Improvement of ferrous metals production efficiency

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Improvement of ferrous metals production efficiency

Petrosyan Spartak,

Student of the baccalaureate of the International Finance Faculty, Group iff17-3k financial university under the government of the Russian Federation

Actuality

Relevance of the research topic. Annual world production and consumption of ferrous metals exceeds 1.0 billion tons. Ferrous metals are the main structural material for the manufacture of tools, structures, buildings, communications and transport, that is, are the material basis of modern material production. F. Engels noted that metal is "the most important of all types of raw materials that have played a revolutionary role in history". V.I. Lenin called metal "one of the main products of modern industry, one of the main foundations of civilization".

The article is devoted to the problems of energy saving and production cost management at metallurgical enterprises. Justified the need the energy and resource saving policy of metal products manufacturers; the directions of energy saving at the regional and enterprise levels to improve the efficiency of their work were outlined. energy conservation metal

Keywords: energy-saving, resource-saving, cost management, ferrous metallurgy, competition, cost price, efficiency of metallurgical production.

Brief outline of importance the metallurgical industry in the whole economic system

The quality of materials used in power engineering, shipbuilding, oil and gas industry is subject to increased requirements. Special attention is paid to mechanical and operational properties, corrosion resistance and manufacturability of these steels. Steels used earlier can no longer meet customer requirements in some cases, which necessitates the development of compositions and technologies to ensure the production of corrosion-resistant x steels that meet the highest requirements of operating conditions.

Professor L.L. Zusman L.L. Zusman¹ - the largest researcher of metal circulation and metal fund of the USSR said: "With sufficient reason we can consider that the modern world material culture rests on about 5.5 billion tons of ferrous metals, forming its metal backbone".

Nitrogen-containing austenitic steels with high strength, ductility, impact toughness and good corrosion resistance are becoming more and more common. Use of nitrogen as an alloying element allows partially replacing nickel and other expensive alloying elements.

However, as the data obtained for the period of this research show, in the presence of all necessary equipment and materials at domestic enterprises, attempts to introduce technology for the production of products from nitrogen -containing steels have not always been successful, and the reason for this was low efficiency of production, primarily due to quality problems.

At present, quite a lot of material has been accumulated about the properties of nitrogen-containing stainless steels, thermodynamics and kinetics of nitrogen dissolution in metal. G. Balachandan in his works systematized methods for determining the minimum nitrogen content in the metal, which provides conditions for obtaining the austenitic structure. The results of experiments and methods for determining the solubility of nitrogen in the metal ar e presented in the works of Y. M. Pomarin, Ferrous metallurgy, producing key components of structural materials in construction and mechanical engineering, plays an important role in forming the industrial foundation of the Russian economy.

The industry generates approximately 4 - 5% of Russian GDP and 6 - 7% of exports. Russia steadily holds a five-percent stake in the global steel market, occupying one of the leading positions among all countries of manufacturers.

The metallurgical industry includes about 1.5 thousand enterprises and organizations. The degree of concentration of economic and financial activities in the industry is evidenced by the fact that more than 80% of the volume of production falls on 9 large companies and vertically integrated corporate groups (these are metallurgical companies EvrazHolding, Severstal, "Novolipetsk Iron and Steel Works, Magnitogorsk Iron and Steel Works, Metalloinvest Management Company, Mechel and pipe companies. "Pipe Metallurgical Company", "United Metallurgical Company", JSC "Chelyabinsk Tube Rolling Plant Group"). Some of these companies are one of the key players on the global market.

In Russia, there are a sufficient number of regions where the ferrous metallurgy is a city-forming factor, thus taking a certain share of "responsibility" for the formation of the revenue part not only of the budget system of the country in the Russian Federation, but also in the Russian Federation in general, but also in the relevant regional budget

The Picture 1 below shows how the share of the main sectors of Russian economy have changed over past 35 years.



Picture 1. Dynamics of the share of the main branches of the national economy of Russia in the structure of industrial production, %2

As picture shows, the share of ferrous metallurgy has increased from justless 5% to 12%. This indicates that this sector becomes more and more important in Russian economy structure. According to official statistics, the industry has seen an increase in metallurgical production since January 2016. At the same time, ferrous metallurgy products (production and primary production) have been growing since January 2016. processing of cast iron, steel and ferroalloys in combination with the production of cast iron and steel pipes) in 2012-2016 has been a leader position in the steel industry structure countries, significantly exceeding the volume of non-ferrous metallurgy production.

Thus, the positive vector of development of the metallurgical industry is the source of growth of the national economy of the Russian Federation and welfare of its population, which is confirmed by the co-directional dynamics of GDP, index of industrial growth, and industrial growth. production and dynamics of production of the main types of metallurgical industry products.

