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  • ANDREY GOROKHOV, PRESIDENT OF UMG HOLDING: “WE PLAN TO DOUBLE OUR TURNOVER TO OVER $300 MLN WITHIN FIVE YEARS”

ANDREY GOROKHOV, PRESIDENT OF UMG HOLDING: “WE PLAN TO DOUBLE OUR TURNOVER TO OVER $300 MLN WITHIN FIVE YEARS”

Over the ten years of its existence, UMG Holding has united clay, limestone and ash assets and reached a synergy of commodities businesses.

1 March 2016

Clay foundation
What did the year 2015 look like for clay production — the Holding’s key business?

Last year, our clay facilities made about 2.4m tonnes of products, or 12% less than in 2014. However, clay still accounts for the largest share in the Holding’s sales pie—72%. 

How does clay distribution go? 
White plastic clays have always been the top export-oriented product in our portfolio. 90% of this product is exported to manufacturers of ceramics and ceramic granite. 
As a result, we estimate UMG’s current share of the global clay market to be about 9%. Our sales territory already covers more than 25 countries, with the largest clients in Italy, Spain, and Russia. 
But I must say that our traditional export markets were affected by some changes that happened in 2015. This is primarily the case with the Russian market. Last year, our clay shipments to the Russian market dropped 34% compared to 2014.
The reason for this is that Russian consumers opted in part for a cheaper and more inferior local product. I don’t rule out that our sales to Russia in 2016 will be equal to or even lower than those the year before. 
The “commodities security” and demand for finished ceramic products in Russia will play an important role in this respect. Naturally, the Holding had to urgently seek other markets. We managed to partially offset the declining sales in Russia by boosting sales in Europe. 

How does the 5% import duty Russia introduced in 2016 affect sales? 
Not all the results are in yet. That said, the duty definitely upsets our commodities shipments to Russia by making products more expensive for the consumer and encouraging import substitution. 
Winter is not an indicative period for evaluating sales, however. We will see the tendencies clearly only by early summer. What I can say now is that Russian consumers have no complaints about the quality of our products or the delivery terms. 

Do you still plan to increase clay exports to Europe? 
In 2015, we did all we could to compensate for the drop in sales caused by the narrower Russian market by expanding exports to Western markets. We managed to increase tonnage to Italy and Spain, for example. However, it will take more time for the losses to be compensated in full; one year is not enough. We intend to continue to expand in the markets of Western Europe and improve our presence in Asia and Latin America.


Flux losses
What are the 2015 figures for the Holding’s flux and dolomite assets? 

The situation in the flux and dolomite area of the Holding, which includes the Dokuchayevsk Flux and Dolomite Plant (DFDP) and Novotroyitske Ore Mining (NOM), was challenging. Flux production alone more than halved during the year, falling to 2.7m tonnes.

What caused such a slump in flux output? 
DFDP and NOM products have always been sold domestically, with Ukrainian steel works being our key clients. Now, a lot depends on external factors. Firstly, global prices remain low, forcing companies to reduce production and consumption of raw materials. 
Secondly, the ravaged railway network in Donbass (southeast Ukraine) is a logistical challenge. In addition, we cannot conduct full-scale stripping works at DFDP because it is located in the area not contr77olled by the Ukrainian government. 
That company is operating in a low gear, with only up to 5% of its capacity loaded. So you can understand: before the armed conflict started in Donbass, DFDP would ship up to 500,000 tonnes of product a month, but as of January 2016, it only succeeded in shipping 6,000 tonnes. In October-November, the plant was idle, although we managed to start up production again in late December. 

What losses did the plant’s downtime cause? 
Let me emphasize that some employees are involved in security and other
“life support” processes at the plant. They receive their wages in full. Laid-off employees receive compensation of 2/3 of their base salary. 
We also pay for the electricity used in the quarry dewatering operations. The company spends UAH 15m–20m (up to $1m) a month to meet these needs. In addition, DFDP’s financial losses from damaged facilities are UAH 11m and the loss of profit is estimated at UAH 361m (around $15m) a year. 

Where did steelworks look for fluxes? 
The task of providing the region’s steelworks with flux products was to a significant extent handled by Novotroyitske Ore Mining. The company accomplished the near-impossible — it tripled output by shipping 2.4m tons of products in 2015. 
In addition, NOM introduced flexible production management. This means that the company’s management adjusts flux output depending on demand, which varies from month to month. This system helps the company to perform better in an unstable market. 

Did you meet consumer needs in full? 
Unfortunately, even the tripled output at NOM did not achieve that aim. Industrialists had to look for other sources of inferior limestone from western Ukraine. Their volume grew 50% in 2015 to 4.1m tonnes.
Last year also saw imported limestone on the Ukrainian market of about 1.7m tonnes. The imported product is better quality than its western Ukrainian counterparts, but at a much higher price. Moreover, payments must be made in a foreign currency. 

How did DFDP’s downtime and commodities imports affect the country’s economy? 
According to our estimates, total financial losses incurred from DFDP’s downtime exceed UAH 1 bn (about $40m) a year. This sum includes UAH 435m lost by steelworks and other industrial companies when they were obliged to buy more expensive raw materials, UAH 238m not received by the state treasury in taxes and fees, and UAH 480m that the balance of payments lost due to commodities imports. 

