The FINANCIAL — Paata Chkhenkeli, General Director of EUROASIAN STEELS confirmed to The FINANCIAL that there are continuing warnings from big Ukrainian armature importers about possible price wars.
The world is in a period of great change due in large part to the current financial crisis, however in Kutaisi, Georgia, a city with a long history of industry, President Mikheil Saakashvili recently celebrated the opening of a Free Industrial Zone, and the town now awaits the revival of its former glory.
A new metallurgical factory is going to be fully put in motion in the next three months. The factory was renovated and will be run by the Indian-Georgian joint venture company EUROASIAN STEELS LLC, which has for four years been exporting scrap-iron. The factory with a total area of 100,000 square metres has the capacity to produce up to 8,000 tonnes of armature and 10,000 tones of billets in the 2 nd stage. The manufactured steel reinforcement bars will replace products currently imported from Ukraine and Turkey and occupy sixty percent of the local market.
The total amount of funds invested over a 2 year period in the new factory in Kutaisi will equal USD 80,000,000.
Paata Chkhenkeli, General Director of EUROASIAN STEELS confirmed to The FINANCIAL that there are continuing warnings from big Ukrainian armature importers about possible price wars.
“Till now the Georgian market has been saturated with steel reinforcement bars from Ukraine and Turkey. These gigantic industrial groups are already threatening us with dumping. The warnings are mainly coming from the Ukrainian side. They are warning us that forthcoming price wars will crash us, but I think we can safely take the challenge,” Paata Chkhenkeli says.
“Without a doubt the first stage of this pressure is going to be very hard to bear, but we think that the Georgian market should be supplied by local factories. Why should prices of imported products be higher if we can supply the same at lower rates? The good thing is that the Georgian market is not so big for them to risk encountering losses for any long periods of time. For them it’s not worth the struggle, unlike us,” he adds.
80% of the construction works are completed. The groundwork and full infrastructure are ready for the on switch. 90% of all the mountings for the factory are at location and will soon be installed, including the transformers for the ovens. 8 ovens were purchased from German-Indian manufacturer MEGOTHERM. The company is setting up 8 ovens, out of which 4 will always be at work, while the other 4 will be for backup.
In his interview with Levan Lomtadze, Paata Chkhenkeli analyzed the current market conditions for his business and emphasized that the factory should focus on exporting because of the economic situation in Georgia.
“The prices of armature were around USD 1,600 a tonne a year ago whereas today it’s USD 600. Nevertheless positive trends are visible. Over the last two weeks prices of black metal have risen by USD 40. We look forward to opening the factory and will be doing so with a sense of optimism and expectations that market prices will gradually be getting higher with time.”
“Personally this factory has given me nothing but a headache so far. Our company could have easily kept on exporting scrap-metal, which in fact is exceedingly profitable despite the crisis. This would surely have been easier, yet we have chosen another way. You may ask why a company would want to face additional difficulties, when so many firms are closing down around about. My answer lies at the very heart of business conduct. Our corporate responsibility is to not only think about generating revenues,” Paata Chkhenkeli told The FINANCIAL.
Paata Chkhenkeli was born in 1959. In 1983 he graduated from Georgian Technical University (GTU), specializing in building-engineering. Between 1976 and 1989 he worked as a constructor-engineer in different construction companies. From 1989 to 2000 he was the Director of Iberia Construction Company, thereby working in Russia, UK and Georgia. In 2000-2003 Paata Chkhenkeli worked as a State Adviser to the Minister of Economy of Georgia. Starting from 2003 he is the acting General Director of GEORGIA METALIX LIMITED LLC. and EUROASIAN STEELS LLC.
Interview with the General Director of EUROASIAN STEELS
Q. How much is your company going to invest in the Kutaisi metallurgical plant?
A. 4 years ago we established a joint venture company with MANAKSIA GROUP, which is a big Indian business holding. They own 15 production plants in India and 3 in overseas location in Nigeria and Ghana. MANAKSIA GROUP specializes in the manufacture of packaging products, crowns, closures, and metal containers, metal products and fast moving consumer goods.
