PROFILE: En+ Logistics plans to create own rail operator, gain foothold at ports
- En+ Logistics plans initial $500 million investment, joint ventures possible
- En+ Logistics to create own operator with RTC as its core, M&A possible
- Plans for now to buy own new freight cars from Russian Machines
- In-house operator to work route loops
- En+ Logistics prepared to vie for Vanino Port, but not at any price
- Company still plans to build rail branch in Khakasia
- Terminal projects in Ust-Luga, Taman ready, waiting for all-clear from state
MOSCOW. Aug 20. (Interfax) - En+ Group at the beginning of 2011 created the logistics firm En+ Logistics. It is headed by Rashid Guseynov, at one time head of the transport and logistics department at Olimpstroy and an advisor to the transport minister. The new unit's primary goal is to provide comprehensive support for En+ businesses and new projects in mining, metallurgy and energy, and to prepare the infrastructure to carry out the group's Eastern Strategy, which is to deliver goods produced at the group's Siberian enterprises to the Asia-Pacific markets.
The assets of En+ Logistics today include OVE, which owns a rail track almost 100 km long plus rolling stock in Khakassia; a 74%-stake in Russian Transport Company, which is a joint venture with N-Trans; and a blocking stake in the stevedore firm Vanino Port . Revenue was $220 million in 2011. The head of En+ Logistics told Interfax about the company's plans in the rail sector and in the stevedoring business.
60 MLN TONNES OF FREIGHT
"In my understanding, logistics is how you optimize the management or resources in a coordinated supply chain. And transport is one of the main links in that chain," Guseynov said. "Our strategic goal is to create an all-round logistics operator, one of the sector's leaders, which would meet the Group's requirements to the full and also provide a considerable volume of services to other parties," he said.
As of the present, the En+ Group's companies, which include Rusal, EuroSibEnergo, Vostsibugol, Tuva Mining Company and others, generate more than 60 million tonnes of freight per year, 8 million tonnes of which is import-export freight. Most of it is aluminum, alumina and other raw material used to produce aluminum, plus coal. Freight traffic will grow considerably in the next five-to-seven years, and the freight mix will alter also: Rusal will put new smelters in Siberia with capacity for more than 1.3 million tonnes of aluminum per year on line, the Chineiskoye polymetallic ore field, Agaskyrskoye copper-molybdenum field and coal deposits in Tuva will go into production and other projects will be launched.
How does the company intend to move towards this strategic goal? "Essentially there are three key areas: creating a fully fledged rail operator with its own rolling stock, building new port terminals and building our own railroads," Guseynov said.
"At this stage the key task is to coordinate the existing flow of freight," he said. "Right now our aim is not to divert all freight to our own transport entity, for example to carry all this with our own freight cars. There are already operators on this market, we use their services. But we don't have to work exclusively with major operators, we're open to business with all of them. Freight cars cost so much per day, and we'll sign contracts with whoever makes the best offer."
En+'s existing freight flows could also draw in other consignors. "A simple example: we have the company OVE in Khakassia, which uses private rail tracks that link industrial plants with the Trans-Siberian. It has its own locomotives and cars and carries around 6 million tonnes a year. We arrange the delivery of alumina to the warehouses of Rusal's Sayanogorsk and Khakass aluminum smelters and deliver aluminum back. We also serve SUEK's enterprises based in the republic. Then, using public railways, the Rusal and SUEK freight can continue to move on the same logistical chain to the Eastern ports, but it would be carried not by OVE but other operators. Here we work mainly with Freight One, Freight Two and Globaltrans."
OWN COMPANY MORE TO THE POINT
Guseynov considers one of his first successes to be closing the loop on the Khakasia - Far East route. This year the company for the first time shipped Tuva coal mined by units of the En+ group for export to Asia through the Vanino port. The same freight cars then carried flexible bulk containers (MK-14-10, with capacity of up to 14 tonnes) of alumina back from Vanino to Khakasia for Rusal.
