BulgariaDomestic (internal) streams count for 17% of freight turnover and 80% of freight volume in Bulgaria, while international provide 83% of turnover and only 20% by volume; from international turnover which 58% are export-import streams, and 25% are transit streams (not counting pipeline transportation).

The share of domestic streams grows constantly, while export-import streams grow stably, and transit streams are growing extra-rapidly. The country’s dominating tendency in transportation stream structure is growth of its importance as a transit way in the south-eastern part of the EU and in so-called Wider Europe.

There are few main directions for the domestic transportation streams:

  • Northern West-East stream – that links Sofia and its surroundings with Varna seaport
  • Southern West-East stream – that links Sofia and its surroundings with the southern industrial zone (Plovdiv, Dimitrovgrad) and then the Southern industrial zone (Plovdiv, Dimitrovgrad) with Burgas seaport
  • North-South stream – that links Sofia and its surroundings with Danube area (northern Bulgaria)

So in general Sofia is the key location that links most of the domestic directions in the country; there are only few important streams in both directions that are going outside Sofia:

  • Burgas-Varna railroad and motorway (both need modernization)
  • Central North-South axis that links the Northern and the Southern West-East streams in the central part of Bulgaria

Five of the ten pan-European corridors, or their branches, cross Bulgaria:

  • Corridor IV: Dresden/Nürnberg – Prague – Brno – Vienna (only railway) – Bratislava – Gyôr – Budapest – Arad (with branch to Bucharest – Constanta) – Craiova – Sofia (with branch to Plovdiv – Istanbul) – Thessaloniki
  • Corridor VII: Ulm – Regensburg – Passau – Vienna – Bratislava – Komárno – Gyôr (Gönyû) – Budapest – Baja – Osijek – Novi Sad – Beograd – Rousse – Lom – Braila – Galati
  • Corridor VIII: Durrës – Tirana – Skopje – Bitola – Sofia – Dimitrovgrad – Burgas – Varna
  • Corridor IX: Helsinki – Vyborg – St.-Petersburg – Pskov – Moscow – Kaliningrad – Kiev – Ljubashevka/Rozdilna (Ukraine) – Chişinău – Bucharest – Dimitrovgrad – Alexandroupolis
  • Corridor X: Salzburg – Ljubljana – Zagreb – Beograd – Niš – Skopje – Veles – Thessaloniki

Corridor IV provides up to 32% of transit freight turnover; Corridor VII – 27%; Corridor VIII – 12%; Corridor IX – 19%; and Corridor X – 10%.

Marine transport processes 13.5% of total freight volume in the country – being the 2nd largest kind of transport in Bulgaria in terms of volume (after road) and the largest in terms of turnover (due to its long-distant international operations). The country’s two seaports – Varna and Burgas – serve not only for Bulgaria’s export and import but also as gates for transit trade and thus they are counted to be parts of Pan-European corridors.

Both seaports have connection with national railroad network and paved roads. The key issue – besides modernization and increase of ports’ capacity – is linking of seaports with double-track railway (now some parts are single-track), to do the same in their connections with Sofia, to complete A3 Chorno More motorway between Varna and Burgas, Hemus motorway (Varna-Sofia) and Trakia motorway (Birgas-Sofia); these measures will allow increasing transit transportations with use of two ports.

Both ports are state-owned – Bulgarian Ports Infrastructure Company is managing their activity; private entities rent cargo terminals in the seaports from Bulgarian Ports Infrastructure Company.

Navigation Maritime Bulgare (Navibulgar) is a leader on the shipping market in Bulgaria.

Road transport processes up to 72% of freight volume in Bulgaria being the largest in volume terms and the second largest in turnover terms (after marine that transports to international long distances). Most of main motorways are owned and managed with the state Executive Road Agency (a part of Ministry of Transport). Transportation by roads is being implemented mainly with the producers (that have own truck fleets) and specialized truck operators; currently 78% of road turnover road is being provided with specialized truck operators, while 22% – directly with producers. SO MAT – former state-owned national carrier, now owned with WilliBetz – is the largest player in a segment, with a fleet in 4000 trucks and 5% market share in Bulgaria. Foreign players are presented with international hauler operators (working mainly in transit and import segments) as well as they are presented among the shareholders of road management companies (Portuguese shareholders in A3 motorway concession).

