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Yevgeniy Tsymarman: This year will be devoted to the most significant investments in the entire history of VESCO

In December 2020, the ownership of Chasovoyarsky Refractory Plant changed, as it was bought by the VESCO Group, the leading clay producer and exporter in Ukraine.

14.04.2021

In December 2020, the ownership of Chasovoyarsky Refractory Plant changed, as it was bought by the VESCO Group, the leading clay producer and exporter in Ukraine. Yevgeniy Tsymarman, VESCO CEO, talked to MinProm about what this acquisition means for the Company, the impact of the coronavirus crisis on the clay (ceramic) market, investments in production and plans for the future, as well as how to make a premium product from clay mined in different quarries.

– Last year, the world and Ukraine faced an economic downturn due to the coronavirus pandemic. What is the impact of the lockdowns and downturn in economic activity on the Company’s business?

Our Company was no exception to global trends, and we recorded a drop in sales volume in 2020 as a result of the pandemic. Firstly, this was due to severe restrictions in the spring of the last year, which included complete shutdown of all manufacturing sites in Italy and Spain, key markets for us. Things got better in the second half of the year, we started making up for lost time, but in general we showed a 10–12 % lag behind the business-plan for the year. We carefully follow the market situation at all times, and as soon as we received the first reports of border closures, there were risks of shutdowns due to personnel illness, and we promptly decided to increase strategic stocks that would allow us, if needed, to ship from warehouses with a minimum number of employees. We also revised the sales plans and balanced the production program for adjusted production volumes. Key tasks were successfully completed, and we did not have any deliveries ruined.

Nothing has mattered more than keeping the team together last year. No one was dismissed, we paid salary steadily, and the extended social package remained unchanged. An epidemiological audit was conducted at VESCO group companies. With the help of high professional specialists, the required changes were implemented in each of the technological stages. As a result, the biggest “wave” was at the beginning of autumn, when about 70 of the 1600 employees were sick. But that is comparable to the usual annual rate of colds in the inter-season. Recently, the number of employees off sick ranged from 8 to 15.

– In general, how did the Company perform in terms of production volumes over the last year, do you plan to increase sales, if so, what gives you confidence in this?

– Our team plans to realize 2.7 million tonnes of clay. In 2020, we sold 2.36 million tonnes. Despite poor performance versus the plan, we received UAH 3.6b of income and paid about UAH 400m of taxes. This is a really strong performance.

We and our clients are excited about 2021. Another wave of the pandemic is here, but the vaccine is already available and it is obvious that the world cannot be stopped for a long time. Customers are re-starting their production facilities and rebuild their supply chains. Therefore, this year we plan to reach the pre-quarantine volume of 2.7 million tonnes.

– In January, the news broke that VESCO Ltd had bought 67.86 % of the shares in Chasovoyarsky Refractory Plant. What does it mean for the Company?

– I would like to start answering this question from afar. This is very important, as clay mining is not as easy a business as it may seem. In the 90s, after the USSR collapse, production chains were cut off, clay began to be sold in very small quantities. Our clay then was presented to Italians, and this led to the development of an entire branch of the world ceramic industry – the production of porcelain stoneware. Clay was exported, and many small businesses were opened, wishing to make money from it. But how did they operate? One of the features of clay deposits is that at the beginning of development, the graded composition is the best, and the overburden is low and the prime cost is perfect. But the further you go, the grade deteriorates, and the overburden ratio increases as well. Therefore, they began to simply “bite” the deposits, which led, on one hand, to a completely irrational use of the subsoil, and on the other, they had a very low cost of sales, and there was a risk of unfair competition and dumping.

It was a dead end for large companies that developed deposits according international industrial standard, did business responsibly, working with a long-term perspective. There was some concern that prices would reduce to economically unjustified. It was obvious that when the best areas of the deposits were finished, further development of such deposits would become expensive or lose any economic viability. The consolidation of deposits was required in order to operate according to uniform rules, to use it rationally, not to waste stock and not to dump. The first thing we (Vesco JSC) did was to consider still unoccupied deposits, and we took part in tenders, paid for and received licences. Several other large market players  followed the same way. This was the only way to preserve the entire industry. In 2006, Druzhkovka Ore Mining and Ogneupornerud became a part of VESCO enterprise. And recently, the acquisition of Chasovoyarsky Refractory Plant was a logical next step in terms of large assets consolidation. continuation of the consolidation of large assets.