Bearing in mind that ferrous metallurgy is a substantial sector in melarrurgic production and in Russian and foreign economy at all, it is important to analyze data and indicators of its efficiency and, based on them, make conclusions whether this industry shows high efficiency indicators, identify possible issues and propose some measures to improve the situation. Consumption of Russian ferrous metallurgy products is ensured mainly by the following industries:

- Automotive industry;

- General mechanical engineering and equipment;

- construction;

- oil and gas production;

- Construction of main oil and gas pipelines;

- pipe production.

So, the internal consumption of metal products directly depends on the situation in the abovementioned sectors of economy.

Types of efficiency evaluation. Eco-energetic efficiency, the values of which directly depend on the indicators of products, is a confirmation of what has been said. If the sub -industry leader on this indicator is the production of pipes and rolled products (almost 200% of the average), the second place is occupied by other sub-industries - 177%, which is more than 1.5 times the industry average. The fact is that the Group's products are highly-conditioned raw materials - not even raw materials, but almost ready-to- make metal, the production of which (collection, cutting and sorting) is incomparably less expensive in terms of energy, labour and natural resources compared to quarrying and smelting.

Eco-energy efficiency of other sub-sectors is lower than the industry average: coke and refractory production - 89%, steel and metalware production - 69%, extraction of ferrous metal ores - 52%, ferrous metal casting - 14%. As it turned out above, ferrous metal casting is the most dirty and energy intensive sub - industry, so the last place in terms of eco-energy efficiency is quite expected here. If the leading positions of the companies included in the "other" are explained by the specifics described above (recycling of already manufactured products and a high role of logistics), the production of pipes and rolled products should be noted as a natural leader in terms of eco-energy efficiency, which has the highest level of intensification of production compared to other sub-sectors.



Picture 2. Eco-energy efficiency in the ferrous metallurgy sub-sectors.

Technological efficiency, which does not depend on the product indicators, demonstrates a fundamentally different distribution. The "Other" sub-sector has a technological level almost twice as low as the industry one (64% of the average). In terms of the level of technologies used, scrap metal production was not far from black ore mining (37%). This should be highlighted as an example of efficient production of products (almost finished metal) by low -tech means. The absolute leader is coke and refractory production (250%).

Here, an explanation of the meaning of the concept of technological efficiency should be made. Environmental and energy indicators are used in technological efficiency assessment. At the same time, the high result reflects the ability of enterprises to perform more work with less impact on the environment than other enterprises, and produce more useful products for each unit of energy, water, land, polluted waste, air or waste. Accordingly, even with high efficiency, the absolute environmental impact can be large and the technological process can be very dangerous.

The coincidence of efficiency and hazard is a fundamental (physical) property, for example, in many technologies where high efficiency (efficiency) is achieved either at high temperatures (oil refining) or in aggressive chemical environments. Such technological processes require special (often very costly) measures to protect people and the natural environment.

Strengthening the "protection loop" and isolation of the technological process (closed water circulation, air purification, spatial compactness) simultaneously leads to a reduction in specific effects on the environment, which also works to improve the performance of technological efficiency.

It is these features that determine the high technological efficiency values for coke production. Other sub-branches demonstrate a level close to the industry average: production of steel and metalware - 100%, ferrous metal casting - 97%, and production of pipes and rolled products - 96%).

Picture 3. Technological efficiency in the ferrous metallurgy sub-sectors.

Main production indicators

Russia in 2018 took the sixth place among countries steel producers in terms of production volumes.

Following the results of eight months of 2019 Russian companies produced 48 million tons of steel, which is less than of the same period last year by 0.4%. While during 2018 year 71,7 mln. tons was produced.

The profitability of leading Russian metallurgical companies in the first half of 2019 was in the range of 24-39%.

Export of flat-rolled products in the first half of 2019 in relation to by the same period of 2018 decreased by 23% in monetary terms in expression and decreased by 17% in physical equivalent.

- Export of pipes in the first half of 2019 in relation to by the same period of 2018 decreased by 51% in monetary terms in expression and in natural equivalent by 39%.

- Imports of flat rolled products in the first half of 2019 in relation to by the same period in 2018 remained in the same volume in monetary terms and decreased by 8% in physical equivalent.

(§§) - Imports of pipes in the first half of 2019 in relation to by the same period in 2018 increased by 43% in monetary terms and in physical equivalent by 86%. At present, the metallurgical industry is the second largest in the world. after high technology, telecommunications, entertainment and media in terms of the degree of digitalization of the industry in Russia (innovation level**) Innovation level - weighted average value of technology complexity assessment (from 0 to 0.5) metallurgical industry - 0.24, innovativeness level on average in Russia - 0.17).

The most common technology under consideration, used in companies of metallurgical industry, is the electronic document circulation (72%).