Railroad transport processes about 11.5% of freight total volume in Bulgaria, being the 3rd largest kind of transport after road and marine. The density of the Bulgarian railway network exceeds the EU average but it falls behind in terms of quality parameters. The key challenge for the segment is that double-track railways exist only in distances between Sofia and Burgas, and Sofia and Varna; all connections with border countries (Romania, Greece, Turkey, Serbia, and Macedonia) are presented with single-track railways, only partially electrified. Moreover there are single-track gaps in Sofia-Burgas and Sofia-Varna double-track routes. To organize constant bi-directional freight traffic between Bulgaria’s key seaports (Varna, Burgas) and Sofia as well as international traffic Black Sea-Adriatic Sea and Europe-Turkey it’s necessary to replace single-track parts with double-track as well as to electrify few segments. This is a key task to be financed with the EU as a part of Pan-European corridors concept. There are 2 freight railroad operators in Bulgaria – a national railroad operator BDZ that holds 95% in freight railroad transportation; and Bulgarian Railroad Company (BRC), a privately-owned Bulgarian-Romanian railway company that operates since April 2005. Passenger transportation is being implemented with BDZ only; there is Sofia Metropolitan that’s the country’s single rapid transit system serving passengers.

River transport holds 3% share in freight total volume in Bulgaria – being the 4th largest kind of transport after road, marine and railroad. The Danube waterway is in itself the Pan-European corridor VII, part of the TEN network. Maritsa is the 2nd most important river in Bulgaria; Iskar is the longest river that runs solely in Bulgaria, and a tributary of the Danube. There are two categories of river ports – a) of national significance; and b) of regional significance. All public transport ports of national significance are public state ownership except the areas for storage of cargo, which may be owned with private operators. All ports of national significance are managed with Bulgarian Ports Infrastructure Company under the Ministry of Transport. Executive Port Agency implements control over activities in river and marine ports. There are few key river ports of national significance in Bulgaria now – Vidin, Lom, Kozloduy, Oriahovo, Sumovit, Svishtov, Rousse, Tutrakan, Silistra in Danube; Pazardzhik, Plovdiv, Dimitrovgrad and Svilengrad in Maritsa; Sofia in Iskar. They provide up to 92% of the total handling/reloading services.

Bulgarian River Shipping Company controls approximately 30% of the river freight flow from and to Bulgaria. Bulgarian River Shipping Company disposes with own fleet, which consists of pushboats, tugboats, passenger ships for short entertainment trips, non-propelled fleet (barges, etc.), Ro-Ro fleet. Country’s largest production companies (steel mills, etc.) have own river fleets that provide up to 60% of freight transportation by river; shipping by the Bulgarian part of Danube is being implemented also with international carriers (mainly German and Austrian).

Airlines hold a small share in freight transportation (less than 1% in freight turnover). At the same time the segment holds up to 23% in passenger turnover, especially in international segment (up to 65% of passengers going from/to Bulgaria).

There are 5 international airports in Bulgaria (Sofia, Burgas, Plovdiv, Varna, and Gorna Oryahovitsa). There are also 13 domestic airports (in addition to 5 international that also work in domestic routes); and also there are 6 unused airports in Bulgaria. Sofia airport holds almost 40% in passenger turnover, Burgas airport – 32% (due to its location it’s the key gateway to the country’s resort zone), and Varna airport – 27% (also resort zone). So these 3 airports hold in total 98% of passenger turnover.

All international airports and most of domestic ones in Bulgaria are state-owned; Civil Aviation Administration under the Transport Ministry owns and manages the airports. State-owned Air Traffic Services Authority implements dispatching for domestic and international flights in Bulgaria.

Private operators implement ground-handing operations in Bulgarian airports; Civil Aviation Administration holds tenders for concession works in airports among the private players. Currently many of the ground-handing operators are owned with foreigners (Swissport Bulgaria AD, Fraport Twin Star, DHL Express Bulgaria, etc.).

State-owned Bulgaria Air dominates in international flights from/to Bulgaria in a sub-segment of regular flights; it’s also the largest regular carrier in domestic flights with almost 70% share. Up to 38-40% of flights in Bulgaria are being provided with low-cost airlines.

