We met with the CEO of Smart-Holding Alexey Pertin to discuss the development outlook of the Ukrainian shipbuilding industry since forecasts by industry analysts predict a protracted global crisis for all shipyards. In particular, DanishShipFinance predicts that the world's largest shipyards may be left without any orders by 2017.
Smart-Holding includes the largest shipbuilding group of Ukraine, Smart Maritime Group (SMG), and SMG incorporates two largest Ukrainian shipyards in Nikolaev and Kherson.
However, before the interview we found out that the holding company had been preparing for such development of the situation for quite a long time and had been looking for new growth areas for its shipbuilding businesses. For example, Smart-Holding is planning to implement a project of the Industrial Park in Nikolaev on part of the territory of Chernomorsky Shipyard (ChSY), and is already negotiating with a number of large foreign and Ukrainian investors. Therefore, we decided to make our major focus on this news and ask Alexey Pertin about the details of this project.
RBC-Ukraine: How did the company come to the idea to implement the project of the Industrial Park (IP) based on part of ChSY's territory?
Alexey Pertin: First of all, let us remember what Chernomorsky Shipyard essentially is. It was a typical Soviet giant enterprise located on huge areas and focused primarily on the needs of the military industrial sector. With the collapse of the Soviet Union, unique capacities of the plant enabling it to build aircraft carriers and nuclear submarines became unclaimed.
Overall, as our experience with the construction of the corvette prompts, Ukraine cannot afford large military shipbuilding. Today, only about 9.5% of the shipyard’s total area (300 hectares) are in fact used for shipbuilding. The rest of the site is actually unused, but the company regularly pays land tax to the municipal budget.
Speaking objectively about the domestic shipbuilding industry, one has to admit that it is in deep recession. In practice, only 3 out of 11 shipbuilding companies inherited from the Soviet Union operate in Ukraine today. Two of them are shipyards of SmartMaritimeGroup in Kherson and Nikolaev.
RBC-Ukraine: What has led the industry to its current state?
Alexey Pertin: There are a number of factors. Firstly, it is the redundancy of the world fleet under the conditions of global economic decline in the last few years.
Secondly, the shift of shipbuilding centres to the Asian region (China, Korea) where the factor of cheap labour is supplemented by a real government support to the industry.
Finally, there are some internal reasons like the military conflict in the East, and a two-year recession of our economy. Due to the well-known events, we have lost the Russian market, while the European market so far has taken wait-and-see position due to the political and economic instability in Ukraine. And this is in spite of all our successful experience and industrial capacity.
Other reasons include the cost of financial resources that need to be raised for implementation of shipbuilding projects, unfavourable tax policy, corruption factor, force majeure risks associated with the military conflict.
RBC-Ukraine: Let us go back to the project of the industrial park.
Alexey Pertin: Yes. Due to the above reasons, we decided to start looking for new, promising growth areas related to the maritime sector. And we found the project on establishment of a major logistics hub on the basis of unused areas of ChSY a perfectly reasonable solution.
Due to its favourable geographical location, convenience of logistics in the direction of a number of key sales markets (Middle East, North Africa, Europe), as well as proximity to major shippers of grain and metals, Nikolaev may, in the near future, become and is, in fact, already becoming a major logistics hub of Ukraine.
Do not we think that the existing state-owned (Nikolaev port, Oktiabrsk port) and commercial (Noble, Nika-Tera, Nibulon, Bunge) transhipment facilities are quite able to fully meet the existing demand?
This is what seems at first glance. However, according to the estimates by the agrarian market experts, demand for spare transhipment capacity will be growing steadily in the grain surplus region. According to the most conservative estimates, only by 2025, demands for grain transhipment in Nikolaev region could increase by 50% or up to 16 million tonnes annually. And with the swing-back from the extensive model so far prevailing in our agricultural sector, these figures may be much higher.
In addition, we expect that metallurgical products will also ensure a steady flow of goods. One of the largest exporters of metal, ArcelorMittal Kryvyi Rih, today tranships about 1.3 million tonnes of products using the commercial facilities of Nikolaev and Odessa regions. Improvement of the situation in the commodity markets may significantly scale up this flow.
RBC-Ukraine: As far as is known, ChSY has been developing transhipment business for a long time. How successful is it? And why was it decided to go beyond the existing framework?
Alexey Pertin: In fact, transhipment projects are implemented on our both sites in Kherson and Nikolaev. On Nikolaev shipyard, this project was launched relatively not long ago, in 2014.
These projects were designed to ensure continuous cash-flow for the companies under the conditions of seasonal downturns and protracted industry crisis. The projects have fully justified themselves, from this viewpoint.
Moreover, transhipment showed fairly high margins, and this was another reason why we decided to implement a major project. Today, the total volume of transhipment for both sites is about 0.3 million tonnes per year. The target volume of commodity flow in the implementation of the large project on Nikolaev shipyard’s site is 4 million tonnes per year.
RBC-Ukraine: What role does the core shipbuilding segment account for in this project? Does this mean that Smart-Holding sees no prospects for development of Nikolaev shipyard?
Alexey Pertin: Nikolaev shipyard of SmartMaritimeGroup will definitely continue to work. Shipbuilding has been and remains a core business for us.
Nevertheless, the current condition of the sector, due to the aforementioned reasons, does not allow us to utilize all the areas and facilities that are at our disposal. Therefore, production facilities directly related to the shipbuilding will be localized and concentrated.
In fact, this has already been made. The staff will be retained and will continue to work in SMG subholding company.
RBC-Ukraine: What will be the peculiarities of the Industrial Park's operation?
Alexey Pertin: In fact, we are discussing the idea of setting up a classic industrial park (IP) on the basis of our Nikolaev site. The park will have its management company and regulated relations with its future residents.
