The Galchev interview
Enhancing this month’s coverage of Russian cement markets is an exclusive interview with Filaret Galchev, chairman of the board and CEO of the recently formed Eurocement, a company better known as Shtern Cement until its purchase last year by the former coal producer Rosuglesbyt, and which now produces over 8Mt of cement. The interview was conducted in Eurocement’s Moscow offices, with Mila German of the Russian Journal Zement and its Applications also adding to the debate. As you will glean, the discussions provide an cogent update on this exciting new Russian cement producer and his plans to further develop his sizeable investments.
ICR: Have we met before? Perhaps we met at a European coal conference, when you were running Rosuglesbyt, a leading Russian coal production and trading group? I never viewed you then as the leading Russian cement producer. What’s brought about this major conversion?
Filaret Galchev (FG): Yes, I think we have met before, most likely at one of those coal meetings. I’m a coal specialist by education, gaining my PhD in coal-related studies. And true, I was quite successful in the coal business. But nothing is permanent in this world, and at any stage in the development of a company, or for that matter, a person, one needs to undertake a periodic review from time to time. So last year we decided to sell our coal business! We used to produce about 40Mta of coal and by the way, our coal faces were among the largest in the world. So we had a business in coal. We knew a lot, but we were still learning, and, looking back, we managed to do quite well. So I’m happy and satisfied that we were able to sell a company that was in very good shape.
ICR: So now you are a fast-becoming a cement leader. Quite a change, but surely rather unusual to build-up a very successful coal business, then just sell it and start again?
FG: One might get that impression but it’s not quite so. Personally I find change exciting. After we sold our coal company, we made studies on a number of industrial sectors and when someone mentioned cement to me I said why not? We then made a detailed study of the cement sector – it didn’t take us too long – and made the decision. Our timing was also good. Shtern Cement was experiencing problems and it looked like they wanted to sell the company. We knew that some of the world players like HeidelbergCement and some others wanted to buy it. But for some reason nobody did. I couldn’t understand why. Perhaps they wanted to buy it on the cheap. People also kept telling me nothing would come out of our enquiries. But when we started studying the options we understood it was a major company with a very complicated structure, with some rather dubious financial foundations. What was to be done? We knew we wanted to buy and they wanted to sell. It was really quite simple. We sat together, locked the door and got our agreement. Simple!
ICR: From the time you decided to buy Shtern to the final deal – how long did it take you?
FG: If you mean the time of the actual negotiations, it took us a very short space of time. But from the moment we started thinking about cement, about three months. Remember, we already had the money from our coal sale and we were so keen to get back to work. Having a pile of money in the bank has no real interest for me.
ICR: Your own background. You said you were an engineer?
FG: By education, I’m an economist, a mining economist. I was born in Georgia 40 years ago. I am an ethnic Greek. My parents now live in Ukraine. They have a small collective farm. I am the last of six children.
ICR: With your background, Georgian, Greek and Russian I suppose you were always destined to make money?
FG: Let me stress, my ancestry is pure Greek and in any case isn’t Greece the poorest country in the EU? But we are proud of our great history. That’s our greatest wealth. Every nation has episodic rises and falls. Nothing is permanent.
ICR: Do you think Russia is on an upward path once again?
FG: Russia can’t be anything else but great. Let’s recap: 12,000km from one end to the other. Raw material reserves, by any count, are at least 30 per cent of the total world reserves of virtually all the main commodities – gold, diamonds, coal, oil – literally everything. Plus people like us.
ICR: Tell us a little about your company structure?
FG: The majority of the shares are controlled by company management. No shares are traded publicly. Not yet anyway.
Our first job has been to clean up the company following the purchase of Shtern Cement. Now one can see all the requisite information – how much belongs to whom.
ICR: Did you find any skeletons in the cupboard?
FG: Plenty! That’s why we took a gradual approach. First we wanted to concentrate on the corporate aspect. Then on the production – systematisation of the finances and sales. Of course, we are still far from the ideal, but we’ve moved ahead a lot. Now we’ve started addressing the problems of improving the management structures. We have used a consulting company (KPMG). We have used this same firm to deal with the problems of an international audit. And finally we have introduced a managerial accounting system. These are three major fields I’m looking after personally.
ICR: It’s quite a challenge – how much more time do you need?
FG: I think two years will be enough. We should be able to float our shares on the public market in two years.
ICR: How much did you pay for the company?
FG: It depends on the way you count it, but a sizeable amount. This would cover cash payments, payouts to creditors, bank loans, banking charges, taxes, everything.
ICR: Possibly a much higher price than what the international players were willing to spend?
FG: Certainly. That’s why I said, everyone wanted it on the cheap.
ICR: You have mentioned your financial and management priorities over the short term. Anything else of immediate importance?
