IN these difficult times for the steel industry Evraz is focusing on reducing costs and increasing productivity and efficiency across the whole company. This includes the railway division which was established two years ago when we decided to restructure the company. This change in our organisational and sales model helps us to protect our position as a leading rail supplier to the local market, and by focusing on our customers' requirements become more competitive worldwide.
Under our partnership with our key client, Russian Railways (RZD), we have a long-term agreement which ensures the supply of minimum volumes of rails up to 2017. One of our main goals is to recapture our share of the home market by offering high-quality rails including head-hardened 100m-long rails. While our mill in Novokuznetsk was being modernised, our customers had to import these rails from Austria and Japan.
In November 2013 our head-hardened rails were certified up to 100m long. We have now developed the logistics for their delivery, and the first shipment to RZD was made last month.
Cautious optimism
One more factor that makes us cautiously optimistic is that several large infrastructure projects are planned to be implemented in Russia in the near future such as the Moscow - Kazan high-speed line, the reconstruction of the Baikal Amur Magistral (BAM) and improving the Trans-Siberian Railway. Evraz plans to play a key role in these projects as a rail supplier.
Finally, we are exploring a range of opportunities in the rail service business. To be successful today it's not enough to be just a rail supplier anymore.
We have a pragmatic view on how the rail market in the Commonwealth of Independent States (CIS) will develop, and are working to increase our exports. We also intend to expand our product portfolio and increase our presence in South America, Germany and the Middle East.
As we have a rail mill in Pueblo, United States, we are working closely with our American colleagues to exchange engineering expertise. This will help us to understand the requirements for new products, and strengthen our global position.
Today, the greatest demand is for long rails. Many rail producers, including Evraz, have already invested in facilities to enable them to produce rails of 100m plus. The construction of high-speed lines has boosted the demand for head-hardened rails.
In the future, we expect rails to become more use-specific. For example, rail used in southern and northern terrains will differ in terms of exploitation characteristics, and use will be differentiated by traffic volume. This in turn will influence the type of rails being used (head-hardened, regular or perhaps bainite), and the average length of rails will increase.
According to our estimates, the market for rails has been growing at 8% a year during the last three years. Europe, North America, and CIS have stable consumption, while China is the main driver of growth. Rail life depends on the volume of traffic passing over a line, the nature of rail-wheel interaction, climate, and of course rail quality. In developed countries, on average, rail replacement accounts for 80% of global demand, whereas in emerging markets such as the Middle East, China, and Brazil, the lion's share of demand is for new construction.
Stronger competition
Competition is getting stronger every year as local players try to expand their business and compete with established companies on the global market such as Voestalpine and Nippon Steel.
We see the market following two paths: product leadership, where rail suppliers offer a premium rail with outstanding technical characteristics (VAE and Nippon Steel are good examples) and cost leadership (Chinese producers) where suppliers offer a low price.
Evraz is trying to combine the two, from our state-of-the-art rail mills, while we are a vertically integrated company with access to our own coking coal, iron-ore and relatively cheap energy, which means we can offer products at affordable prices.
Evraz's market share in Russia is 73%. The lions' share of the remaining 27% consists of imports of head-hardened rail for RZD from Austria and Japan.
In December 2013 Evraz began regular production of head-hardened rail, which is why we expect to increase our market share in Russia to 90-100% in 2014. Last year we had a 61% share of the CIS market. In five years' time Evraz aims to be a global player, supplying rails of any profile up to 100m long.