As part of the proposed model, the operator of the IP will be providing a full range of services related to cargo transhipment: processing/handling, loading, forwarding, weight and quality control, provision of specialized storage facilities and so forth.
It will also be providing the residents with delivery of the necessary resources (electricity, gas, water supply and waste water disposal)
RBC-Ukraine: Has the concept of the Industrial Park been developed for today? Who will be the initiator?
Alexey Pertin: The document is under development. We expect to finalize it by August.
Naval Logistics will be in the role of the initiator; its work will be led by Alexandr Yurkov. In the future, it will also be performing the functions of the operating/management company.
RBC-Ukraine: What will be the specialization of the park? Are there any ideas about the anchor company?
Alexey Pertin: The main idea is to build a logistics hub with a focus on grain cargo and steel products. The concept also envisages location of related production facilities for processing of agricultural products and metals, as well as a number of other related service providers in the territory of the future IP.
Speaking about metal products, I would like to remind you that in 2013 ChSY, as a subcontractor for Zaporozhye bridge crossing, went through the respective certification from Paton Institute regarding its capabilities for production and assembly of large metal structures. The company built and equipped special technological sites. In case the government resumes large infrastructural projects, this segment may be in great demand.
Answering the second part of your question, I would like to note that today Smart-Holding is in talks with a number of multinational companies specializing in trading and processing of agricultural products. Recently, we have made significant progress in this matter. However, disclosure of details of these negotiations would be premature now.
RBC-Ukraine: Your chosen form of the IP, brownfield, presupposes subsequent infrastructural and transport problems. Do you have an understanding of how to avoid such risks in your particular project?
Alexey Pertin: Currently it has a well-developed infrastructure, including railway connection, approach roads, mooring berths, navigable water area, storage and transhipment facilities.
Of course, we will need to address a number of "bottlenecks" to attain the target scales. Here, we are primarily talking about the railway logistics and clearing of navigable water area to ensure the designed depths.
To reduce the load on the Ukrainian Railways at Nikolaev Railway Station, we plan to build our own transfer station within ChSY where all the necessary sorting/handling operations will be carried out. This station will serve the needs of all our potential residents.
The same applies to the road vehicle logistics. In order not to load the city with cargo vehicles, special parking areas for parking of freight trucks will be built in the territory of ChSY.
As for the navigable water area, it will need to be cleared to meet the designed parameters of 8.5-11.5 meters. This means the work with silt soils rather than dredging in the classic sense. This will enable us to now handle handysize vessels with water displacement of up to 30 thousand tonnes. In the long term, if the government decides to extend the Black Sea shipping channel, we may think of making classic dredging in our navigable water area.
Of course, within the project’s framework, we will also need to carry out some work on the modernization of the warehouses and cargo lifting machinery, to purchase additional cargo handling equipment, to organize own quality control and so on. Yet, these are quite reasonable and affordable investments that do not cause any questions from our side.
RBC-Ukraine: Have you reached any agreements with electricity, gas and water suppliers to meet the needs of the IP? Will construction of any additional engineering/utility lines be needed and if so, who will finance them?
Alexey Pertin: Today Nikolaev shipyard has all the necessary engineering services to meet the resource needs of the potential residents. Historically, power supply to the company was organized according to the first energy class and is made through two power terminals, one of which is equipped with two transformers of 63 MW each. A minor upgrade will make it possible to increase the throughput capacity of the gas pipeline in case such a need arises.
The same applies to water supply and sanitation. In this regard, no any expansion of the networks will be required at the initial stage of the project. Questions of resource supplies to the residents will be the responsibility of the management company.
RBC-Ukraine: In your opinion, what will be the advantages of your site?
Alexey Pertin: To our mind, one of the advantages over similar neighbouring sites will be that we will be ready to offer specialized warehouses for separate storage and accumulation of goods.
This is primarily important for niche grain nomenclature when the shipper is interested in preserving the quality and specific characteristics of a particular consignment. This point is often neglected at the major terminals where after entering the general silo banks grain is "depersonalized", and its owner has difficulty in controlling the quality characteristics.
An important advantage will be availability of own transfer railway station that will significantly speed up handling of cargos, which is a crucial aspect for a consignor.
In addition, administrative premises of ChSY not utilized today could be used as business centres, office premises for residents of the park and for small and medium businesses of Nikolaev.
RBC-Ukraine: What is the total budget of the project and its estimated payback period? Who will be the project's investor?
Alexey Pertin: Before finalizing the concept, it would be premature to give any specific numbers and timing. With regard to investments, they will amount to hundreds of millions of Ukrainian hryvnias (UAH). Smart-Holding will be in the role of the investor for the infrastructural tuning.
RBC-Ukraine: Concentration of production facilities implies environmental risks. As it is known, today, the water area of the Southern Bug and Liman is not in its best environmental condition.
Alexey Pertin: All the projects that will be implemented on the site in Nikolaev will go through a strict environmental assessment in accordance with the requirements of the applicable legislation. It suffices to point out that with the proposed specialization of the park, environmental risks are minimized as much as possible.
RBC-Ukraine: And one question about the shipbuilding business. How about the project of building corvette for the Ukrainian Navy?
Alexey Pertin: The construction is behind the schedule because the government stopped the financing completely. Recently, the new commander of the Ukrainian Navy visited our SMG shipyard in Nikolaev. He made an inspection and clarified at what stage the project was.
As of now, the level of completion is about 17%, and more than 80% of the hull work under the project has been carried out. We asked the commander questions about the regularity of financing and he promised assistance.
Ukraine needs to have its own naval fleet. We have access to the two seas. If the state sees other contractor for this project, we are ready to pass it over at any stage. This is not a business project.
Interviewed by Victor Gatsenko