Above all, it gives us an increase in balance stocks and flexibility in the grade composition. ChRP is unique in its way, it extracts clay with a high aluminium content, white after firing. It’s another matter that now the market does not really need this high-grade clay. The market requires medium grades and even slightly lower quality – with a lower aluminium content. But, having a large number of different mines, where different grades of clay are mined, including high quality ones, we have a wider range of proposals on the market in terms of grade assortment, we get more flexibility in the preparation of mixtures, in the rational use of all the balance we have. This is the answer to the question why do we need ChRP, why do we need new careers in terms of strategy as a principle.

– How many products does the Company ship for export now and how many to the domestic market? And which foreign markets are the main ones?

– Export markets account for 84 % of our sales. At the end of last year, Spain was the leader, followed by Italy, and Turkey and Poland buy quite a lot. In general, we export our clay to 18 countries across the world. We build relations with consumers as a long-term partnership, it is important for us to be reliable and predictable for partners. Last year we completed a very serious project, namely building our own distribution network for the Italian and Spanish markets. The project has been running since January this year. This is a strategic move that significantly influences our behaviour on the market.

– Tell us about the VESCO Group products. The Company is one of the leaders in white plastic clays mining and supply in the world. What is the uniqueness of product you mine?

– The uniqueness of our clay consists in the mix of certain technical specifications in one product. The fact is that clay is a natural and very unstable material, and customers expect raw materials from us with a certain set of quality specifications. It is necessary to separate clay from different quarries by grade as much as possible to obtain such raw materials. Moreover, it is required to have as many mines as possible, because this gives a wider separation range. Further, the production site should have an absolutely high-class, technologically well-equipped laboratory, because clay differs in dozens of parameters.

So, clay should be separated as much as possible, all its ceramic and chemical characteristics should be identified, and then the technology of mixing should be used. Firstly, this gives high stability of quality, and secondly, the rational use of minerals. That is why it is impossible, working in one or two mines, to produce grades that are needed on the market. There will always be one grade in abundance and another in short supply. Recently, we have 60 intermediate and 20 commercial grades of clay.

– How much did the Company invest in its development in 2020, and what are the investment plans for the coming years?

– If last year we had to reduce the volume of overburn and mining operations, revise the technical re-equipment programs, since we understood that liquidity might be needed, then the 2021 business plan includes a large-scale technical re-equipment program. This year will be devoted to the largest investments in the entire history of VESCO. Last year, we spent UAH 140m on a technical re-equipment program including all major overhauls, permits, new equipment. At the end of the year, we had enough liquidity, that is why the program for the current year will amount to about UAH 450m.

Our company has a re-equipment program, according to which we buy equipment, operate it rationally for four years with maximum load, and then sell it, despite the fact that it is still in good condition by that time, and buy a new one. Such a program is absolutely economically justified, we calculated that in the long term, for example, in 10–12 years, it is more profitable to change this equipment three times than to invest in its repairs. In 2021, we change a lot of equipment operated for a four-year period, namely 26 units, and we acquire two additional overburden facilities, and these include two excavators, three articulated hauls, five vehicles, a grader and a body cleaner. Thereby, we are already creating about 80 new jobs this year.

– Let’s get back to Chasovoyarsky Refractory Plant, how are you going to develop this asset?

– At the time of the purchase, the Company was completely underinvested and lost its position in the market. Nothing was invested in the infrastructure or equipment for many years, people did not even have enough work clothes. But that doesn’t scare us, we are sure that we will be able to use our management experience to realize the potential of ChRP.

Recently, we have been changing the technological scheme of the mine development. We have changed walking excavators to our own technological scheme which is better, more economical and more efficient. We conducted an internal logistics audit of the Company. We removed some warehouses and built others, improved the track development and continue to improve for maximum production performance.

We have a clear rule that each company in the group should earn an income on its own. Therefore, when we held meetings with employees of ChRP in the shops, and talked with people about the future, I could promise them and show them how it will be, what can be achieved, but, obviously, it will not be tomorrow. I think it will take two to four years. Recently, our main task is to make this Company profitable and financially sustainable, optimize performance and minimize environmental impact. Last year, the plant sold only 140 thousand tonnes of products. We are already planning 200k tonnes for 2021. This is a growth of more than 40 % at once. And the volume of sales is the money that the Company will earn.