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Solid Arguments: Concrete Market in Ukraine

Currently domestic players provide 97% of concrete market deliveries, while importation counts for only 3% of consumption volume in Ukraine; in 2011 the share of imported concrete may fall to 2% – they plan to reach 98-100% self-supply.

There are two categories of domestic producers:

  • Concrete plants – that produce market concrete and (usually) concrete/ferroconcrete elements
  • Constructors – that directly mix concrete in the building area (using stationary or mobile mixers)

Currently there are about 350 concrete plants in Ukraine and they provide up to 70% of concrete production in Ukraine; constructors directly produce 30% of concrete. From 70% of concrete produced with plants almost 60% is being used for concrete/ferroconcrete elements and brick substitutes production while 10% are presented with market concrete delivered to constructors; from 30% of concrete produced with constructors all is being directly consumed with this category of players.

All concrete/ferroconcrete construction elements are being produced with concrete plants; constructors do not produce such elements (only concrete for direct use). Currently 300 of 350 concrete plants in Ukraine produce not only concrete but also concrete/ferroconcrete elements.  

There are 5 “concrete zones” in Ukraine (6 if to count Kyiv City as a separate zone) – i.e. areas that are characterized with more or less similar concrete consumption patterns, set of players, and distribution models; moreover – the share of each zone in Ukraine’s concrete total production is stable for last 10 years:

  • Western zone – provides about 15% in production
  • Northern zone (without Kyiv) – provides about 10% in production
  • Kyiv zone – provides about 10% in production
  • Central zone – provides about 25% in production
  • Eastern zone – provides about 30% in production
  • Southern zone – provides about 10% in production 

Ukraine’s concrete market is highly fragmented – most of the plants are “regional” players, i.e. they make most of their deliveries within a specific area; only large plants in Central and Eastern Ukraine are exceptions – they make deliveries not only locally (within theie “native” area) but also to neighboring zones (like Kyiv or Western Ukraine).

Currently Ukraine’s concrete industry is highly concentrated – 9 largest players provide almost 50% of production; at the same time it’s necessary to know that such high concentration if defined with the fact that the largest players are state-owned holdings; at their privatization the separate plants (now owned with the state-run holdings) may be purchased with different investors – in such a case the industry will become low-concentrated (i.e. owned with many proprietors). The next stage in concentration – M&A of separate plants – may start not earlier than in 1-2 years after privatization of state holdings.

Local players are presented with 5 categories of companies:

  1. Concrete plants under the national state holdings:
    1. Ukrbudmateriali Corporation (construction materials holding) – currently provides about 55% of domestic production of concrete in Ukraine; it incorporates separate concrete plants as well as regional (zonal) sub-holdings (like Kyivbudmateriali – in Kyiv zone; Vinnitskbumateriali and Lvivbudmateriali in Western zone, etc.); most of the plants within Ukrbudmateriali are located in Western, Central, and Northern/Kyiv zones
    2. Ukrstroi Corporation (construction holding) – currently provides about 7% of domestic production of concrete in Ukraine; it incorporates separate concrete plants mainly in Central and Northern zones
    3. Ukragroprombud (construction in rural areas) – currently provides about 4% of domestic production of concrete in Ukraine; it incorporates 15 plants in 15 regions of Ukraine
    4. Ukrtransbud (transport infrastructure construction) – currently provides about 1% of domestic production of concrete in Ukraine
  2. Large plants owned with cement holdings; as the players in cement market are presented with foreign-owned holdings so they are also the players in concrete market. For instance, Dyckerhoff owns 4 concrete plants in Ukraine (in addition to its 3 cement plants), etc.
  3. Concrete plants owned with large construction companies/holdings;
  4. Large plants owned with local investors; most of them are located in Kyiv and Eastern zone (as the businessmen from Donetsk and Dnepropetrovsk could lobby their privatization in the 1990s); among them are few “Greenfield” projects (such as Disk Beton plant, the largest in Eastern Ukraine – it was launched in June 2006)
  5. Small regional plants that provide deliveries within specific region or to neighboring regions
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Russian Staffing Market: Too Many Managers, Too Few Engineers

Key trends in Russia’s staffing market:

