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. Last Updated: 07/27/2016

Evraz Poised to Shake Up Urals Steel Town

bloombergA worker moving slag in a blast-furnace shop at a Nizhny Tagil steel mill.
NIZHNY TAGIL, Sverdlovsk Region -- Communist production quotas, financial meltdown and the rise of the Russian oligarch -- Mikhail Tretyakov has seen it all.

His 50 years of service at the giant steelworks in Nizhny Tagil in the Ural mountains span the post-Soviet turmoil that dragged an industrial behemoth to the edge of bankruptcy.

"The situation was the same all over Russia. Then, it wasn't a simple question of economics," said Tretyakov, a decorated engineer and adviser to the plant's managing director.

A decade later, it's profits that count.

Mittal Steel and Arcelor's creation of a new world steel giant three times bigger than its nearest rival has shaken up a sector revitalized by a Chinese-led surge in demand.

Analysts expect more consolidation and believe Evraz Group, which acquired the Nizhny Tagil plant in 1998 on its way to becoming Russia's largest steelmaker, could drive the trend in Russia.

The company has a fresh advantage: it can now call on the financial clout of the country's richest man to help bring the 65-year-old mill in Nizhny Tagil into the modern age.

Roman Abramovich's investment arm, Millhouse LLC, last month agreed to acquire a 41 percent stake in London-listed Evraz in a deal analysts valued at $3.1 billion.

The billionaire owner of English football champions Chelsea, who made his fortune in oil and aluminum, has already played a role in Kremlin moves to corral strategic assets after selling his stake in oil company Sibneft to state gas monopoly Gazprom last year.

Steel, analysts say, could be next.

"His political influence could be a catalyst for consolidation in the sector," UralSib metals analyst Kirill Chuiko said.

In the center of Nizhny Tagil, the rusting shell of the town's original steel plant stands as an open-air memorial to the birth of heavy industry in the Ural mountains.

"It's the father of today's NTMK," said a guide at the old plant, using the four-letter abbreviation by which the modern plant is known, as sunlight streamed through gaps in the wall of a blast furnace built in 1725.

The city of Nizhny Tagil was founded three years earlier around an iron-ore deposit Evraz still mines today. Nearly 10 percent of the city's 360,000 people work in the modern steel plant for an average monthly wage of 13,000 rubles ($484).

NTMK, one of three Russian steel mills owned by Evraz, produces about 5.5 million tons per year of crude steel. Last year, the group produced nearly 14 million tons.

There are no plans to increase output. "Our main task today is not to increase production. It's modernization," NTMK public relations director Alexander Baziyan said. Behind him, German-built robots lift gleaming steel wheels that will be fixed to railway carriages across Russia.

NTMK's state-of-the-art wheel shop opened in 2004 and a second line will start next year. The plant will also use some of Evraz's $435 million capital expenditure budget this year to upgrade a blast furnace and build a new coke battery.

As well as wheels, NTMK is a leading producer of the rails on which they run, while a kilometer-long rolling mill shapes thick steel beams used in construction.

But signs commemorating last year's 65-year jubilee are a reminder this is not a modern steel plant.

"Evraz plants are old, so there's lots to do to make ourselves competitive," Baziyan said.

The two main owners of Evraz, billionaires Alexander Abramov and Alexander Frolov, have already done much to cut costs. The company can supply 75 percent to 85 percent of its iron ore after acquiring mines in the Urals and Siberia, reducing exposure to record-high raw material prices.

Evraz has also ventured abroad, buying steel rolling assets in Italy and the Czech Republic, and 73 percent of leading U.S. vanadium producer Strategic Minerals Corp., or Stratcor.

But Alexei Mordashov's failed bid to merge his Severstal with Arcelor suggests Russia's steel barons must work harder to make their mark on the world stage.