Metafrax

Takes prompt measures to prevent losses in the wake of the GFC

The Chairman of the Board of JSC Metafrax, Mr. Armen Garslyn, spoke about the activities of the group of companies within the first three quarters of 2009 and a gave a short forecast for the beginning of 2010.

IRJ: Armen Gajosovich, when did Metafrax group feel the crisis?

AG: The enterprises felt very deeply the approach of the crisis at the end of 2008. It came suddenly and manifested in reduced consumption. Consumers began to stock up on raw materials, to fill up their warehouses and simultaneously gradually decreased their production output.

The activity of the companies group of Metafrax, Karbolit and Metadynea is concentrated on the output of the compounds of products used for housing construction (70 per cent of production): fibreboard, particle board, medium density fibreboard, paint and varnish industry and components for motor industry (30 per cent) applied in manufacturing of tires, nonfreezing solutions, plastic.

It is generally known that these industrial sectors have suffered more than the others, and as a result they have considerably reduced the consumption of methanol products. One of the largest customers of Metafrax is Niznekamskneftechim, a company which supplies the motor industry, that has considerably reduced its production volume. And at the same time, the great reduction of the world prices occurred.

Because of the reduction in market demand, the budgets of almost all our companies were at a loss in 2009. Metafrax was calculated to have a negative profit of about 600 million rubles. We had to quickly take measures to alleviate the situation. Our group held negotiations with federal structures concerning the increase in the delivery volume of limited gas and the tariff reduction for rail traffic. We were able to achieve some results.

At the end of August, the Federal Traffic Authority provided a resolution about issuing discounts for methanol producers at the rate of 8 dollars per 1 tonne provided that Metafrax would export not less than 110 000 tones of products till the end of the year. It is a hard yet feasible task. Now, in order to export the required volumes, all subdivisions (from production to loading units) are at full production. The railway is in need of increasing freight turnover and if we transport the agreed volume we will be considered for traffic preference in 2010. However, a 14 per cent discount provided till the end of the year is not enough to break even, therefore, we have submitted an application for a tariff reduction of 35 per cent. We believe that the methanol sector in Russia should be supported. It is easy to destroy something but to recover it is much more difficult. It should be noted that there was no manpower cut within the group at the time of crisis, in spite of partial interruption and a drop in production output.

Karbolit is the exception to this. The employee layoff at the enterprise in Orehovo-Zuevo is connected with the implementation of new technologies which results in a decline of employees engaged in the production process. We expect that in 2010, the operational activity of the enterprise will obtain a positive result. To date, Metadynea is the largest producer of synthetic resins and has 45 per cent of the Russian market.

It should be noted that the Meakir brick factory worked to zero for the first quarters of 2009. However, the best result within the group was obtained by the transport company Metatrans. Over the last year, it has been operating in the black. What is very important here is the role of the manager, who was able to take a sufficient numbers of orders. The growth of their numbers, in comparison with three quarters of 2008, was 15 per cent.

We look upon the operation of JSC Metafrax this year as a positive one. The make quantity for ten months amounted 4.2 billion rubles. At the year end the net income is expected to be three times less than the same performance in 2008.

IRJ: What work has been done to stabilize the enterprise activities?

AG: There was a strategic change in production distribution. Thereupon, Metafrax penthaerythitol and hexamine production plants were stopped from the beginning until the end of 2009, due to weak exportation numbers of methanol. Its volumes were, instead, supplied to the domestic market. Since our competitors also decreased or ceased their methanol, Metafrax raised its share on the domestic market. Following the results of nine months, Metafrax has 43 per cent of the methanol goods market, almost 80 per cent of formaline market and more than 90 per cent of pentaerithrytol market. As for other products, it has from 60 per cent to 90 per cent of those markets.

In addition, this was contributed to by maintenance of good relations consumers formed over the years, and efficient fulfillment of our obligations. With those, we would have had to close production: it is not possible to keep methanol at stock; after yields from the plant it is filled up in the tanks and sent to consumers by railway transport.

At the end of the first quarter, production distribution began to stabilize, and in the period of nine months Metafrax has realized a profit of 330 million rubles. Yes, it is almost in three times less than it was for nine months in 2008, but this is a profit, nevertheless, and it was made during hard economic conditions.

The groundwork for the situation leveling was laid when large-scale investments were made for the modernization of the basic production assets and construction of new capacities. The methanol production plant is due to have an increased yield of 1 million tonnes. Meanwhile, its prime cost was decreased, which has made it possible to increase the company’s competition capacity.

We didn’t curtail the investment program: there is life beyond 2009. To date, there are three projects in our active investment phase. A social investment project, the construction of a 9-floor block-of-flats for the company’s employees, which has also been completed. The commissioning works at a new polyamide production plant are carried on; it is planned to start-up a gaseous nitrogen and dry gas production plant in January of 2010, and besides that, the company continues to finish the building of the hexamine plant (scheduled for 2010). Metafrax’s 2009 investments will total 1 billion rubles.

In 2010, this investment number will be a little bit less, at about 600-700 million rubles. Investments in the construction of new hexamine and gaseous nitrogen production plants cost 280 million rubles, and about 230 million rubles will be forwarded for the modernization and update of our existing capacities.

In addition, we are scheduled to perform design and survey works for the construction of 80-flat house for employees in Gubakha, and also for the construction of the railcars repair workshop.

IRJ: What helps Metafrax keep its share of the market? How are alternative product applications developed?

AG: To date, Metafrax is a leader in Russian methanol producers. First of all, we have internal treatment for downstream products—a minimum of 20,000 tons of methanol are processed on-site. Our long-term goal is to increase the internal treatment by 40 per cent, and after that to 50 per cent. Secondly, by increasing the estimated capacity to 3,000 tonnes per day, we can optimize our costs. Among all Russian methanol market players, Metafrax has the lowest production costs.

This all means that we operate at 70 per cent of the maximum capacity and have optimal costs. Alternative application of methanol is a production of olefins (ethylene and propylene) and dimethyl ether. In China, methanol is already used as an additive to benzenes, and 15 to 85 per cent of methanol is added to the fuel.

If these technologies are implemented on an industrial scale, then the world demand of methanol will increase up to 60 billion tonnes, with the assumption that now about 50 billion tonnes are produced in the world.

IRJ: What is your branch-wide forecast?

AG: As we expected, the end of 2009 has been stable. This will continue into the first quarter of 2010. However, the Russian market trade area will not consolidate its position, and it is impossible to predict its movement.

There is the same precarious situation on the international market. The absence of stability holds up the budget for 2010. At the moment, it is detrimental: gas and electric power will rise in price, and the situation with rail traffic rate is not clear, but the prices for methanol products do not rise, so we will revise our budget accordingly.

As we expected, the construction industry should revive by the end of the first quarter of 2010, since the housing needs are big enough, and the market won’t be stable for a long time. It is difficult to predict the situation following the first quarter.

IRJ: How will you level the prices for gas, electric power?

AG: This is complicated question. The market doesn’t react to the increase in prices for resources. If the price for gas rises it does not necessarily mean that the price for methanol will also increase. In some way Metafrax has the best, prime cost figures.

IRJ: How did the crisis impact the social sphere at the company?

AG: In the first half of the year, we took some unpopular measures, but by the second half of year we began paying bonuses, and by autumn we began to pay monthly premiums!

The Board of Directors made a decision not to pay dividends for nine months, but at the end of a year they will be paid to the shareholders. And dividends amounts will be more than in previous years. Strategic development of the enterprise is necessary for the purpose of attracting investments.

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