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18.02.2011

SATisfaction, or restoration of branch-wise business

"SAT&Company", the joint-stock company, has realized its assets for the sale of petroleum derivatives in 2008, thereby having marked the new strategic era in company’s development that means the diversity of the activity, focused on development of processing manufactures.

Kasym Sultanov, " The Expert Kazakhstan", February, 14th .

SAT&Company", the joint-stock company, has realized its assets for the sale of petroleum derivatives in 2008, thereby having marked the new strategic era in company’s development that means the diversity of the activity, focused on development of processing manufactures. Metallurgy and petrochemistry became the main target segments; the company has exactly estimated the huge market potential of these branches as well as the political risks, leveled by large-scaled state support of processing branches.

Business structure

Today SAT&Company represents the vertically integrated metallurgical holding which structure includes the extracting and processing companies of identical production cycles as the drawing below presents.

Petrochemical manufacture occupies the special position in processing sphere presented by “Kazakhstan Petrochemical Industries Inc” LLC. The last was established for the purpose of realization of the large-scaled project for construction of polypropylene manufacturing gas-processing complex.

The metallurgical block is structured in order to achieve raw materials independent support of own ferroalloys manufacturing factories (or that of majority market share). The geography for both extraction and processing is not limited by borderlines of the Republic of Kazakhstan: development sites for extractions are located in Kazakhstan and Turkey; sites for processing – in Kazakhstan and China.

The basic changes in structure of assets took place in 2009 when the SAT&Company’ acquisitions allowed the occupation of one of the leading positions in metallurgy across the Republic.

Thereby 2009 SAT&Company has redeemed 100 % of market shares of "KazNickel" LLC in 2009. This company owns the contract for investigation and extraction of cobalt-nickel ores at Gornostaevsky deposit, located in Beskaragaisky area of the East Kazakhstan area. Deposit stocks, according to the Department of Energy, make 20,4 million tons of ore containing 173 thousand tons of nickel and 12 thousand tons of cobalt. The same year SAT&Company declared purchase of brown coal deposit of the Kumyskuduk site in Karaganda area and as well its proprietor which was "Mining company" Darhan " LLC. According to the plan in 2010 extraction should increase up to 1 million tons of coal, and to reach the estimated capacity of 1,5 million tons by 2011. In parallel with mining, two reservoir sites, both representing great potential for increase of resource base, are explored in addition.

Also in 2009 SAT& the company’s affiliate named “SAT Sino FerroAlloy Ltd.” has bought from Tianjin Jinsheng Metallurgical Products Co., the Chinese company, 51 % of market share of participation in three enterprises, that are: Taonan City Jinsheng Metallurgical Products Co., Ulanhot Jinyuanda Heavy Chemical Industry Co. and Baicheng Jinsheng Nickel Industry Co. Besides, SAT Sino FerroAlloy Ltd. together with Tianjin Jinsheng Metallurgical Products Co. Ltd has established the joint trade enterprise named Jinsheng SAT (Tianjin) Commercial&Trading Co., Ltd., having received 51 % of the controlling stock over the enterprise.

The abovementioned enterprises have rather impressive processing potential. Taonan City Jinsheng Metallurgical Products Co., Ltd is the manufacturer of high-quality ferroalloys on the basis of manganese in Jiling province. The factory by the capacity of 47 thousand tons of ferroalloys per year produces high, middle and low-carbon ferromanganese and silicomanganese. Ulankhot Jinyuanda Heavy Chemical Products Co., Ltd. is located in the city of Uhan-Khot, produces silicomanganese of SiMn 65/17 brand, low – carbon and middle-carbon ferromanganese, the general capacity of the enterprise is 68 thousand tons of ferroalloys per year. Baicheng Jinsheng Nickel Industry Co., Ltd. (the factory for manufacture of ferronickel and ferrochrome in the city of Bajcheng, Jiling province) is equipped by the production line by the capacity of 60 thousand tons of ferronickel, or 100 thousand tons of ferrochrome.

The company has published the investment memorandum on release of preference shares in July 2010. In 2010 the company transferred the advance payment according this document to "Mark Global Corporation Kazakhstan" LLC for 87 % of securities of the company of "SAT&Co Holding A.S” in Turkey. The structure possesses 99,992 % in SAT&Co Madencilik Isl. Tic. A.S,, owning chromic deposits with the confirmed stocks.