"The dispatch point for the coal is Minusinsk (Khakasia), where there are also Rusal plants, which get alumina in the same cars," Guseynov said. The coal from Tuva is being carried to the railroad in Khakasia by truck until the Kyzyl-Kuragino rail line is built. This minimizes the losses from empty runs on this route, making it attractive for operators.
"Naturally, the management of operators always strives to reduce empty runs. But empty runs are a curse not only for operators, but also for any other company, including ours," Guseynov said.
In order to not give up this looped traffic to an outside company, En+ plans to hand it over completely to its own operator, Russian Transport Company (RTC). RTC currently carries about 9 million tonnes of freight per year, but it does not use its own rolling stock.
"The size of the fleet depends on the season. For example, we will be using 3,000 gondola cars for coal alone this year," Guseynov said.
"In future, we plan to operate our own rolling stock on loop routes," he said. This project would have been completed in part this year already if the company had purchased LLC Transgarant. "Yes we sought to purchase Transgarant, but alas," Guseynov said, adding that the company might buy another existing operator "if there will be a good offer."
But for now the company will create its own fleet by buying new freight cars. "Our colleagues from Basic Element have railcar production facilities within the Russian Machines holding. We and Rusal and RM are now in the final stage of developing a new type of multiuse railcar that can carry both bulk and piece goods. We plan to build 1,000 such cars for ourselves by the end of next year. RTC will operate them," Guseynov said.
Analysts contacted by Interfax welcomed En+ Logistics' desire to create its own operator. "In the case of creating a vertically integrated holding, developing an in-house operator to manage shipments is a logical step that will make it possible to increase the efficiency of the business. In addition, although leasing rates for railcars have decreased somewhat after the big jump amid the shortage of rolling stock in 2010-2011, they remain high, so moving to an in-house fleet will make it possible to lower the operator's transport costs," TKB Capital analyst Tatyana Zadorozhnaya said.
It makes sense to create an in-house operator if the route is looped, Aton analyst Nikita Melnikov agreed. "It doesn't make sense to hire some other companies that will still offer rates with their own profit margin," he said.
Another transport market analysts said that the "trend in the metallurgy sector is to pull out of the operator business, since a fairly competitive market has formed there, prices for railroad assets are at a good level and metals companies are overloaded with debts." However, the freight car services market remains attractive, with an EBITDA margin of more than 40% and return on capital as high as 20%, so creating an in-house operator is not only a means of controlling the supply chain, but also a way to make money, he said.
En+ is also working out the strategy for its operator business in the coal sector in Irkutsk Region. The company has large coal deposits in the region and coal-fired power plants with combined capacity of nearly 4 GW. Coals shipments for the plants total about 12 million tonnes per year, and will grow year after year, Guseynov said, adding that this is an ideal place to fine-tune logistics processes within a given region.
Last summer, at the suggestion of En+ companies, pooled operation of freight cars was organized in the Irkutsk Region, where Russian Railways (RZD) gives priority to freight going to thermal power plants regardless of who they belong to. This made it possible to optimize supplies to power plants. En+ then called for a meeting with operators, representatives of the East Siberian Railway and the regional authorities, at which it was decided to set up a joint dispatch and logistics center.
"The management of East Siberian Railway responded immediately. The same day that we made the proposal to create the center, a working group was brought together. And a presentation was already ready in a week. And a while later the head of the railway approved it at a coordinating council meeting. Twenty days! The model for implementing this project is now being selected," Guseynov said.
NATURAL DISASTERS PROVIDE IMPULSE TO BUILD
There are also infrastructural transport projects under En+ Logistics management. One of the company's priorities is the construction of a railroad in Khakassia bypassing Abakan. In May of last year, an earthquake and spring flooding caused one of the spans of the bridge over the river to collapse. This threatened the stability of operations at Rusal's aluminum smelters, and difficulties also emerged for SUEK, whose freight is transported by this route. As a result, one of Rusal's shareholders - Sual Partners - sued for 1.7 billion rubles in damages incurred at the Sayanogorsk aluminum smelter due to the natural disasters.