Picture 4. Dynamics of steel production in 2018-2019

As the graph shows, the growth rate of steel production during 2018-2019 years was unstable, with positive and negative fluctuations from 2 to 6%. All in all, for the period more than one year and a half, since the beginning of 2018 year, when the steel production was more than 6 mln. Tons, it decreased by 166 thousand tons, showing the figure 5,9 mln. tons.

Production growth in Russian of the metallurgical complex was in the first half of the year 2019 2.6%, which is higher than on average for the manufacturing sector. However, as a result of the confrontation. USA and China all metal prices have decreased, so the companies' revenues from Russian exports of steel in the first half of 2019 also decreased (by 12%).

To find the reasons of the decline in production volumes in Russia, it is necessary to identify the main companies-producers of steel. Evraz, NLMK, Severstal, MMK, Metallinvest and Mechel in the first half of 2019 produced a total of 32 mln. tons of steel, which is more than 87% of steel production in Russia during this period. So, these corporations are worth analyzing.

To recognize actual profitability of the corporations, it is important to calculate profit margins. The most accurate figure will be obtained by finding EBITDA margin (not gross profit or net profit margin), which is EBITDA divided by revenue. The results are shown in the Table 1.

Table 1. Financial indicators of the main Russian metallurgic corporations4

	Revenue, $ mln.	EBITDA, $ mln.	EBITDA margin
	2018, first half	2019, first half	2018, first half	2019, first half	2018, first half	2019, first half
Evraz	6343	6140	1906	1482	30%	24%
NLMK	5906	5666	1727	1430	28,3%	25%
Severstal	4432	4208	1580	1416	36%	34%
MMK	4161	3835	1210	937	30,1%	24%
Metallinvest	3779	3584	1491	1410	39%	39%
Mechel	2639	2353	696	466	26%	20%

According to the Table 1, the profitability of leading Russian steel companies in the first six months of 2019 ranged from 24% to 39%, down 2-6% compared to the same period of 2019. Although the revenue decreased over the year for the all companies, the rate of decline in EBITDA was higher, thus the EBITDA margin fell down. This indicates that the Russian corporations fail to increase sales and make high shares of profits from there sales.

One on the drivers of the increase in production volumes and price is the consumption resulting in the growing demand. The factors which move the demand up have beneficial influence on the whole industry indicators. The graph represents the changes in consumption levels from 2011 to 2020 years.



Picture 5. Ferrous metallurgy products consumption since 2011 (mln. tons)

Up to 2014, the demand level have showed increase, but due to the currency crisis, in 2015 the indicator was even less than in 2011 year.

The growth in demand for steel in Russia continues go a long way to increase due to domestic steel consumption renting. According to the forecast of World Steel Association International association of iron and steel products manufacturers. The Association brings together more than 170 steel producers, national and regional associations of steel industry and steel, research institutes., in 2019 consumption growth iron and steel products will be 1.0% and 1.5% in 2020.

In the opinion of an expert from Severstal, a significant part of the demand growth came from exactly in the first half of 2019 due to the increase in construction before making changes to the law on escrow accounts.

Table 2. Russian companies development strategies

Comp any	Corporate strategy	Competitive strategy	Functional strategy
NLM K	"Strategy-2022" - investment in development projects maintaining financial stability and highly competitive dividend policy. -Steel production growth by 1	Operating efficiency improvement manufacturing and global leadership at the cost of production of steel	Environmental impact minimization - Finance: financial stability, maximization shareholders profitability
		million tons to 14.2 million tons per year. - Concentrate production growth to 20 million tons per year, - increase in electricity selfsufficiency from 60% to 95%.	- Target of increase of efficiency (on EBITDA) will be $0.5 billion per year (2023) as compared to 2019)	- Marketing: growth of steel products sales to 18 million tons - Personnel management: high level of motivation and involvement, injury rate reduction (LTIFR = 0.5)
	EVR AZ	Global mining. projects with minimal cost at all stages of production. Five key success factors - Health, Safety and Environment; - company employees; - partners and clients; - asset development; - business system of the company.	Minimum cost at all stages of production (self-sufficiency in ore - 79%, in coal - 239%) - Focusing on the steel market infrastructure hire (rails, beams, construction hire)	- R&D and introduction of new technologies and costs reduction -Management organization continuous improvement - Finance: debt management, stable dividends, - Marketing: focus on customer - HR management: achieving employee engagement at the industry leader level, safe operation (LTIFR < 1.0x)
	Metal loinve st	The company's development strategy is to strengthen its position one of the leading manufacturers of iron ore products with high added value in the world.	Operating efficiency improvement (low cost of production pellets and HBI/LPG*) Focusing on HBI production (maintaining position as the largest producer of commercial HBI)	- R&D: introduction of energy efficient technologies - Main activity: production of iron ore raw materials with the highest level of quality -Management organization: corporate governance efficiency,