FG: Well, what I can add is that we’re going to expand. By the way we’ve just bought another plant. This time a dry plant in the Urals called Nevyansky Tsement.
ICR: Can you say a few words on domestic market conditions for cement?
FG: I can say that this is a gradually growing market today. It’s also a fairly stable market because over the last three years we’ve seen an average growth of up to nine per cent. And if we take the central part of Russia, the figure would be 12-13 per cent, especially in Moscow and the surrounding territories. I read somewhere recently that, if we are going to continue at the same rate, in 100 years we’ll achieve the European level. But there was a “but” there – that was on the condition that the Europeans don’t build anything in the meantime. In my view the rate of construction today in Russia is not sufficient. Construction is a direct indicator of the people’s welfare. If people get richer, there’s always a demand for construction. This year we expect a growth figure of six per cent, although the national GDP growth is expected to be only 3-4 per cent. Over the last three years the growth rates in the cement sector have been greater than those in all the other industrial sectors. But as you know, there were some very substantial falls in production. Back in 1990, Russia used to produce 92Mt of cement. Then the production fell to as low as 27Mt. Today the figure is almost 38Mt. I think that within 3-4 years we’ll achieve a level of about 48Mt.
ICR: What about Russian cement industry capacity levels?
FG: In terms of production capacity Russia still has around 72Mt. But in reality, we don’t know what sort of conditions these facilities are in. How mobile are they? And its not just technology. It’s the mode of operation over the last 10 years. Some facilities have been running at a capacity utilisation level of 20-30 per cent where nothing has been repaired. You know the Savinsky plant in Arkhangelsk oblast? In 2001 it produced 250,000t. In 2002, especially after we arrived there in August, we started to push the production and we managed to produce 0.5Mt. This year we’ll achieve a figure of 0.8Mt. Next year I think the capacity utilisation rate will be over 90 per cent, so the output will be 1.1-1.2Mt. But it takes a lot of effort.
ICR: How did a relative newcomer to the sector achieve such results?
FG: First: with money, and second with a desire to succeed. What else! Of course we are also providing incentives to the workforce. They used to get 2500 roubles (US$81) but now the average monthly pay is 6000 roubles (US$195). They used to have collective farms, boiler houses, social infrastructure objects, and now they’ve got rid of those. It used to take 1150 people to produce 250,000t of cement. Today we are going to produce 0.8Mt with 700 people. When looking at our workforce levels we decided that what we had to change mostly was the managerial staff. Secondly, we rearranged the structure of management. We didn’t fire anyone. But if someone is unable to cope with his work, or does not use his working day to his best endeavours, then we have to optimise the structure. Our main goal is not reduction of the staff. Our goal is productivity. At Savinsky plant, as we mentioned before, the productivity level was 400-540t/man. I showed them my budget, the norms, the productivity targets one had to achieve at 1100t/man. This is your money. This is your budget. Of course, if you want to achieve this with 700 staff or even as many as 3000 staff it’s up to you. Again, for this year we have set certain indicators for other plants. For example, they have to achieve a productivity of 1450t/man at Mikhailovsky and Lipetsky plants. At Maltsovsky, we have already achieved about 1750t/man. If we make monthly savings of gas and power this will also reflect on the cost and the welfare of the plant and on the quarry. These are the indicators we are interested in.
ICR: How much have you allocated for the next two to three years for investment in modernisation?
FG: The main project is now under study and we’ve prepared a feasibility study and a draft statement of work for it. The plant has three kilns, one is dry and two are semi-dry. We are proposing to invest US$30m in the plant to fully convert to the dry method and to expand the production capacity of the plant. Today, it’s 1.7Mta and we can easily achieve 2.8Mta once fully converted.
ICR: Are you using Russian technology to advance your kiln systems?
FG: We’re studying both world and Russian technologies. From first impressions, I don’t think there’s a very great difference between the two technologies. At the Lipetsky plant we shall make use of the infrastructure that is already available and keep the plant running while the conversion work takes place.
ICR: How many plants do you now own?
FG: Five, including the latest acquisition. And these are cement plants that are running today with a utilisation rate of 80- 95 per cent. Not bad!
ICR: Out of the total plants that you now own are there any that are setting you any real challenges in terms of technology or perhaps the raw material base?
FG: Well, I don’t see any great difficulties as far as our cement plants are concerned. I think the greatest problem is changing the mentality of the management. The technology of cement production is relatively simple. The raw materials base is different everywhere. Different in the depth of deposits, aluminium or calcium content. For instance, I don’t like certain raw materials values at the Maltsovsky plant. The initial humidity of the raw materials there is higher than at the other plants. So you have to spend more on gas. However, I like the Lipetsky plant very much. I think we’ll make it a plant that will match any European works. I also like the Mikhailovsky plant very much. If you had been there last August, you would probably have said: “What’s this? A swamp?” Today the situation is radically different. Although on my first visit I had to wear high rubber boots and I almost drowned! That was also my first real experience of a cement plant.