Within three weeks of the accident, En+ Logistics had built a temporary crossing over Abakan, and the bridge had been restored within four months. However, at that time the government of Khakassia and En+ had already started discussing the possibility of constructing a detour railroad route (71 kilometers) bypassing the river so as to minimize natural risks.
"We are now actively working on the project jointly with the government of Khakassia. We did a laser scan of the whole area and created a platform on the basis of a geo-informatic system (GIS). We plan to start designing this route in the GIS in the near future," Guseynov said.
Investments in the railroad are preliminarily estimated at $117 million. According to Guseynov, the project is expected to be implemented in the format of a public-private partnership, which, besides the regional government and En+ plus, might involve other companies operating in the region - for example, SUEK.
"Right now we are in the stage of negotiations on this project with SUEK," Guseynov said. It should take two years to build the railroad.
Dmitry Baranov, the leading expert at Finam Management, said this project could very well become one of the success stories of public-private partnerships. "Since both the company and the Khakassia authorities are interested in it, a portion of the preparatory work has already been performed, the financing issue has been resolved and the necessary material and labor resources are there to implement it, one can expect that the bridge will be built at the specified dates," he said. He added, however, that this is only true if no force majeure arises due to the economic situation and if there are no complicated geological, hydrological and climactic conditions at the construction site.
Another infrastructural railroad project envisages the construction of approaches to the Chineyskoye polymetallic ore deposit in Transbaikal from the Baikal-Amur Mainline. In contrast with Khakassia, there is currently no active work underway on this project. "Today En+ and scientific institutes are developing their own technology to recover metals from ore at the Chineyskoye deposit. The fact of the matter is that nobody in the world has such a technology yet. Just as soon as it is developed, we will immediately activate work on the project," Guseynov said.
ALMOST ITS OWN STEVEDORE
Besides railroad construction, En+ also invests in port assets. The group's largest enterprises and new projects are situated in Eastern Siberia and oriented towards Asian markets. "For us it's very important to create integrated logistical infrastructure to deliver our products to Asian markets, and modern, high-tech port capacities must become a part of it," Guseynov said.
En+ Logistics owns around 28% of OJSC Vanino Commercial Sea Port's stock. The company has projects to build alumina and grain terminals at Vanino, as well as to develop container processing and to attract new freighters to the port, which the company estimates will boost cargo handling from its current 6 million tonnes to 12 million tonnes in the next five years. However, until the state-owned stake in the port (55% of its stock) is privatized, which should occur this year, it is difficult to predict the fate of these projects.
What will En+ do with its stake if the stevedore is not privatized in its favor? "I don't want to talk about that in this spirit. We will participate and we will try to win the auction for Vanino," Guseynov said. However, he added unequivocally that the company is not tasking itself with buying a controlling stake "for just any money" - for the amount that Seltekhstroy offered, two terminals could be built from scratch (Seltekhstroy offered almost 11 billion rubles for the government-owned Vanino stake at the first auction, which was eventually declared invalid).
As regards the prospects for the auction, analysts have varying opinions. "At the moment, all of the contenders have totally equal chances. The condition for winning will be the highest amount proposed by the winner for the government-owned stake in the port. There are no other conditions, and that means that it will be the deciding condition," Finam's Baranov said. En+ has the cash; it is simply a matter of whether or not it will manage to outperform the other contenders' offers.
Aton's Melnikov, on the other hand, considers En+ to be the player to beat at the auction. Far Eastern ports (in contrast with European ones, where freight flows are historical) need to form their own freight flows, and En+ has them. Besides that, the purchase of a stevedore logically fits in with the company's development strategy, which is aimed at exporting raw materials to Asian markets, he said. Other contenders, which already have their own freight flows, already have port capacities in the Far East, and they are not in any acute need to buy another stevedore.