			- Finance: growth in shareholder value and investment attractiveness, - Marketing: strengthening of market positions - Personnel management: personnel development, social responsibility
Mech el	The strategy aims to improve financial of the company's results, increase in its shareholding cost and reduced debt burden.	- Mining segment: focus smelting - Metallurgical segment: focus in the production of long products.	- Main activity: ensuring low production and transportation costs - Finance: improving financial performance, increasing shareholder value, debt reduction -Marketing activity: development of service and sales network
MM K	"Strategy-2025". The main goal is to become steel leader of a world with comparable production volume in terms of total shareholder return.	- Strengthening positions on priority markets. Share of internal market sales in the structure of MMK will increase to 84% in 2025; - Increase in operating and functional efficiency (an annual decrease in cost of production by 23%).	-Main activity: lean production, timely supply, improvement of material accounting, minimization of warehouse stocks -Management organization: simple structure, transparency - Finance: increasing investment attractiveness;
			- Personnel management: involvement in operational improvement
Seve rstal	A "protective growth" strategy aimed at increasing product quality, used as a counterbalance to increase of scale of production, impeding capacity get more profit from one ton of production.	-Improving quality and control over a cost; - Decrease in the cost of basic products by at least 10%.	- R&D: development of Big Data - Main activity: modernization of the site in Cherepovets, aimed at to expand product range - Management organization: reorganization of the structure - Finance: EBITDA increase by 10-15% annually - Marketing activity: improving customer focus, flexibility, increase in online sales to 50-60% by 2023 - HR management: the bonus system linked to EBITDA

One of the project stages was a survey among experts, in which representatives of a number of metallurgical and pipe companies took part. A detailed analysis of data obtained for this subgroup allowed us to study the state of the metallurgical sector in Russia, as well as to identify sentiment of its participants regarding the prospects of their business and the industry as a whole.



Picture 6. Survey: assessment of the industry development prospects

Almost two thirds of respondents from companies in the metallurgical industry (62%) have a positive assessment of their company's development prospects. Share of respondents who are optimistic about their prospects development of metallurgical industry in Russia, increased by 8 p. p. (45%). Also 45% stated that the situation will not significantly change. The remaining 10% of respondents believe that the situation in the industry will get worse.

After the analysis the situation in Russian ferrous industry, some ways of efficiency improvement may be proposed:

- Growth of self-sufficiency of metallurgical production with raw materials and energy;

- Modernization of technological units, IT infrastructure and control systems;

- Expansion of assortment and improvement of metal products quality;

- Development of service and sales network, improvement of customer service quality;

- Strengthening positions in priority segments of the domestic market;

- Increasing employee motivation and involvement;

- Improving the investment attractiveness of the business;

- Maximize return for shareholders (consistently high dividends)

-Ensuring safe working conditions (decrease in occupational accidents) and the number of fatal accidents at work);

- Reduced harmful impact on the environment;

- Reduction of costs (increase in operating room efficiency);

- Ensuring financial sustainability, debt reduction;

- Development of production of products with high added value

Following this recommendations is likely to help Russian corporations to solve the efficiency problems, increase global market share and increase revenues together with EBITDA indicator.

What comes to foreign companies in ferrous metallurgy industry, they also have efficiency issues. The chart below shows production volumes distribution among countries and regions.

Picture 7. Production volumes distribution among countries and regions, 2019 year

For many years, China is the main producer and exporter of ferrous metallurgy products, especially steel.

The U.S. accounts for 75% of steel consumption in North America 6

Economist Intelligence Unit, a research and analysis unit, made predictions for the 2020 and 2021 steel production dynamics. The table with results is given below.

Table 3. Steel production dynamics

		2019	2020	2021
	World production	+2,3%	-1,1%	+3,0%
	Asia	+3,6%	-1,5%	+3,0%
	China	+4,0%	-2,5%	+3,0%

The rest of Asia	+2,5%	+1,5%	+3,0%
The EU	-3,0%	0%	+2,0%
The North America	+3,0%	+1,0%	+2,5%

There are recommendations how to solve national economic problems and global expansion issues:

- Integrating sustainable development goals into business;

- Participation in industrialization of the national economy (companies from China, South Korea, India);

- Contributing to the implementation of the country's socio-economic development plans (state companies from China, Iran);

- Promoting economic development through the introduction of innovative technologies;

- Aggressive growth and broad expansion in foreign markets, building global markets. production and technology platforms (companies from China, India, Japan);

- Strategic partnerships with foreign metallurgical companies;

- Development of businesses not related to metallurgy (conglomerates from China, India);

- Increasing business resistance to periods of decline in demand for steel.

Thus, the relevance of studies related to the circularity of metal and material intensity of metallurgical production, with the formation of resources of secondary metallurgical raw materials, with the choice of optimal options for its processing and use and determination of their economic efficiency is beyond doubt.

References

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