The United Metallurgical Company (OMK) started back in 1992. Today, it is one of the country's largest metals-industry conglomerates, embracing some 20 enterprises, including the major pipe producers Vyksa Steelworks and Chelyabinsk Tube-Rolling Plant. The two combined control 36 percent of Russia's pipe market. OMK is the largest supplier of wheels for rail wagons, steel springs for cars and trucks, ferrotitanium, ferrovanadium and super-fine sheet for televisions and electronic appliances. In 2001, OMK's sales posted nearly $1 billion.

The cardinal rule of business is that you should always prepare to defend yourself. In Russia's steel industry, where hostile takeover tactics are the norm, OMK is demonstrating that friendly alliances can be just as effective, and possibly more profitable for shareholders.

Russian steelmakers in general, and pipemakers in particular, are bracing for a year of unsteady demand, falling prices, rising costs and shrinking profits. But Anatoly Sedykh and Andrei Komarov of OMK are more optimistic than most. Sedykh, 37, an economist, is chief executive of OMK; Komarov, 35, an engineer, is chairman of the board of directors at OMK. Sedykh heads the board of directors at Vyksa Steelworks, and Komarov is head of the board of directors at Chelyabinsk Tube-Rolling Plant. Last year, the two joined forces to form the largest pipe-making group in Russia. As things stand today, every third pipe in the country is manufactured at OMK facilities. OMK has won 13 foreign market tenders out of the 14 in which is has participated.

The OMK group first began in 1992, Sedykh told The Russia Journal, with the construction of a factory to produce ferrotitanium. Then the group was joined by Chusovskoi Iron and Steel Works, based in Perm Oblast, followed by Vyksa Steelworks in 1999, the oldest and largest pipemaker in Russia. In 2000 the Shchelkovo Metallurgical Plant was added; it specializes in production of steel for electronics, one of just three plants in the world to do this.

In 2001, OMK grew again, with the addition of the Gubakhinsky Coke Plant, the largest coke producer and supplier to the Chusovskoi Iron and Steel Works and the Chelyabinsk Tube-Rolling Plant. Throughout all these years, the OMK's growth went on in a quiet and civilized way, without conflicts. Most often it involved share acquisitions at auctions or by accepting sale offers.

OMK is a management structure for the whole group of enterprises it embraces, Komarov explains. In practice, this means that the enterprises delegate management functions to the "center." Budget formation, sales, supplies, plans and investments in modernization – all are centralized. The enterprises and the company have one and the same managers and altogether they own more than 75 percent of the shares of the enterprises.

OMK is oriented primarily to the domestic market, which requires thoroughly investigating the demand of potential partners in the regions. This policy has helped OMK to become Russia's largest pipemaker. In 2001, OMK won 13 domestic tenders out of the 15 in which it participated. OMK shares in Russia's total pipe output are 79 percent of large-diameter pipes; 25 percent of medium-diameter pipes; 30 percent of casing pipes; and 43 percent of pipes for water and gas pipelines.

Year by year, OMK is expanding its presence on the markets of the C.I.S. and other foreign countries. In 2001, OMK's exports increased by 30 percent over its 2000 figure and reached 11 percent of output. In addition to pipes, OMK exports cast-iron, rail-wagon wheels and ferrovanadium. The Association of American Railroads has granted certification to Vyksa Steel Works' rail-wagon-wheels shop in accordance with the M-1003 American Standard. Rail-wagon wheels produced at OMK are used in the United States, Iran, India, Pakistan and South Korea. OMK's major customers include Samsung and General Electric Transportation Systems.

"Our aim is to build up a vertically integrated company that will allow boosting efficiency of production," Sedykh said. "The aim is achieved through incorporating new enterprises (for example, the Chusovskoi Iron and Steelworks, one of Russia's leading producers of commercial cast-iron, is our major supplier of input material) as well as through making market alliances."

One of the examples is a market alliance between OMK and Severstal, based in Cherepovets. The logic is very simple. OMK is the largest producer of pipes and the biggest consumer of steel sheets in Russia (in 2000, OMK consumed approximately 1.3 million tons of steel) and Severstal is the largest producer of steel. Therefore, Severstal gets a reliable buyer and OMK gets reliable supplies.

