***NOTES FROM MOSCOW: The next Russian revolution — make with love, not more

There are more Bentleys on the streets of Moscow than ever. Private wealth in Russia is big news. The country’s billionaires aren’t just business leaders, they are the custodians of some of the former Soviet Republic’s most important assets.

New Russia: steelmakers look to changing demand to ensure future success

There are more Bentleys on the streets of Moscow than ever.

Private wealth in Russia is big news. The country’s billionaires aren’t just business leaders, they are the custodians of some of the former Soviet Republic’s most important assets.

Two of them spoke on the first day of Metal Bulletin’s Russian Steel Summit on Tuesday. Alexei Mordashov, ceo of Russia’s largest producer Severstal, was first up.

Fresh off a plane from New York, his message was clear. Things might be getting better and there might be plenty of precious metal rolling along Russian boulevards, but they’re still a long way from being good.

“The crisis is in fact the world we will have to live in for some time,” he told delegates. Companies need to prepare themselves for this new reality.

Severstal’s mining subsidiary is a substantial company in its own right. Severstal Resources owns and operates various deposits in a number of complexes, not just raw materials.

It’s looking to pick up more —Severstal has investments in Africa planned. Its Cherepovets mill, which is entirely self-sufficient and very low cost, shows how these plans are already paying off.

Russia’s steelmaking sector is already highly consolidated. It’s dominated by a number of massive groups like Evraz, which produced 15.28 million tonnes in 2009.

Novolipetsk Steel (NLMK) produced 10.61 million tonnes, while Magnitogorsk Iron & Steel (MMK) and Mechel produced 9.61 million tonnes and 5.49 million tonnes respectively.

Pretty much all of them have significant raw materials assets, and several are self-sufficient.

Compared with the rest of the industry, this is pretty advanced stuff. There might have been a lot of restructuring during and after the crisis, but the larger Russian steelmakers made it through pretty much unscathed.

There are good reasons for that.

Russia remains one of the lowest cost places to make steel in the world. And many producers here took advantage of this during the downturn, making up for the shortfall in domestic demand by selling more tonnage overseas.

In 2009 Russian steel consumption fell by 27%, while production only dropped 12%, according to Mordashov. The share of Russian steel production being sold on the export market rose to 70%, he said.

The most successful companies also made tough decisions. NLMK, for example, abandoned its takeover of US coking coal producer John Maneely Co, swallowing a hefty penalty fee for turning its back on the deal.

It paid off – NLMK’s leverage ratio is in pretty good shape. Calls like this go some way to explain why ceo Vladimir Lisin is Russia’s wealthiest individual.

There was more at play than just good decision making at the top of Russian steel companies, however.

As one of the country’s most important wealth providers, there is huge political interest vested in steel. As demand collapsed, there was no way the government would let these groups go to the wall.

When banks in the rest of the world just stopped lending and Lehman Brothers collapsed, state-controlled organisations like VTB, Sperbank and Vnesheconombank (VEB) stepped in.

They offered domestic steelmakers finance at a good price and on good terms at the time when they needed it most. Without it, last year would have been much more painful.

Did accepting the Russian’s government’s rouble leave these companies more exposed to state influence? Probably.

Talk of a state-sponsored metals and mining‘mega-merger’ has been around for a while. It’s unlikely, delegates at the conference reckoned.

One of the key elements of this combination, Metalloinvest, is planning an IPO soon. Post-flotation, a tie-up would be even more unlikely.

There is a precedent, though. The Kremlin’s moves in oil and gas betray the state’s tendencies when it believes valuable assets aren’t being handled properly. Pressure on oligarchs to make their businesses a success must be greater now than ever.

When Vladimir Putin attacked Mechel owner Igor Zyuzin two years ago he quickly accepted the prime minister’s provisions. It was a timely reminder that these top dogs are still vulnerable, despite their wealth.

Pumpyansky: president of Russian integrated pipemaker TMK

TMK president Dmitry Pumpyansky runs a great business — the integrated pipemaker has been growing for years. Last year he ranked 132 on the Forbes list of the world’s billionaires. He has strong views.

Russian recycling is in a dismal state. As things stand, the only steelmakers really taking advantage of Russia’s rich reserves are overseas.

This has to change, Pumpyansky says. The government should support steelmakers by introducing limits on exports. If you run one of the few EAFs in Russia, that’s a great idea.

Merchants might not be so happy — Russian scrap already trades at a significant discount to material collected in Europe thanks to inefficiencies and outdated practices, like backhanders paid to less scrupulous plant managers.

In the long term, though, it makes sense. If it flows into recycling, steel mill money will help the ferrous scrap sector to develop, consolidate and, hopefully, flourish. And steelmakers certainly need to diversify.

Life is getting harder for Russian steel plants, you see. Costs are rising.

Even though the country has extensive oil and gas reserves, energy prices are climbing. And fast. Last year Russian energy prices rose to European levels. They’ll keep rising this year.

Energy isn’t the only problem. Russia’s growing middle class can’t be ignored and labour costs are on the up. Inflation is a serious problem and there are difficulties internationally as well.

“Exchange rates are very important,” Mordashov told the conference.

Of course they are. Remember, even when trade flows rebalance, 50% of Russian steel will still be exported.

“The reinforcement of the rouble is reducing our competitiveness,” he said.

You might have the best cfo out there on your board, but limiting yourself to trimming costs wherever you can just wont cut it.

As bulk steelmakers, Russian companies are among the best in the world. But bulk steelmaking is not a place you want to be. Quality is much more important.

Sergei Madatyan, the head of laboratory at NIIBZh, came up with a good example. Russian mills are some of the largest longs producers in the world, and they export a lot of what they make. The majority at the moment.

But builders still have to rely on imports for key sizes and qualities – they’re just not available at home. Worst of all, many of these imports are rolled from Russian semis. Investment in better products and improved quality is long overdue.

Carbon steel slab or billet isn’t going to end up being rolled into new parts for all those Bentleys, after all.

“We need to constantly work on development,” said Pumpyansky. “Take the automotive industry — high safety requirements mean new vehicles demand higher qualities of steel.”

“There’s huge potential,” he said. “The objective is to create new quality steels and rolled metals.”

Fortunately, Russian steel is starting, slowly, to get the idea.

“The only projects we used to get in Russia were to tweak equipment, and that was rare,” one leading industry consultant told MB on the sidelines of the event. “But things are starting to change.”

“We’re being asked to do more and more strategic projects that are long overdue — reducing costs in relation to the number of employees for example,” he continued. “Traditionally, Russian plants have had thousands and thousands of employees. The top guys are starting to realise how inefficient this is.”

There’s still a long way to go though. Leaders like Mordashov and Pumpyansky have proved they are way ahead of the curve. The rest of the industry needs to come onside if there’s going to be a revolution.

“It’s not just about convincing the people at the top, they are all onside already,” the consultant continued. “Even when the decisions are made, they are often sabotaged lower down.”

“Changing the mindset is very difficult here,” he added. “It might be impossible.”