  1. Due to the diversification of the Russian economy there is a shortage in many working and engineering professions in Russia, especially in those regions where they launch new manufacturing sites (like there is a shortage of car-industry specialists in St.-Petersburg and Kaluga region, where Toyota, Ford, Volkswagen, etc. are producing cars). If in the 1990s the companies produced mainly FMCG and beverages in Russia, so now they actively make cars, equipment, consumer goods, etc. In general there is 30-50% deficit of qualified workers and engineers (not managers) in car-building, aerospace, consumer electronics, turbine production, energy equipment, geology survey, etc.
  2. “War for talents”: there is a tendency for re-hiring of staff from competitors – with suggestion of a salary at 20-30% higher than at the old employer’s side.
  3. Hiring of staff from CEE: a) many fast-growing companies in Russia prefer to hire top-managers from Poland, Czech Rep., etc.; moreover – if earlier only export-oriented companies hired such professionals, so now even companies working for domestic market (like FMCG producers or retailers) implement such practice; b) since 2006 many retail networks hire not only top-managers from CEE but also mid-level managers from Poland, Bulgaria, etc.
  4. There is a transfer from fast-growing hiring of staff to staff management; many companies have reached the limits in expansive development and now begin to think about effective staff management; HR director is one of the most popular and salaried positions in Russia, now not only in large companies but also in mid business.
  5. Regional development: 5 years ago only Moscow and partially St.-Petersburg benefited the economic growth in staffing market; now other cities with pop. over 1 mln as well as industrial regions are also included to the mainstream; there is still a difference in salary level between Moscow and regions – but it falls (for instance 5 years ago the salary in St.-Petersburg was 25-35% lower than in Moscow, now – only 10-15%; currently such cities as Yekaterinburg are at the same stage as St.-Petersburg 2-3 years ago
  6. Professional migration: there is a tendency when people who earlier leaved Russia and went abroad in job search now return home – as they can pretend higher salary here rather than abroad; there are two main reasons for this: a) Russia claims for 13% personal income tax, while US, EU, etc. – much higher; b) Russian economy grows fast for last 7 years, while US, EU, etc. – either slow growth or stagnation.
  7. Temporary staffing growth: it’s a new segment in Russia’s staffing market, but it grows fast (240% in 2002-2008); the structure of temporary staffing (by number of staff): workers – 38%, secretaries/assistants – 30%, IT staff – 12%, accountants – 9%, HR staff – 6%, others – 5%
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Duets For One: Foreigners in the Uzbek O&G Market

O&G industry of Uzbekistan is characterized with few features:

  1. High level of manufacturing, technological and organizational integration – the same players are involved into all stages of business: from geological surveys to well drilling, from O&G extraction to their transportation, from crude oil sales to petrochemical production
  2. High level of regional concentration – main extraction and production assets are localized in a limited number of the country’s regions that decreases management and transportation costs
  3. Upstream segment significantly prevails over downstream – upstream sub-industries (crude oil & natural gas) are much larger than downstream sub-industries (refining or petrochemistry); in general by now the country has implements «upstream» strategy in O&G industry – i.e. primary development of O&G extraction and export, while downstream products with high added value were actively imported; at the same time for last 4-5 years Uzbekistan developed its downstream segment significantly and continues to invest it
  4. Low presence of global and foreign players – by now only 5-6% of O&G extraction in Uzbekistan is being implemented with this or that participation of global or foreign companies
  5. Low export dependence – now Uzbekistan exports only 20% of O&G products (by value); domestic market consumes 80% of products (especially gas – due to the fact that 80% of thermal power plants in the country work in gas)
  6. High dependence on external pipeline systems – the geographical location of Uzbekistan doesn’t allow it to export O&G directly to foreign consumers, it has to use Kazakhstan’s and Russia’s pipelines for export to EU – that increases transportation costs and makes the industry vulnerable of Uzbekistan’s relations with neighbors; few pipeline projects outside Kazakhstan and Russia (via Turkmenistan) reduce such dependence – but never can eliminate it completely
  7. High demand in investments – for continuing development of the industry (from new geological surveys to expansion of pipeline infrastructure) Uzbekistan needs $30-35 bln of investments for the next 8-10 years
  8. Depletion of existing deposits – currently Uzbekistan is passing through process of O&G output fall because of existing deposits depletion; they in the Government try to involve foreign operators into geology surveys and development of new deposits to compensate the fall and to increase output

Currently there are 194 O&G deposits in Uzbekistan (including 102 oil and 147gas); 51 oil deposits and 27 gas deposits are operable now.