After transaction for Turkish deposits of chrome, SAT&Company declared acquisition of 100 percent market share "Central-Asian investment consulting company" LLC which owned "Tarazsky metallurgical works" LLC. Along with the factory, specializing in ferroalloy and steelmaking manufactures, the company has got three deposits, extracting ore for the given enterprise.

The processing of steel which is carried out by joint-stock company "KazFerroSteel" is included into the metallurgical block of the company as well. However inclusion of integrated works into full cycle extraction-processing can be conditional as "KazFerroSteel" JSC works with breakage and waste of ferrous metals and belongs to the enterprises of the so-called semi-integrated steelworks. Such activity among holding structure is rather isolated; however in the nearest future its integration by means of introduction of hardware manufacture on basis of ferroalloys produced by own factories is provided.

The management company (CAIIK) and the trading house (Jinsheng SAT (Tianjin) Commercial&Trading Co., Ltd.) function in the metallurgical block in addition, that allows to centralize strategic management, and is the characterizing feature of completeness and isolation of functional cycle within the limits of the given business segment.

Thus, in two years after re-structuring, started in 2008, SAT&Company has turned into competent diversified metallurgical holding, having successfully realized market and geographical expansion.

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Petrochemistry

Whereas prospects of Kazakhstani metallurgy are more or less clear, petrochemical manufactures are still very young and demand scaled support of the state via special programs, creation of free economic zone and financing arrangement.

Today experts underline forward planning for Atyrau complex both for SAT&Company, and for Kazakhstani chemical branch as a whole. By estimations of experts, the demand for plastic in Kazakhstan is covered due to import from Russia (Nizhnekamsk chemical factory, Kazan chemical factory) and China. In China, for example, demand for plastic is only 50 % covered by internal manufacture, and for the last 30 years the output of this class of product has increased on international scale by 550 %. Thus, our country has the best chance to become the serious player of petrochemical and gas market in 10–20 years.

Sergey Smirnov, the expert of Institute of political decisions, demonstrate the promising prospects of branch as follows: "Nearby there are the largest consumers which are the countries of Central Asia and China. Let China develop chemical branch more actively than Kazakhstan, but it constantly lacks raw materials. The requirement for the derivative products of petrochemical and gas chemical industry (and the latter branch is even younger than petrochemical in the Republic) is really huge. The basic precondition for development is raw materials. Take gas for example: Kazakhstan has the big stocks of associated gas which, unlike net gas that goes at once to a pipe as in Turkmenia, contains bulk of elements required for the chemical industry".

That is sad, the analyst believes, that in spite of all potential possibilities, raw materials processing is still insufficiently developed, that, probably, depends upon faulty developed projects. For example, all three oil processing factories, belonging to the state, with annual workload of 12 million tons are provided by Kazakhstani oil only by 50%, and the rest share of raw materials is supplied from Russia. Oil processing factories lack means for upgrading, and the improved effective processing is impossible without such upgrading; though theoretically these factories could considerably improve their state at reasonable investment. However investors prefer rectify oil for export, and to process it at the foreign enterprises, as sales of products there is much more favorable. The expert sees the solution in respective alterations of the legislation obliging foreign and domestic investors to develop processing projects, and as well preventing unreasonable accumulation of assets within the National Fund, while these assets could be invested into innovative projects. Sergey Smirnov believes, that chemistry prospects are huge. He says: “Take simple pipes for example: today these pipes are produced of expensive metals. But it is possible to produce same pipelines and public utility networks of cheaper plastic and as well to export these products".

Kanat Berentayev, the other expert and economist, is rather optimistic regarding the fact, that the petrochemical complex supervised by "Kazakhstan Petrochemical Industries Inc." LLC has entered into The Program of Forced Industrial-Innovative Development (FIID). Basically, in Kazakhstan even during the Soviet period the development of polypropylene, polyethylene and ethylene manufactures was entered into many strategies as the major issue. Today, as the analyst marks, there are quite valid reasons for the development of petrochemical complexes, requiring only minor modernization. "The demand for products of processing increases each year, and Kazakhstan has energy capacity for establishment of manufactures, and what is more important, the country has suitable raw materials. Of course, establishment of petrochemical complex is the expensive initiative demanding major investments. The analyst considers unstructured environment of branches as one of the obstacles for rapid realization:" Very often extraction and processing are controlled by different entities. The prices in the world market grow quickly therefore it becomes unprofitable for the extracting companies to supply oil and gas into home market ". Nevertheless there are preconditions for improvement; for example the Atyrau factory is included into FIID, and Masimov, the Prime Minister, according to his own assurances, is obliged to promote realization of the projects noted in the program. However it is required to reduce the gap between volumes of raw materials supply and demand of manufactures, and also carefully elaborate and ground the future commodity market, the analyst believes, because the branch will be unstable without it. "Realization of petrochemical and gas projects is the matter of the next 5–10 years, and it is necessary to consider, that chemistry is one of those branches which Kazakhstan could manage with, starting with extraction of raw materials and till finished products. It is quite probable, that in the long term we can produce not only common plastic, but advanced technological goods ", – assured Kanat Berentayev.

