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Exceptional CIS, September 2012-January 2013 - OMK - EY - Russia

Exceptional CIS, September 2012-January 2013

In tune with heavy metals

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“We aim to be a global company and we will thus consider acquiring other assets abroad.“
Anatoly Sedykh, CEO of OMK.

Inspired by the philosophy of William Edward Deming, Anatoly Sedykh is expanding his metals company across Russia and around the world.

When Anatoly Sedykh and a group of partners founded United Metallurgy Company (OMK) two decades ago, they never imagined that it would eventually become one of the largest metallurgical groups in Russia and serve customers around the world.

“It was never our goal to become the biggest. Instead we strove to be efficient and that is what has always driven the company’s growth,” says Sedykh, Chairman of OMK.

The company specializes in the manufacture of steel pipes for the oil and gas industry, plus train wheels, pipeline couplings and rolled steel. It owns three metal plants built during Soviet times: Vyksa Steel Works in the Nizhny Novgorod region, Trubodetal Plant in Chelyabinsk and Almetyevsk Pipe Plant in Tatarstan.

Over the past seven years, ОМК has modernized these plants, introducing state-of-the-art technology and advanced management methods, while also expanding the facilities.

In 2008, the company also built a Casting and Rolling Complex (LPK) in Nizhny Novgorod — the first new metals plant to be built in Russia in two decades. In 2011, ОМК built the Stan-5000 Metallurgical Complex (MKS-5000) at Vyksa Metal Works. Total investments in the construction of LPK and MKS-5000 exceeded US$3b. In just seven years, the company has spent more than US$5b on building new facilities and modernizing existing ones.

Sedykh grew up in the far north of Russia, where his father worked in the mining industry. An ambitious student, Sedykh enrolled in the Moscow Institute for Steel and Alloys, which trained the Soviet Union’s leading metallurgists. After graduation, he went to work as an economist at the Institute of Economics of Chermet Central Research Institute. At this time, perestroika was opening up exciting opportunities for anyone willing to take a risk and try their hand at being an entrepreneur.

With a group of friends, Sedykh went into business, working first as a metals trader and then obtaining a loan from Sberbank to invest in a small ferrotitanium plant. These were extraordinary times: young people with an average monthly salary of 117 rubles (US$3.7) came in off the street and the bank approved their business plan and loaned them a million rubles.

“It was a very difficult time, although metallurgy was not in such a catastrophic state as other sectors,” says Sedykh. “But it was exciting as well; there was a kind of economic romanticism in the air.”

Metallurgical plants cooperated quite closely in the early 1990s, but due to the poorly developed banking system and a number of economic problems, payments were frequently held up, sometimes for six months or more.

It was then that Sedykh and his partners came up with the idea of starting an industry bank to ensure that the payment system operated smoothly and reliably. The Ministry of Metallurgy supported the initiative, and many giants of the Russian metals industry became founders of Metallinvestbank in 1993. Sedykh became the bank’s CEO, a position he held until 1998.

The bank built a spotless reputation and earned customers’ trust. As privatization got under way, and many companies were in a near-critical situation, the directors of the steel works appealed to the bank for help and proposed that its top managers become shareholders.

The bank’s first major acquisition was the 1997 purchase of Chusovoy Metal Works in the Urals. In 1999, Sedykh and his business partners picked up a 20% stake in Vyksa Steel Works. Vyksa, which celebrates its 255th birthday this year, is among the oldest of such enterprises in Russia. During tsarist times, it produced cannon and cannonballs, iron for the first Russian railways and ornamental castings.

At the turn of the 21st century, however, the plant was in a deplorable state and there was little demand for its pipes and wheels. The Soviet metals industry had always been a world leader, with an especially strong scientific base. The Soviet Union was responsible for three of seven key breakthroughs in metallurgy in the 20th century, but new times make new demands.

Metallurgists had to adjust quickly, start thinking in terms of business, learn to produce what the market needed and survive in a competitive environment. But the directors, out of sheer inertia, were far more concerned about output and fulfilling the plan than with economic and quality indicators.

“They were stuck in their ways,” says Sedykh. “We had a completely different mindset and so could be more flexible and active.” The new managers of the plant strove to instill these values in the companies that OMK acquired.

Pipe dreams

Surprisingly for a country that had built some of the world’s longest pipelines, the Soviet Union had no facilities to manufacture pipes with a diameter of 1,420mm, capable of withstanding pressures of more than 100 atmospheres and with a wall thickness of more than 21.6mm. These are the pipes required to transport oil and gas over long distances inside the Arctic Circle, in Siberia, in seismic
zones and underwater. Millions of tons of these so-called Russian-size pipes were supplied to Russia by producers in Japan and Germany.

Only in 2005, with the completion of a new complex at Vyksa, did Russia begin to produce large-diameter pipes with unique technical capabilities. The production of the new generation pipes has helped Russia reduce its dependence on imported pipes and save billions of dollars for the domestic economy.

Modest by nature, Sedykh attributes OMK’s success to favorable economic factors and good luck. But luck always involves an ability to forecast and analyze risks.

“Risk assessment is a key factor in business,” he says, “because risks, above all, mean the ability to look ahead. The rest is pure math. If you correctly judge the future and your own capabilities — which is also very important — things should work out. A good entrepreneur also understands that you can’t get everything at once.”

The history of ОМК’s collaboration with Gazprom is a good example of this ability to look ahead. Traditionally, Gazprom never gave its pipe manufacturers any guarantees, but it played an active part in developing new kinds of pipe production.

“In the early years of this century, our pipe manufacturers worked with Gazprom specialists to develop the specifications for a new line to produce largediameter pipes,” says Sedykh. “As a result, experts think this line will meet Gazprom’s most optimistic requirements for the next 30 years.”

Another reason for ОМК’s success is that it was able to accurately forecast growth in Gazprom’s demand for pipes and then risked investing in the construction of a facility to produce large pipes with a diameter of 1,420mm.

The risk ultimately paid off: ОМК has been a key supplier for all of Gazprom’s major projects since 2005.

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