ICR: A good start but clearly one that gave you the impetus to bring about some rapid changes?
FG: Yes, I understood that the problem was not in the plant itself – there were kilns, risers – the usual stuff. But if the roof is leaking, then people are unable to work! I understood that it was a fairly good compact cement plant, with a good layout, easy to manage. The only thing that was lacking there was order. But the rate at which we were able to put things in order was very high. It’s the same situation at the Savinsky plant. It won’t take long to put it into great shape. But our most efficient plant in operation today is Maltsovsky. However, things are complicated there, mainly because there are actually two plants there – the old one and the new one. The area is huge. And the output is 3.8Mta. In fact this year we are planning to produce 4.04Mt. Therefore, from that viewpoint, the plant is great; but I find smaller, more compact plants much more interesting to deal with. Again the Nevyansky plant fits this view extremely well. It’s the newest plant, only 15 years old. It’s a dry plant. Just one kiln, two mills, 1.2Mta capacity. I think we can make this plant perfect.
ICR: What about pricing developments for cement on the Russian market?
FG: Prices are improving. Currently the consumer price is about US$28/t. Within two years I should expect to see such prices up at the US$50 level, not less than that. Even this year it will go up as high as US$45. Higher prices are in everyone’s interest. In the interests of the state, the construction sector, of the people who buy it and, of course, in our interests. Of course I want to earn some money. If I said I don’t want anything for myself, I’ll do it all for my country, well, I wouldn’t be sincere. Last year when we hiked the prices a little, the Anti-Monopoly Committee started talking about industry collusion. The construction sector lobby also complained. But they miscalculated. I asked t hem these questions: my price is US$28. Who wants cement? Is there a shortage? They say no. So what’s the problem? If you don’t want to buy it, don’t.
ICR: You’ve clearly been very successful in the Moscow region, in the central part of Russia and now in the Urals with the Nevyansky purchase. Any other expansion plans? For example, have you got any designs on the Volga region?
FG: Holcim is already there. Look, our goal is not just to buy another plant or two. Our goal is qualitative growth. If you look at the Russian cement map you could find many plants that we could get for free. But we don’t want them. We are not just going to buy anything that turns up. Take the Nevyansky plant, Lafarge wanted to buy it. Why they didn’t I don’t know. They’d been bargaining for two years and nothing came out of it. Our goal is not to buy up any plant in sight. Absolutely not. We are satisfied with the production capacities that we have. What we want to have is a qualitative change.
ICR: Do you have any opportunities to export cement or clinker at all?
FG: We currently export cement to Lithuania and now we are now considering exporting to former COMECON countries: Bulgaria, Romania, Hungary. But as you know, there’s a surplus of cement in Europe now. Perhaps we shall have to make do within the framework of our own country.
ICR: What about vertical integration? I think you have already started given the success of your dry mix division.
FG: Today our structure is like this. First, we have a very wide distribution network. Second, we are the only and the largest company in Moscow which has two major storage elevators over 40,000t. Moscow consumers, smaller ones, who take their cement by truck, all buy it from us. So far, we have four dry mortar units. We have an asphalt-concrete plant in Moscow, we also have a mineral powder plant. A small part of its production is used in agriculture, but most of it goes to asphalt plants. We also have a joint venture with Dyckerhoff producing dry mixes. Then we have a concrete product plant in Bryansk oblast. But I personally think that we have to produce both cement and concrete. This is the r eally interesting development. More so than the rest.
ICR: How are your relations with Dyckerhoff?
FG: We are currently conducting negotiations with Dyckerhoff and all problems between us will be settled.
ICR: Has this experience made you wary of entering into any other JVs?
FG: Perhaps I must be a selfish man. My experience tells me: whatever is mine should be mine. As any woman will tell you, you can’t be half pregnant!
ICR: Russian winters must have a strong effect on your marketing strategies. How do you cope?
FG: It’s not so much of a problem. We can do repairs. If sales are down I tell the production people: we produce 8Mt. Let’s divide it by 12. What’s the problem? In any case from time to time you have to stop the kilns for periodical planned repairs. Under normal market conditions such repairs could be performed every month. For example, today we have eight kilns in operation at Maltsovsky. One could leave five of them in operation and stop the other three for repairs. In winter we have five kilns in operation periodically. We are one of the few companies that, by 1 April this year, had 0.53Mt clinker and 0.32Mt cement in our stores. We did it on purpose, not because we couldn’t sell it. We did it to be prepared for the season and now we can definitely say that the market is there and we’ll have a normal budget by spring.
ICR: What about getting the new generation to join the cement sector. Are young people interested in a cement career?