 

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Strategic planning

Acquisition and realization of assets, carried out by SAT&Company for the last years, could seem ex facte to be spontaneous and chaotic; and the sale of such profitable enterprise as joint-stock company "Shimkent Munai Onimderi", - to be the total distraction. However the investments, including assets gained from sale of other business units, into purchase of metallurgical and associated actives, and as well into petrochemistry development, is the result of deep analysis of the markets and potential risks.

In the frameworks of stage-by-stage strategic planning, SAT&Company reproduces diversified model, as the drawing shows.

Taking into account, that in SAT&Company metallurgical segment ferroalloy is the basic manufacture (TMZ, Ertis, three Chinese ferroalloy factories with horizontal diversification), the return vertical diversification is obvious via procurement of ore deposits, delivering raw materials for process of ferroalloys manufacture. The question is the alloying metals improving quality of alloys (increase the hardness, durability, corrosion resistance etc.). The basic alloying elements in steel and cast iron are Cr, Ni, Mn, Si, Мо, W, V, Ti, Zr, Be, Nb, Co, Al, Cu, B, Mg. Therefore the deposits of manganese, chrome, nickel (and cobalt as the deposit is polymetallic) in SAT&Company portfolio solves the question of provision of ferroalloy manufactures by raw materials, and also optimization of expenditure pattern by means of cost saving of such raw materials.

Besides, as manufacture of ferroalloys is the very power-intensive branch and the foreign market of coal shows steady growth, procurement of own coal open-cast would be rather reasonable as well.

Direct vertical diversification by means of procurement of business unit producing hardware is the logical strategic step in this relation, for example, "KazFerroSteel" joint-stock company. SAT&Company continues development of the given manufactures, prepares them for use of own ferroalloy factories production.

Often the model of development of metallurgical direction of SAT&Company holding is compared with ENRC which also purchases deposits and factories abroad, and coal open-casts in Kazakhstan. However ENRC, possessing unlimited business ambitions and resources, purchases deposits which are ones of the largest three ore deposits in the world, for example, African Tonkolili and Brazilian Pedra de Ferro. Investments into their development and infrastructure building are measured by hundreds millions dollars, and political risks are very high, because nationalization and local criminogenic conditions can affect considerably the course of projects realization, up to loss of assets.

SAT&Company invests into development of manufactures in the Republic and into the more stable countries, such as Turkey and China. The latter, undoubtedly, is as well characterized certain political risks, however, unlike Brazil or Africa, Kazakhstan has real economic reasons of domination upon China.

The petrochemical company "Kazakhstan Petrochemical Industries Inc" LLC, operating in processing sector of economy, is the asset of SAT&Company not connected with metallurgy. Such strategic choice is economically proved too:

1. Polyethylene and polypropylene manufactures show steady growth in the world and local markets.

2. Such factories don’t exist in Kazakhstan; the demand is covered by import.

3. The raw materials (gas) are in excess and in geographical proximity to manufacture.

4. The branch is supported by a number of government programs.
In order to concentrate on metallurgy and petrochemistry, and as well to release funds for purchase of corresponding assets, SAT&Company has refused the directions established already in 2000 and ones that has appeared later, including pension assets in "Otan" NPF and "Shimkent Munai Onimderi" joint-stock company dealing with mineral oil trading. This strategic course is not clear to some entities, looking for easy petrodollars, and is not interested in development, and does not see branch prospects.

Kenes Rakishev, principal owner of SAT&Company, stated his vision of business during n one of meetings with students as follows: "I knew, that for successful business “the exit " is necessary. I did not want to be involved into such kind of business which cannot change". Business without the development prospects, that don’t demand thinking and risk, limits growth and economy reorientation on the whole and of each separate company in particular, such as trade of oil products, and is not prior to SAT&Company.