Uzbekistan operates O&G activities in six regions:

  • Ustyurt area in Karakalpak region – 5.4% of current value
  • Bukharo-Khivy area in Bukhara region – 27% of current value
  • Southwestern Gissary area in Kashkardarya region – 30% of current value
  • Surkhandaryinsky area in Surkhandariynsky region – 7.6% of current value
  • Fergana area in Fergana region – 27% of current value
  • Namangan area in Namangan region – 3% of current value

O&G territorial clusters in UzbekistanMap 1. O&G territorial clusters in Uzbekistan

Currently all projects in O&G in Uzbekistan are implemented with mandatory participation of the national operator, Uzbekneftegaz.

Until 2004 Uzbekneftegaz used so-called “risk-service contracts” in upstream projects – it was like PSA but without use of “PSA” term (the law on PSA started to work only in 2004); since 2004 Uzbekneftegaz uses PSA (Product Sharing Agreements) with foreign O&G operators.

Another organization form is JV that is established with foreign company and Uzbekneftegaz; after establishing Uzbekneftegaz transfer rights over some depoist to such JV. Uzbekneftegaz also uses JV form in downstream projects.

For geology surveys they use such form as “investment agreement” – foreign company has to provide survey works and if success this company has preferable rights to the deposit development (at conditions of PSA that will be signed after).

Intil 2004 Uzbekneftegaz actively used service contracts in downstream projects – foreign companies were contractors of Uzbekneftegaz on construction of some O&G downstream facilities or their modernization.

Currently all projects in O&G in Uzbekistan are implemented with obligatory participation of the national operator Uzbekneftegaz
In upstream projects until 2004 Uzbekneftegaz used so-called «risk-service contracts» – it was like PSA but without use of «PSA» term (the law on PSA started to work only in 2004)
Since 2004 Uzbekneftegaz uses PSA (Product Sharing Agreements) with foreign O&G operators
Another form is JV that is established by foreign company and Uzbekneftegaz; after establishing Uzbekneftegaz transfer rights to some depoist to such JV
For geology surveys they use such form as «investment agreement» – foreign company has to provide survey works and if success this company has preferable rights to the deposit development (at conditions of PSA that will be signed after)
Intil 2004 Uzbekneftegaz actively used service contracts in downstream projects – foreign companies were contractors of Uzbekneftegaz on construction of some O&G downstream facilities or their modernization
Uzbekneftegaz also uses JV form in downstream projects
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Restless Business: Seaport Strategies with Russian Steel-Makers

Marine transportation holds 1,4-1,5% in total Russia’s freight turnover; at the same time it’s the main route for export freights (except gas/crude oil – that is transported mainly with pipelines); while marine doesn’t play any important role in domestic transportation (railroad is the main kind of transport there). In total marine transportation plays important role for steel-makers only for their export deliveries outside CIS.

There are 45 commercial seaports in Russia, and only 11 of them are the largest ports that process 90% of all cargoes:

  • Northern sea basin – Murmansk and Arkhangelsk ports;
  • Baltic sea basin – Saint-Petersburg and Kaliningrad ports; a new port in Ust-Luga begins to play the key role there too
  • Black-Azov sea basin – Novorossiysk and Tuapse ports;
  • Far Eastern sea basin – Vladivistok, Nakhodka, Vostochny, Posyet, and Vanino ports.

Most of these 11 largest seaports are owned by the largest Russian financial-industrial groups, including those having interests in steel industry. Smaller ports – especially those located in Arctic region – are state-owned. 