LISIN TO BEAR THE BRUNT SO FAR
In addition to projects in the Far East, En+ Logistics is mulling the option of building an alumina and aluminum terminal at the Ust-Luga Port on the basis of a public-private partnership. "We are now in negotiations with Ust-Luga's management company [which brings in investors for the port] for purchasing Baltic Aluminum Terminal. Federal Antimonopoly Service permission has been granted. A master-plan has already been prepared, which sets the terminal's planned capacity at 6 million-7 million tonnes a year. But everything doesn't hinge on us. The project has been conceived, once again, within the framework of a public-private partnership and we should have a concise understanding that RZD will build a part of a route for general use while the Transport Ministry does its part with an underwater channel, dredging work and so forth. Unfortunately, we don't have this understanding so far," Guseynov said.
However, he added that there currently is no pressing need to develop the terminal. Freight turnover for En+'s enterprises through Baltic Ports has been diversified, which allows a choice of more comfortable options. At present, alumina is imported through the Petersburg, Kokkola, and Liepaja ports. Aluminum is exported westwards through OJSC Seaport St. Petersburg (which is part of Vladimir Lisin's UCL Group). "But this isn't the sole possible option. We don't have to change 1,520 wheel pairings (railway wheels) in the Baltic as we have the option of changing port," Guseynov said when asked whether the company is worried about the pressures from UCL's service pricing. At any rate, when En+ builds its terminal at Ust-Luga, a portion of freight turnover will be transported through this facility, he said.
WAITING FOR STATE PARTNERSHIP
Another port asset included in En+'s preliminary plan is the construction of an alumina and grain terminal at the Taman Port. "We've written several letters to the Ministry of Transport to take part in the construction of the port in Taman. We are proceeding with a broad front, with Rusal and colleagues from Basic Element's agro-business," Guseynov said, adding, however, that a master plan still has not been entirely developed. "Do you know what the aim of this project is? We have many different and interesting projects in the country but no information platform to correlate them all. There are all on paper," the top-manager said. Guseynov proposes that the government develop this platform, where any investor could have open access.
In any case, the company has hopes for this port and has still not looked into the option of buying a stevedore company in Ukraine.
Analysts' opinions vary in regards to the Taman Port's future. "The construction of an additional deep-water port in Russia's south has been long overdue and the development of the port in Taman is necessary for rerouting Russian exports from Ukrainian ports to Russian territory," TKB Capital's Zadorozhnaya said. She added that Ukrainian ports handled almost 30 million tonnes of export freight last year. According to the project to develop the port by 2020, handling capacity should come to around 60 million tonnes, which would mean bypassing Ukrainian ports entirely. "A special feature of the port's development is the involvement of private investors in construction, who are interested in new port capacity. Therefore, we believe that the new port's services will see demand, especially with more favorable terms in comparison with Ukrainian competitors," Zadorozhnaya said.
However, the analyst from Aton considers the project to be "dead". "This project isn't viable because of its geographic location," Melnikov said, adding that Taman is far from ideal in terms of its bay and navigational options. Also, the construction of the port would require enormous capex, which might not produce adequate return. "If built it will be used but not with the fantastical volumes now planned," he said.
$500 MLN TO START
Guseynov estimated En+ Logistics' priority projects at around $500 million. "We are considering all possible options to finance our investment program and haven't ruled out the appearance of partners in our projects," he said. "En+'s strategy, 'Go East', and many of the group's companies, already have Asian partners. For instance, Rusal is cooperating with NORINCO, and EuroSibEnergo is working with China Yangtze Power Co. Negotiations are now underway for partnership in coal and other En+ businesses. We're not the exception here," the top-manager said. Furthermore, Asia has some of the biggest and modern ports in the world. "Their experience, technologies and financial resources will definitely be in demand in Russia," Guseynov said.