FG: Today there is really a shortage of specialists. What can we do? We can make use of the available age potential as a springboard for the young people to give them training. My senior vice-president is Victor Kushchidi. He turned 71 last year. He is quite fit, he jogs. But he’s 71 and so I tell him that within a year or two you will have to train so many specialists in various areas. Now we have some college students in training. Remember in the Soviet times everyone wanted to be a cosmonaut, or an engineer, or an army officer. During the perestroika everyone wanted to be a banker or a bandit. People didn’t want to study any more. Now everyone is aware of the need for education. Over the last 4-5 years people started realising that education is a base you have to have. And now there is competition to enter technical colleges.
ICR: How about environmental matters. Have you an environmental programme in place? Do you have any specific problems to overcome quickly?
FG: You know, I wouldn’t say that there are particular environmental problems. There’s more talk than is justified by the real problems. We had a court case against us at Maltsovsky. We realise that the cement industry does have its environmental problems. And we knew what we had to do about them when we acquired every plant, including Maltsovsky, where local pressure groups made trouble. They say they want to protect the environment, the people etc. We say: we have an approved programme, here are its implementation stages, we have done so much, this is what we still have to do. Within the next few years we’ll spend about US$10m on solving environmental problems at all our plants.
ICR: Do you produce white cement or have any plans to do so?
FG: No. The market is too small, only something like 200,000t produced by the Shchurovsky plant.
ICR: Where will you be in two years with your production levels?
FG: Last year we produced just over 7Mt. This year we planned for a 1.285Mt increase. I now think that plan was too ambitious, possibly due to a certain lack of competence on my part. Now I’m much more knowledgeable and we had to revise our figures down to 7.716Mt. These were still realistic figures, equivalent to a 9.8 per cent growth. And the new plan made it easier for our production facilities to reach the targets. This is without Nevyansky which would add 0.83Mt to that figure. And I think we’ll be able to turn out 0.9Mt there. Next year we’ll make 8.2Mt plus a further 1Mt from Nevyansky. This is how we see it today.
ICR: In terms of your fuel prices, what’s the current situation in Russia?
FG: There was a first positive sign this year – a law was adopted on increasing the tariffs for energy, railway transportation and gas. These prices will be changed once a year. This now enables us to plan more effectively. This year in January there was a 14 per cent hike in power prices, a 16 per cent rise in the railway tariffs and a 22 per cent rise in the gas price. This resulted in an approximately 10 per cent increase in our production costs. So fuel prices are bound to grow, but the growth will be gradual, not aggressive.
ICR: Do you have any immediate plans to change your cement works to coal-firing?
FG: We haven’t got that many cement plants in Russia that work on coal. We are in a good position to evaluate the various fuel options. We have a plant – Savinsky – which burns coal. We have plants that can switch to burn fuel oil, Maltsovsky for example. We have two dry plants. We even have two semi-dry kilns. So, on the basis of our own experience, we can test in practice the effectiveness of this or that cement production method using various fuels. This is what we are going to do to allow us to properly identify and analyse all the options.
ICR: Can you see much higher levels of consolidation occuring in Russia as has, for example, taken place in western Europe?
FG: This will happen in Russia too. You know, your neighbours, for example, Lafarge, Holcim, Italcementi and the other players that are now present on the Russian market, have to stop regarding Russia as just another banana republic and realise that the time is long past when you could buy a plant for three cents. If they change their psychology there may be three or four cement producers left at most. Monopolisation is always a big question. So I think that in any area there must be competition. For Russia, three or a maximum of four companies in the cement sector will be good.
ICR: Are you a believer in the view that the Russian cement industry should be for the Russians? Or do you take a more international view of markets and ownership?
FG: Probably yes. We intend to be looking at some plants in other countries as well. The experience of major world companies supports this view. When I bought Shtern Cement I had the greatest wish of buying up many more cement companies, but it was a wishful, emotional view. Then I analysed the situation, had a good look and realised that one could buy plants in various countries – a couple of plants here, and a couple there – and do quite well. Perhaps we can still buy up all those Russian plants and make a swap with major international players!
ICR: You built up your coal business from scratch to a very profitable company in a very short period of time and then sold it. Do you have the same investment strategy for cement?
FG: No, and I’ll explain why. In the coal business it was exactly the time when you had to make a big move. Our coal business was entirely focused on servicing the power sector. Say, it’s like the German experience – now our energy/power sector is undergoing reform. On these big coal faces there are power stations every two, three or four kilometres and we did not want to take part in the inevitable vertical integration process. Thus, we had two options: either to sell out, or start working according to the new system. There was no third option. That would have caused problems. So our decision was to sell. In cement the situation is different. Here you can produce it, you can sell it, there’s a great market. I can tell you right away – we are not a company that buys a company, paints it up and sells it off. We are in this business for the longer-term. It’s as straightforward as that!
Article first published in International Cement Review, June 2003.