With GEORGIA METALIX LIMITED, the joint venture company we created in partnership with MANAKSIA GROUP, we were exporting scrap-iron. Afterwards this was followed by a 51% share acquisition of Meoshavliti, one of the major scrap-metal salvaging companies in Soviet Georgia. This deal cost us USD 200,000 and on the bright side we saw that now we had the infrastructure we needed for further expansion. The perspectives seemed promising. As you can see over the long period we were trying to get prepared for the opening of our own metallurgical factory. Everything started with identifying bases with efficient amounts of scrap-iron, as it is the major recycling material for the factory we are opening.
Apart from buying Meoshavliti we made deals on land purchases in Poti. The aim was the same, to have sufficient numbers of scrap-iron bases. Finally when we were sure that we had the capacity to open the factory, we decided to start the construction works.
Approximately a year ago we bought the iron-concrete industrial unit in Kutaisi. Its infrastructure includes 100,000 sq. Metres of territory, edifices with an area of 16,000 sq. metres. There we will set up the first-line manufacturing unit. The entire production process is divided into 2 lines.
The first stage of investments totalled USD 22,000,000 &2 nd stage would be USD 13,000,000.The project is funded by equity and debt. The debt has been sanctioned and disbursed by a leading international bank.
While speaking of the main construction works it first of all needs to be mentioned that the biggest challenge was cleaning out the territory. We had to get rid of 50,000 cubic metres of garbage. Then we had to make level the entire territory. After that we built roads from concrete and installed two weighing-machines, one for machinery and the second for railway, each weighing 100 tonnes. The façades were replaced and two kilometres of railway line was constructed.
In addition to that we had to completely renovate two power stations for Energo Pro Georgia (Key Electricity Distributor in Georgia). These costs were not included in the budget of Energo Pro, so the total cost of renovations, USD 350,000, was covered by our company. Our factory is mainly dependent on supply of electricity. The factory consumes 22 mega watts of electricity and there was no other option but to take care of this issue.
By the end of 2009 we’ll be ready to start working on the second phase of the factory’s development. It will cost us an additional USD 13,000,000. Over time new types of electric ovens should be installed which can twice increase the efficiency of the factory. Plus those ovens will enable us to produce not only steel reinforcement bars, but also plural rails, train wagon wheels and other industrial goods, which don’t need metallurgical processing.
The company has also plans to build a hydro electricity power station to meet its captive requirement of 50 mega watts of electricity. The project cost of the hydro electricity power station is estimated at USD 45,000,000.
Q. What will the quality of the armature produced at your plant be?
A. The factory has the capacity to produce up to 8,000 tonnes a month. The hardest and most central part of the job is metal casting. Before today there were no modern electric ovens for casting metal. Our primary goal was to install electric ovens in which we would receive the alloy with the exact features needed for manufacturing steel reinforcement bars. We didn’t want to produce steel reinforcement bars like those that used to be produced in Georgia. Our objective is to promote high quality products rather than old soviet traditions. So now we are on the path to succeeding in reaching European standards.
Q. The city of Kutaisi used to be an important industrial location for Georgia in soviet times. Most of the city’s occupants were employed in factories. After the collapse of the USSR Kutaisi stopped being a centre of production and employment in this sphere. What are the perspectives of Kutaisi in terms of regaining the position it had all those years ago?
A. The recent creation of a free industrial zone in Kutaisi has proven to be an extra stimuli giving force to companies like ours. There are already 12 industrial units opening as a result. Hence I believe that Kutaisi has great potential for becoming a strategically important city again, like it used to be in soviet times. Generally speaking the region of Imereti has good perspectives for economic growth.
Important news for us and the whole of Georgia is that World Bank has provided USD 220,000,000 for a new project which entails building an electric transmission line from Georgia to Turkey. This energy distribution line will be an alternative mean for selling electricity to Turkey. Consequently this is enabling many investors to put money into building more hydro-electric power stations in Georgia and then selling to Turkey.