The alliance has already implemented a number of interesting projects, including mastering manufacture of pipes made of low-alloyed, corrosion- and cold-resistant steels of the X52-X70 strength grade, increased corrosion- and cold-resistant pipes for pipelines, and hydrogen-sulfide-resistant pipes.

The most grandiose of the OMK-Severstal joint projects is the joint venture Alliance 1420 established in June 2001. This is not a typical alliance for Russia; most often such mergers involve change of ownership. In this case, OMK and Severstal are equal partners, each owning exactly 50 percent of the issued share capital. And both sides benefit. Severstal will enter the market for large-diameter pipes, which is strategically important for it, while OMK will increase its competitiveness. In early 2004, the joint venture plans to launch production of large-diameter pipes, including 1,420 mm pipes, for the oil and gas industry; currently such pipes are imported. The whole project will take only 1,000 days to implement, and after it is accomplished Russia will become the world's fourth country producing high-quality 1,420-mm diameter pipes.

The year 2001 was remarkable for OMK not only for the start of the Alliance 1420 project but also for a number of other achievements, including a total pipe output of above 1.5 million tons and a 29.5 percent increase in the production of large-diameter pipes that exceeded 650,000 tons.

After a year of exceptional growth, Russian pipemakers are cautious about forecasting what will happen next. According to preliminary industry statistics, pipe production in 2001 is estimated to have been 4.5 million tons. That represents a growth rate of 8.5 percent compared to the year 2000. This gain for pipemakers contrasts with output by Russia's steelmakers, which rose just 0.2 percent last year.

Domestic consumption of pipes was up by 6 percent and totaled 5.6 million tons in 2001. Pipe exports to Nov. 30 were 730,000 tons. OMK sales have been growing faster; in dollar terms OMK sales increased 36 percent in 2001 over 2000.

There has been a deceleration of output at pipemakers in the past few weeks, according to industry observers and official figures. In February, Russia's pipe output is expected to be lower than in February 2001.

This notwithstanding, OMK representatives, while admitting that the first several months of this year will be a hard time for pipe suppliers, say they believe that if oil stays between $18 and $20 per barrel, demand and supply of pipes in the Russian market will get balanced. Andrei Komarov says that, though oil companies are showing low investment activity at the moment, it will increase in the second half of this year. One of the main reasons will be the depletion of old oil and gas deposits, which will push the companies into prospecting for new oil and gas provinces, which, in turn, will require developing pipeline infrastructure.

A second factor affecting the market, Sedykh added, is the physical deterioration of existing pipelines. Their overall length is above 200,000 kilometers (gas lines — 152,000 kilometers; oil lines — 50,000 kilometers) and the average age of the pipelines is 22 years. Thirty-seven percent of existing pipelines (18.1 million tons of pipes) were laid more than 20 years ago and 16 percent (7.8 million tons) over 30 years ago. There is a substantial backlog of demand for replacement of old pipes.

Stable trends of general economic growth in Russia permit one to conclude that the pipe industry has good prospects in terms of demand for its products. According to estimates made by international financial and crediting organizations, even if the oil market goes further down, Russia will achieve at least a 3 percent increase in its gross domestic product this year. Komarov believes this opens up an opportunity for OMK to expect increased sales outside the oil and gas sector, specifically in construction, engineering and house maintenance.

Although it is extremely difficult to predict demand from oil companies, Sedykh concluded that he has enough reason for optimism. Additional orders will come with the development of the Sakhalin oil projects.

OMK representatives told The Russia Journal that they have plans to increase their presence in C.I.S. countries and enter the markets of the Middle East and North Africa. OMK has made a breakthrough by winning the tender to supply 10,000 tons of longitudinally welded pipes to the Iranian State Oil Company. OMK has also won supply bids in Kazakstan and Turkmenistan and is tendering now in Azerbaijan and India.

The example set by OMK demonstrates that a new, technocratic generation of managers has appeared in Russia that is capable of handling large-scale investment and production issues.