We asked a director of a manufacturing department at a leading Russian commercial bank to, under the condition of anonymity, comment on the current situation in manufacturing.
TEI: Several respondents that work in export-oriented companies reflect on the current situation with unbridled joy – the ruble depreciation has significantly strengthened their position. Is their optimism justified?
The golden export company is a myth. First of all, we don’t have companies on the Russian market that only export goods – at least a portion of their domestic demand has declined. Secondly, the credit portfolio of exporter companies are based in dollars, which almost completely negates any gains from depreciation (as almost all companies are running on credit). Thirdly, prices in foreign markets have dropped and have yet to show potential for recovery. Depreciation helped weaken expenditures and prevented a collapse, but it’s hard to call that a pot of gold.
TEI: What are the main problems companies face?
The only thing that almost all manufacturing companies have in common is their clients’ poor solvency. Many companies, in turn, are trying to root out those who can’t pay, pushing aside small contractors and banks, which starts a vicious cycle. In such circumstances, stability and solvency become more important than margins, which makes it hard to adopt a pre-crisis mentality.
It became more expensive for industrial companies to just exist – they are anchored to their debt. They have already reached the limits of optimization after increasing efficiency during the 2008-2009 crisis; now, everything revolves around price.
«It became more expensive for industrial companies to just exist – they are anchored to their debt. They have already reached the limits of optimization after increasing efficiency during the 2008- 2009 crisis; now, everything revolves around price»
The more marketable the company, the more comfortable it will be. Marketable companies have exchanges, exports, data, all of which can be used to create forecasts. For quasi-marketable industries, such as ferrous metallurgy or coal, the situation is more difficult, here everything depends on demand. For example, ferrous metallurgy is large and vertically-integrated, which helps control supply-chain costs. A dependence on domestic demand appears in several other industries, including construction, railway construction, repair, and the auto industry. At the moment, there is only one demand driver for railway construction – RZD. The coal industry, on the other hand, is diversified, there are several small manufacturers who are just on the brink of survival as coal prices have fallen.
TEI: Can we expect a consolidation in the industry, that the smaller players will leave?
I doubt that there is anyone interested in small assets with huge amounts of debt. For example, banks are reluctant to seize the assets of manufacturing enterprises – they simply don’t have the expertise to manage them. Only coal miners can manage coal mines. In retail and real estate banks have much more expertise, which makes them more attractive for banks. When it comes to manufacturing companies, it’s much better to earn on the margin than to take over the assets yourself.
TEI: Which industries are in the best position?
Petrochemicals and fertilizers are doing well. First of all, demand is stable. Fertilizers have to be used each year (except for potassium), no one holds a high inventory each year. Secondly, they have relatively low debt load, and are not currently having trouble with their debt obligations.
«In such circumstances, stability and solvency become more important than margins, which makes it hard to adopt a precrisis mentality»
We already talked about metallurgy and coal, energy is not faring better. Despite the fact that this industry works exclusively in rubles, it has serious problems collecting payments, which have been deferred several months already. Energy still survives by cutting down on investment programs, but if it encounters more non-payments it will require state intervention.
Machinery, as a contract producer, is also not doing well. It does service orders from the military, but not significant enough volumes. If you remove the military from market machinery, then only transportation machinery is left (again, tied to RZD) and energy.
TEI: Can the government serve as a driver for manufacturing companies?
Don’t assume that government orders can save everyone and everything – the same leading state companies pay poorly enough and irregularly. In addition, in many industries, for example, piping, run exclusively on project-based orders. Tomorrow the government could suspend or cancel the project – and the whole investment program that project is supporting can be written off.
This article was published in the special edition of the Talent Equity Newsletter, "Heavy Industry. Is there a crisis?".
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