Q. How many people will be employed at the factory?
A. At the first stage of operations approximately 400 people will be employed. But if we sum up the total number employed in the infrastructural bases of our factory the number hits 800 people. If we add the number of employees of our contractors and partners the figures will be even higher. 95% of people employed are Georgians, the rest are foreigners.
The training sessions will be conducted by specialists from India. The thing is that Kutaisi was an industrial city for a long time during the soviet years. People who worked in such factories as the Auto Factory back then need just a little additional training to make them qualified for work today. At one time there were 30,000 people employed in the metallurgical plant of Kutaisi. For instance our chief metallurgist used to work in the Auto Factory of Kutaisi. Many professionals were working there and now we have brought those same people to work at our factory.
Keeping in mind the current financial crisis, it’s quite hard to speak about average salaries at our factories, but I can confirm that the minimum salary will be USD 300. Before the crisis stability enabled us to forecast the costs of production and prices at which we could sell, but today these processes are much more complicated.
Current Market Conditions and perspectives for 2010
Q. Are the current local market trends setting ground for expanding here or are you going to take more of an export-oriented approach?
A. The long-term target market for our product will be the domestic market, but exports will definitely be very important at the same time. Since there are 2 alternative factories being renovated in Rustavi, which will significantly influence our market share, we should focus on exports in the short-term too. For export markets we are looking forward to dealing with Armenia and Azerbaijan mainly and also maybe Iran. If the three factories start working simultaneously including ours, then the amount of steel reinforcement bars manufactured will be 3 times exceeding the amount that the Georgian market needed before the crisis. Therefore we must consider export markets a source of income.
If each of the 3 factories manages to occupy 30% of the local market, then 70% of production will be export oriented.
In the current market conditions our major client base in Georgia includes key developer and construction companies that are facing very grave times. They are in a very difficult situation. As I’m aware today the Georgian market consumes 3,000 tonnes of steel reinforcement bars, whereas before the crises it was 25,000 tonnes annually. This is why from the very beginning we have been thinking about potential export markets. Despite the fact that we are naming the local market a long-term source of income, it should be mentioned that the current situation pushes us to export.
As long as we have enough supplies of scrap-iron locally, we can maximally support competitive prices of our products. This follows on from the fact that we have scrap-iron collecting fields on site in Georgia; as a result our merchandise is not going to be more expensive than Ukrainian merchandise. If the state supports us by limiting selling scrap-metal from Georgia which is quite a hard task, it will surely help a lot.
Today it’s quite difficult to name the exact number of clients in Georgia, since we need 3 more months to fully put the factory in motion. The next 3 months will be spent on metal casting. The production of steel reinforcement bars is set to start from December. And nobody knows what the situation is going to be like by December. We are living in the world of a constantly changing economy and thus don’t know how well the construction companies will handle problems by that time. Some of them may go bankrupt, but others will survive and we’ll be there to supply them.
Q. What were the losses your company incurred as a result of the global financial crisis?
A. The financial crisis has not hurt us as much as it has hurt the construction and developer companies. As we were operating by our own resources, it was much easier to survive the critical period. There were no postponements in construction works of the factory in Kutaisi, though we did have some difficulties in the meantime.
Naturally prices of steel reinforcement bars are lower than they were one year ago. So is demand. However while mentioning this I can say that our factory is very mobile and this enables us to switch the factory on or off anytime we want, unlike the big Ukrainian factories. For them every switch of the factory costs millions of USD and consequent losses. As for demand on foreign markets, it’s true that it has significantly shrunk, but still for the capacity that we are going to produce it’s sufficient. We hope that our sales will be successful in the coming year.
Q. What targets does your company have for 2009-2010?
A. My answer lies at the very heart of business conduct. Our corporate responsibility is to not only think about generating revenues, but also give money back to our stakeholders. We additionally strive to improve the society in which we are living and working. By expanding our business, we want to create more job opportunities, especially now when unemployment is on the rise. There are categories of people who only think of their own interests and benefit. However we believe that our mission is to facilitate the progress of society by creating more jobs than there are today. For this reason my expectations for 2010 and our company’s future are very optimistic. I assume that 2010 will be more welcoming than 2009.
Written By Levan Lomtadze
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