The ownership over seaports with steel-makers:

  • Evraz Group – Nakhodka Commercial Sea Port
  • MMK – Eisky Port (small port in Black Sea), Astrakhan Seaport (Caspian Sea)
  • Severstal Group – no seaports in ownership now
  • NLMK Group – Tuapse Commercial Sea Port; Taganrog Commercial Sea Port; stevedore operator in St.-Petersburg Commercial Sea Port
  • Mechel Steel Group – Posyet Seaport
  • Metalloinvest – no seaports in ownership now

The key driver for steel-makers’ ownership over seaports is reducing of transportation costs; most of the steel-makers in Russia are integrated groups with own coal, coke, steel, metal products, etc. Most of the assets are located either in Urals, Siberia or in Northern Russia, that are locations far from export seaports. If to analyze the FOB price of metal or coal in the seaports, so it’s possible to see that the ex-mine/ex-works cost is equal or sometimes even lower than transportation cost, that consists of few components; and the steel-makers – who could elaborate programs for production cost control – wanted to control transportation costs too:

  1. Railroad cost (as all transportations within Russia and pre-export shipments from plants to ports are done with railroad) that consists of 3 sub-components:
    1. Fee for use of infrastructure (rails); it’s in the state monopoly and steel-makers can’t influence it
    2. Locomotive fee: it’s also under state control now, but steel-makers are among the most active lobbyers who try to get permission for use of own locomotives in public railways
    3. Railroad car fee: all steel-makers have own operator companies that manage own or rented cars; now the steel-makers can really reduce/manage car cost component – for this they invested millions USD to own car park, repair facilities, etc.
  2. Seaport cost (for export trade – that provide 40-70% of revenues in most of the steel-making groups) that consists of 2 sub-components:
    1. Handling fees: all steel-makers have own stevedoring firms working in most of the ports (even in those not owned with the “host” group); with this they can control uploading component – but they had to invest into own port warehouses, loading vehicles, cranes, etc.; the largest steel-makers invested into construction or modernization of own terminals in “own” or “alien” ports
    2. Fee for infrastructure (docks, berths, etc.); as the state allowed port privatization so the steel-makers decided to control this component too

 Economic situation in seaports:

  • Most of them need investments counted in hundred millions or even billions USD
  • Key issue – low depth of seaports, that doesn’t allow to process large ships (only 2 ports that work with 125-174 kt vessels; no ports for work with 175+ kt vessels)
  • Large steel groups (Evraz, Mechel, NLMK) invest to their ports’ development, but they need more while other ports (especially with state share) are less invested
  • Key projects (existing ports modernization + new ports construction) refer to oil, petrol products and coal, while metal is in the 2nd line (no new projects for metal specific transportation)

 Future trends:

  • Fight for control over last non-affiliated ports (St.-Petersburg, Novorossiysk) among steel-makers, Russian Railroad, oil companies (steel makers are not in strong position there as others have more lobbying power in governmental agencies)
  • Investment programs for “captive” ports with steel-makers (Evraz, Mechel, NLMK)
  • MMK may (probably) purchase few other small ports in the Black/Azov Seas (as it can’t compete for large ports – owned with other players; MMK’s lobbying power is small for participation in privatization of St.-Petersburg and Novorossiysk ports)

The government is “indifferent” to who will own this or that port – the key item is that the owner has (by the government’s opinion) to invest and develop the port. Most of ports have old enough infrastructure; there are not many deep ports; many ports are frozen at winter. So it necessary to invest hundreds of million or even billions USD to seaports. And this is the critical point:

  • Steel-makers began to invest to seaports as into the way of own cost reducing
  • When they met with the challenge that seaport is not a workshop of their own steel mill – i.e. that other clients also use the port – they had to accept the idea that seaport owning/management is a separate business (that in particular reduces their metal costs) and to make a choice:
    • To go into this business as a valuable project (maybe even independently from their main – metal – business), to invest it, etc. or
    • To refuse from supporting business that was perceived initially as only way for cost reducing
  • By now Severstal group decided to go the second way: they exited all seaports projects and decided to concentrate efforts only in stevedoring and railroad components; Mordashov didn’t want to invest billions to seaport development as he planned to develop his empire with steel assets M&A
  • Other players with own ports are on the cross-road – i.e. they decide if to go further or to exit; probably Evraz’s shareholders are close to decide to “seriously” continue with seaports business
  • The government is looking for a possibility to replace steel-makers with someone if steel-makers decide to exit seaports business; “Russian Railroads” is the most probable candidate – the idea is the same as with Gazprom (single national gas operator), Rosneft (single national oil operator) – i.e. a single national transport operator that control railroad and ports; so it’s possible to expect that Russian Railroads will replace steel-makers in the cases if they want to exit port business 
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