Cement Ambition of Filaret Galchev

Having consolidated the lion’s share of the market, Eurocement Group has created favorable conditions for the development of the whole Russian cement industry.

By Ilya Stupin

Eurocement was created in 2002 based on the assets of Stern-Cement, the largest Russian producer of cement. The company, which controlled several Russian plants with an aggregate production volume of about 7 million tones, was acquired by coal barons Filaret Galchev and Georgiy Krasnyanskiy. Later they sold 44.4% of Eurocement shares to Russia Partners, an American direct investment fund.

Despite an impressive market share of Stern-Cement in 2002 (about 30%), the financial condition of the company was unstable. It was heavily indebted, the business was anything but transparent, and production assets were worn to the limit. The new shareholders managed to impose order in their new companies and considerably strengthen their market positions.

Mr. Galchev created a new company, Eurocement Group, in 2003, following disagreements with Russia Partners. Initially, the group included the former plants of Stern-Cement, but in 2005 several new production units were added, in particular, the cement division of Inteco company owned by Elena Baturina (six plants) and two cement plants of Moscow’s construction company Su-155 owned by Mikhail Balakin. Besides, the Eurocement Group, now fully controlled by Galchev, acquired cement plants in Ukraine (Pushka and Balcem) and Uzbekistan’s Akhangarancement.

The situation on the Russian cement market was conducive to new acquisitions and market share build-up. Before 2002, despite increasing demand, tough competition between fragmented producers resulted in prices of no more than USD 30 per ton, with margins nearing zero. That didn’t get the producers any closer to implementing the badly-needed modernization programs. The majority of Russian cement plants had been built either before WWII or in the 1950-1960s. Not a single new production line had been commissioned ever since. The average wear factor for the industry was an appalling 70 percent.

Having consolidated more than a half of the cement market (this year the capacity of the sixteen cement plants of Eurocement Group reached 35 million tons per year), the holding now can toughen its marketing policies, drive smaller competitors out of the market and raise prices. This year, the prices rose to an average USD 80 to 90 per ton. According to industry experts, such price levels allow producers to channel considerable funds into modernization and production development programs.

But better pricing and favorable demand has attracted new investors into the Russian cement industry. One of the major world players, German HeidelbergCement, recently announced a plan to build a factory in Saratov Region with a capacity of 2 million tons per year. Investment into the project is estimated at USD 200 million. In the coming 2.5 years, St.Petersburg’s construction group LSR will build another 2-million-ton plant in Slantsevski District of Leningrad Region. Favorable market situation has led to a revival of a number of small plants, which had been idle or operated at less than full capacity.

Eurocement Group has its own plans for new construction. In particular, the company intends to build a cement factory in Voronezh (expanding existing Podgorenski Tsementnik factory) and another one in Lipetsk Region. Their combined capacity would be around 3 million tons. Besides, the company is working on a design for a new plant in Ryazan Region. According to president of Eurocement Group Mikhail Skorokhod, the company plans to spend about USD 560 million under its modernization and expansion program before 2008. Of that amount, USD 237 million will go to modernize and upgrade the existing facilities, and another USD 265 million to build 6.2 million tons of new capacity. However, there are several factors at play that can interfere with those ambitious plans.

First, state regulatory authorities can create problems. Last year, the Federal Anti-Monopoly Service (FAS) filed a suit against Eurocement caused by a sharp increase in prices. Back then, the anti-monopoly service demanded that Eurocement reduce the prices and pay a fine of RUR 65 million. It also threatened to break up the monopoly. The cement company appealed, but had to settle with FAS for approximately USD 10 million. The antimonopoly service accepted only when Eurocement Group agreed to sell a considerable portion of its production through a commodity exchange. That does not mean, however, that the state will never again have any claims against the cement monopoly.

Second, additional risks are created by the conflict between Eurocement Group and American direct investment fund Russia Partners, which is supported in the dispute by A1, a subsidiary of Alfa Group. Recently, Russia Partners (it still holds 44.4% in the charter capital of Eurocement, the other 55.6% are controlled by the current shareholders of Eurocement Group) filed suits in Russia, Great Britain and Cyprus, accusing Galchev that he had channeled cash flows and profit from Eurocement to Eurocement Group. Court proceedings may destabilize the operations of the company and create problems if the company plans to attract large strategic investors (especially Western ones), something it really needs to continue the development of its business.