Modernization for the sake of modernization: cement industry example

April 22, 2016 18:32

On June 4th, the JSC Krichevcementnoshifer released a test cement batch using the new technology line.

The new production lines’ launch at cement plants did not result in increased cement production. Low-quality equipment shipments by Chinese partners have resulted in greater financial debt without improving enterprises’ financial performance. Enterprises’ modernization without taking into account economic situation, failed to improve the foreign trade, rather made it worse.

Belarus’ cooperation with China has attracted a modernization loan for the cement industry: Eximbank allocated USD 530 million. The cement industry modernization project was estimated at USD 1,134 million. The project envisaged installation of new cement production lines at three cement plants in Belarus. 1.8 million tones capacity each, which meant to increase cement production from 4.6 million tonnes (2011) to 10 million tons annually by 2014. Two of the three lines are already running, but during January – April 2013, cement production decreased by 1.6% over the same period in 2012. The domestic market’s consumption shrank, export supplies are limited by transport arm of 500 km, and shortage of cement in Russia is not envisaged. Currently the only potential customers that can increase the cement consumption volume are in the domestic market.

Chinese partner was chosen due to the soft loans provisions, which covered half of the required amount for the project’s implementation. Cooperation with China has demonstrated the consequences of the preferential loans. The launch dates for the production lines were repeatedly postponed. The third line at the Krichevcementnoshifer has produced a trial batch, but it will take at least one year to implement the line’s full capacity. Poor quality of the supplied equipment resulted in repeated production sabotage due to equipment failure and in additional costs for businesses and downtime.

As a result, the cement industry situation is as follows. New capacity is created, but not used. Financial resources from China were used, entailing relevant repayments. Cement exports cannot be increased substantially due to cement overproduction in Russia, and limited transportation capabilities to other countries. The domestic market is stagnant, and the increased transportation tariffs as of January 1st 2013 by 3.5 times are yet another negative factor (harmonization of tariffs was due to Customs Union agreements). The significant increase in accounts receivable resulted in the need to attract banks’ credit resources at a high rate, which, together with an increase in rail tariffs worsened enterprises’ economy. In addition, Chinese equipment supply resulted in deteriorated foreign trade balance in goods.

Thus, systematic miscalculations, and the pursuit of preferential loans resulted in unnecessary expenditures, foreign debt growth and deteriorated industry’s financial performance. It would have been more reasonable to fund the areas with export potential, which do not depend directly on transport tariffs and which really lack funds to expand their production capacity.