Galvex hits major development slide

  • 2005-10-26
  • By Kairi Kurm
TALLINN - Galvex, the U.S.-owned steel galvanizing plant in the Muuga port, has brought in professional management consultants to reinvigorate the company. It's the largest foreign investment to date in Estonia, and could possibly lead to business with a foreign strategic investor. The Eesti Paevaleht reported this week that ownership of Galvex is now firmly in the hands of a group of investment banks, including Germany's Hypovereinsbank, after the company failed to meet payments on loans. According to the paper, the syndicate immediately sold its equity stake, along with the debts, to Goldman Sachs and Deutsche Bank.

The latter two will restructure Galvex, established in Tallinn in 2002, and then resell it to Russia's Severstal or Novolipetsk, Eesti Paevaleht wrote.

There is much speculation, however, that Severstal, Russia's largest steel producer, will come out ahead. Galvex invested 65 million kroons (4.1 million euros) into Severstallat, Severstal's Latvian subsidiary, which provides Galvex with steel and distributed galvanized output in Russia and Ukraine.

Last year, Severstallat provided 60 percent of the raw material used at Galvex.

Roberts Dlohi, marketing director at Severstallat, said that the company has never said it would buy Galvex. "But if we take into account global tendencies, one could presume it is the case. We could consider this, but at the moment it is not the case," he said.

Dlohi added that it would be logical for a steel supplier to purchase Galvex due to the trends in the market.

Last year when one of the owners was selling a 45 percent stake in Galvex, a potential option was seeking a strong partner such as a major steel company. However in the end, Daniel Bain, an American shareholder, used his right of pre-emption to increase his share to 90 percent.

The remaining 10 percent of the company belongs to Center Re, an insurance subsidiary of Zurich Financial Services Group.

Recently, the company has been tightlipped about the extent of its cash-flow problems. The firm only announced that it was under restructuring and would attract working capital from Deutsche Bank and Goldman Sachs.

The investment banks have also appointed two new consultants as chairman of the board and CFO.

Dlohi said he appreciates the bank's behavior, and has high expectations for its professional consultants.

"If you look globally, you see that such small standalone enterprises are integrated in a vertical supply chain. They must be integrated. If they don't have raw materials for galvanizing steel they are in big trouble and suffer huge losses," said Dlohi.

He said that working under capacity could be very costly for any metallurgical enterprise. Since raw materials such as iron ore and coke are in deficit, companies that have their own suppliers are more competitive on the market.

Meanwhile, raw material prices are unstable. Compared to 2004, they are down, though up on 2003, Dlohi said.

"The perspectives of Galvex are pretty good. The consumption of galvanized steel is higher than the supply. The prices in Russia are higher than in Europe because of strong internal demand. I see that Galvex was doing well and can do well in the future. We are completely open for the [next level of] cooperation," said Dlohi.

Galvex invested almost 4 billion kroons in the Muuga plant when it opened three years ago. At full capacity the plant could produce up to 500,000 tons of galvanized steel annually.