Do you plan to increase limestone output? 
Yes, of course. We are doing our best to substitute the bulk of limestone imports with our products of the desired quality. Ukrainian consumers are also interested in buying Ukrainian raw materials. If DFDP is operating at full capacity, no imports will be required. 
 

Marginal ash
The Holding has been promoting a new line for several years — microspheres and coal combustion products. Where are these products used? 
Let us look at other countries’ experience in using coal combustion products (CCP, by-products of coal burning at CHP plants). For example, the USA recycles and consumes about 50% CCP, Japan — more than 90%. 
Most of it is used in road-building and the remainder is consumed in the production of cement, concrete and dry mortars. When used in road construction, CCP help to save on natural materials (by replacing crushed stone and gravel) and meet the environmental challenge by recycling heat generation by-products. 
It might be easier to say where CCP are not used, since they can be found in the ceramic and construction sectors, plugging of oil and gas wells, and manufacture of plastics, explosives, even surfboards and bowling balls. 

How much CCP does Ukraine produce? 
Coal burnt annually at Ukrainian CHP plants generates about 8m tonnes of CCP, including 6m tonnes at DTEK power generating companies and 2m tonnes at other CHP plants. This quantity is enough to build two large motorways similar to Kyiv-Chop. 
To start the widespread use of CCP in Ukraine, we have to standardize the products and work on domestic standards. This is what we are doing now. 

Have your microsphere sales grown? 
The key microsphere markets lie abroad. In 2015, microsphere deliveries remained largely unchanged year-on-year at about 1,300 tons, but the price rose significantly. The reason for this is that we used to sell unprocessed raw materials directly from CHP dumps, but then our company took a different path: we built a modern greenfield microsphere processing factory in Druzhkovka (Donetsk Oblast). Now, we are selling a product of better quality and value. Overall, our CCP sales grew by 38% in 2015 to 350,000 tonnes despite the decline in construction. 

What are the prospects of the CCP market? 
In 2016, we expect a 15–25% increase in the sales of these products. With this goal in mind, we intend to help engineers at Ukrainian companies work out solutions, whereby imported and more costly materials can be replaced with local recycled materials. 
We should also note exports. Last year, we shipped slag to clients in Europe and humidified ash to Belarus, and we intend to further pursue this cooperation. 

Strategy
What new areas does the Holding promote? 

The company operates the Incubator of New Businesses, which is a business unit that analyzes new business ideas, selects the most promising ones and develops them into operating businesses. For example, our Incubator led to the construction of a microsphere production plant in 2014. It cost us $1.2m. 
In 2015, we launched the processing and sale of rare (neon, xenon, krypton) and technical gases (argon, nitrogen, oxygen). Also that year, the Holding began to sell mineral fertilizers to Ukrainian agricultural producers and export grain and oil crops. 
UMG’s current portfolio includes about ten projects at various stages of implementation. In the future, we want to initiate five new business lines in the commodities and related segments. 

Where does the Holding plan to invest in 2016? 
We plan to maintain our investments at about the 2015 level, i.e. $9m. About $6m of this amount will be used to expand and improve the performance of the clay production business, and another $1m–$2m will be invested into the flux and dolomite assets. 
The balance will be allocated among other business lines. To compare, in 2015 funds were mostly invested in industrial machinery, like dump trucks, excavators, and loaders. 

What are the Holding’s key goals? 
Our team has developed the 2021 Business Development Strategy (for five years). We plan to nearly double our turnover to over $300m. We want to achieve this result by starting at least five new business lines and promoting existing ones. 
For example, if the situation plays out favourably, we plan to restore limestone and dolomite production to pre-crisis levels and pursue new lines, such as CCP processing, by increasing sales of its output to 1m tonnes a year. At least $100m in foreign investment can be raised to fund new businesses. 

Two key questions from BUSINESS

What is the Holding’s greatest achievement, in your opinion? 
Its greatest achievement and main capital is people. We’ve brought together a team that wants and is able to achieve specific targets, optimize processes and create new lines of business. 

Which of your personal decisions that influenced the Holding’s development has had the greatest impact, do you think? 
We’ve overcome the conservatism in the extractive sector and created a wider view of the business. Today, we have five commodities businesses with products sold in 30 countries worldwide. 

UMG Holding Profile
Created in 2006.
Headquartered in Kyiv. 
Business segment: clay extraction, limestone and dolomite production, processing and sale of CHP by-products, trade in mineral fertilizers, agricultural products, rare and technical gases. 
2015 turnover: $164m. 
Production facilities: 16 quarries and CCP bases at CHP plants in seven oblasts. 
Workforce: about 4,000. 

Interview highlights
Will the free-trade zone facilitate higher sales of your clay to the EU? 

We effectively worked without this “preference” before. The only thing to have changed is that our relationships with European consumers have become “warmer”. 

What is the most appealing aspect of your new CCP business? 
Microspheres are the type of CCP with the highest margin. In 2014, we were selling them for $50/tonne, but today we can get up to $1000/tonne.

Source: Business