– A significant part of the Company’s assets are located near the separation line in Eastern Ukraine. What impact does proximity to the conflict zone have on work? Do you still face difficulties in your work, for example, with logistics?

– Clay mining enterprises are located at a distance of 60–70 kilometres from the separation line. This is an absolutely peaceful area for people who live in Donbass. But, you are right, from the point of view of our customers, such proximity is dangerous. For example, we buy equipment from serious brands such as Volvo, Liebherr, Caterpillar, Komatsu, Renault. Manufacturers usually deliver training courses for workers at their workplaces, but for many companies it is difficult to hold such events here because of certain company policies and proximity to the conflict zone. Previously, there were difficulties with leasing equipment that was offered at higher interest rates, or even refused. But now this question is off the table. Even at the very beginning of the armed conflict in Donbass, we feared that difficulties might arise with the delivery of our products to the port of Mariupol, that is why we contacted the ports of Odessa, Nikolaev and Berdyansk in advance and entered into agreements with them. As a result, when the port of Mariupol became inaccessible to us, since the route thereto goes through Donetsk and Yasinovataya, the supplies were interrupted for less than two weeks. Export flows were redirected through the ports of Berdyansk, Nikolaev and Odessa.

We experienced a catastrophic shortage of wagons on the market, we had to constantly be on top of it. Recently, VESCO has 375 own wagons. They do not completely solve the problem, because we ship 150 wagons per day, but they help in case of a wagons shortage. In 2019, we faced the problems with diesel traction. Even now, we periodically encounter interruptions in the work of the railway.

Last but not least is the distribution of logistic load hubs. Initially, we had only one Druzhkovka station, then Mertsalovo station was added. And after the ChRP acquisition, we also have Chasov Yar station. The load distribution across the three stations allows for a much better solution to possible logistic problems during peak loads.

– What social programs does VESCO implement in the regions of its presence?

– Our social programs can be divided into several areas. Firstly, support for employees of the enterprises. We are sure that VESCO group companies offer competitive wages (today it is an average of UAH 15k), in addition, our employees have medical insurance, the Company has a standard of the workplace, and one of the best collective employment agreement in the industry is in force. Further, at VESCO, we have the “Stazher” (Trainee) project, in terms of which we cooperate with universities and invite talented youth to join our enterprises. These young people undergo training, gain experience and a salary at our companies. About a thousand people passed the program, not all of them then stay with us to work, but those who stay are already qualified, strong professionals. An important area in terms of personnel support is also training, retraining of personnel in terms of working specialities directly in production.

We implement external social programs through social partnership agreements in the regions where VESCO group enterprises are present. We help communities develop in the areas of medicine, education, sports and infrastructure. How it works: within the scope of agreement, we allocate certain amounts to each community and together with residents, head, and deputy staff, we decide projects to spend this money on. In 2020, we kept social investments at the pre-quarantine level – UAH 2.8m was invested under 7 agreements. I would like to note that despite the fact that the Company itself needs additional financing, we have already allocated UAH 300k for infrastructure development in Chasov Yar.

Of course, last year we had an absolutely clear priority which is support for medical institutions, we were preparing for the pandemic, we bought everything for hospitals, from mattresses to equipment. With the support of the Rinat Akhmetov Foundation, we were even able to deliver a lung ventilator to Druzhkovka.

Separately, I would like to note that we are committed to environmental issues. VESCO performs all the needed land recultivation work. Moreover, we perform not only technological, but also biological recultivation. This means that as the result, we are getting land of better quality than before the start of industrial mining. Or, for example, in areas where there used to be lifeless alkali soils, we performed recultivation, changed the composition of these soils, made them sandy, and have planted more than 200 hectares of coniferous forest over the past few years.

– Tell us about your vision of the Company’s development in the long term, 10–15 years?

– We developed a ten-year strategy back in 2009–2010 for the first time. Then we refreshed it into a 15-year strategy, and then into a 20-year strategy. We review it every year and correct, if needed. Our Company is here to stay. We are one of the largest producers of white plastic clays in Ukraine, we hold a key position on the global market, we have a fairly large amount of balance reserves. And with the existing performance, these balance stocks will be enough for decades. As far as our development is concerned, we see organic market growth. Thus, our main task is to adapt in a timely manner to market requirements. We expect the market to grow at an average of 5 % per year and our sales will double in 20 years. We will also consider further horizontal integration.

 

Interviewed by Vasily Yanvarev