Evraz may oust Ukrainian manufacturer from the Russian market of railway wheels

The company will double the production of wheels.
Evraz Roman Abramovich, Alexander Abramov and Alexander Frolov began a project to expand the capacity of the wheel and tire shop at the Nizhny Tagil Iron and Steel Works with 78,000 wheels per year, the company said. The investment will be about $ 60 million, its launch is scheduled for 2021. Evraz is also considering options for building a second plant with a capacity of 200,000 wheels per year at this site, said Ilya Shirokobrod, vice president for sales and logistics. He noted that in recent years, the demand for railway wheels in Russia has been growing.

The representative of Evraz did not mention the timing of the project and its cost. Nikolai Sosnovsky, director of metallurgy and mining at Prosperity Capital Management, estimates it at about $ 100 million.

Railway products are the most profitable in the Evraz order book and account for 11.1% of the steel division's revenue structure, he notes. The project's EBITDA can be about $ 20 million annually, which is 1.4% of EBITDA for 2017, Aton analyst Andrei Lobazov adds.

Now Evraz produces about 280,000 wheels per year. A total of 1,024 million wheels were produced in Russia in 2017. The share of Ukrainian Interpipe in the production of steel wheels in the countries of the former USSR in 2017 was 14.4% (179,424 pcs.), Its price for Russia was on average 10% lower than that of Russian manufacturers, according to Infoline -analytics.

From April 5, on the territory of the countries of the Eurasian Economic Union (EAEU) duties on railway wheels from Ukraine were raised from 4.75 to 34.22%. The increase in production of Evraz will allow forcing out imported products from the Russian market, believes a top manager of a company working with counterparties Evraz. Sosnovsky agrees with him and Maxim Khudalov, director of the corporate ratings group at ACRA. "The Ministry of Industry and Trade has already imposed a ban on the supply of railway products - arrows and cars - Ukrainian production, the following may be a ban on the import of Ukrainian wheels," - adds the latter.

Evraz has chosen a good time for capacity expansion, the government has many plans for the development of railway infrastructure, notes Lobazov. Production of cars in Russia is growing, the existing capacities for the production of wheels may not be enough, adds Sosnovsky.

Transmashholding buys about 50,000 wheels annually and will increase the purchase of products in the future, but there are no Interpipe products among them, a company spokesman said: "Increasing wheel production by Russian manufacturers will help stabilize the market and prices." UWC's production and repair units consume more than 200,000 wheels per year and Evraz is one of the suppliers, the UWC representative said: “The launch of new capacities is a long-awaited step for the market.”

In recent years, freight turnover in Russia has been growing faster than the railway fleet is being updated, says director of research agency Infranews, Alexei Bezborodov. “There is a shortage of wheels on the market. If three years ago a pair of wheels cost 45,000 rubles, then today it is cheaper to find a couple cheaper than 100,000 rubles. is impossible. The Evraz project is not an attempt to oust someone from the market. This is an attempt to meet demand, ”he believes.

“There is an acute shortage of solid wheels on the market,” said the source of Vedomosti, who is close to one of the consumers of wheels for freight cars. - It is not profitable to buy Interpipe products due to a duty of 34%. Russian enterprises do not cope with the volumes contracted in long-term agreements. This forces consumers to make adjustments to their production programs. Middle and small wheel buyers have to look for products in the secondary market, where the markup can reach 100%. ”

But OMK (the largest wheel manufacturer in Russia) says that the production capacity of wheel manufacturers and real consumer demand are balanced. A temporary peak demand arises due to the lack of “regular, regulated repair of wagons with the replacement of worn parts with new ones and strategic planning in the horizon of 1–2 years,” the OMK representative explains. The producers of the EEU have enough power and facts that indicate a shortage of wheels, which leads to significant downtime of the cars, he says: “As early as 2019, after the Kazakh manufacturer“ Prommashkomplekt ”entered production capacities in the amount of 200,000 pieces. wheel requirements will be fully met. ”