Certainly, restoration and even the more, establishment of petrochemical and metallurgical manufactures, demands huge investments, support of the state and participation of financial institutions. Therefore remarks of some experts regarding the delay of realization, for example, of the petrochemical holding project, are nonprofessional, precipitate and unreasonable. Investments of holding into the project are not made for image or for portfolio demonstration, and will be realized at favorable conjuncture. Work under the project is continued. So, recently the RK Ministry of oil and gas has declared that it expects to solve the question of financing for construction project in the nearest future. "Samruk-Kazyna" and Bank of development of Kazakhstan have directed the request and package of documents for financing registration to export-import bank of China. “We expect, that the question will be solved ", as it was mentioned in the message of Lyazzat Kiinov, the vice-minister of news agency. As well Kiinov informed, that construction of infrastructure objects and industrial installations of the first phase of the project will be carried out at the expense of credit line of Eximbank in China, and the contract for turn-key construction will be signed with the Chinese company "Sinopek Engineering" in spring of 2010. Besides, the given company guarantees outlet polypropylene commodity market. The project is included into the program of "30 corporate leaders of Kazakhstan", and also into the list of strategic investment initiatives. It is supposed, that in the long term 30 thousand persons will be employed on the basis of this complex, and about 3 thousand kinds of production will be produced there, including 500 000 tons per year of polypropylene and 800 000 tons per year of polyethylene. Final cost makes 5,3 bln dollars, the project is planned to be finished in 2013.

The investment sphere of the company activity continues to grow. A number of large-scaled investment projects is realized, including launching of several factories manufacturing oil and gas equipment, establishment of transport group, organization of the service companies rendering various services (such as infrastructure, logistics, geophysical and aerophotographic and space photo researches) to the enterprises of oil branch. In August, 2010, SAT&Company has informed on investment of 50 million dollars into zinc and lead deposit of Shalkiya in exchange for 81,39 percent of market share in the capital. Deposit resources can be used both for the chemical industry, and for metallurgical enterprises of holding in future.

Unfortunately, crisis has caused serious decrease in incomes in metallurgy (more than twice) and has stopped realization of investment projects of holding that certainly affected its financial results. At the same time crisis has appeared the optimum period for acquisition of assets, therefore SAT&Company has shown dynamics of financial and economic indicators as it is represented in drawing.

During specified period SAT&Company has increased assets due to sale of secondary business units which brought the essential income, but because of unfavorable post crisis market conjuncture had no time to start a number of the investment projects, that should not only generate last incomes, but also considerably exceed them. In such situation ill-informed investors counting on short-term benefits, can predict decrease of market capitalization of SAT&Company and refuse acquisition of assets and investments into the company. However the analysis of holding structure and the markets where SAT&Company had strengthen its position shows the opposite. So metallurgy today is characterized by regenerative trends – since 2010 started the gradual increase in volumes of world consumption of metals for average 4–6 % per year till 2014 that will promote increase of the prices for metals. ENRС, leader of the branch, reoriented growth from Kazakhstan onto other countries and don’t plan to increase operating capacities of ferroalloy factories in Aktyubinsk and Аksu. Petrochemistry did not show recession at all and continues to increase rates of growth.

Thus, export-oriented petrochemical and metallurgical manufactures of SAT&Company fof outlet of new products with the high added cost and deep complex processing of the initial raw materials which cost three-five times cheaper, than the finished goods’ price, will allow the holding to restore positions already in the short-term period. Moreover, today's participation in realization of such strategic programs of the state as the State program of the forced industrially-innovative development, the Program of development of petrochemical branch of RK and the program of "30 corporate leaders", will give holding the status of leader of positive branch transformations.

Social responsibility.

Until recent times, the disputes about social civil responsibility were fashionable western trend. Participation in sponsorship and charity was prestigious too. However the creepy stories around social responsibility have quickly ceased and yesterday's patrons of art and donors have left attempts to gain prestigiousness by means of such ungrateful and cost-based way.

SAT&Company was active in its participation in charitable projects from the beginning of the existence and continues to be active in this sphere till present moment. The company co-operates with welfare fund "Sabi" for the purpose of support medical institutions for children, children from needy families, handicapped children and adults. The company makes its best for introduction of new technological systems and innovative transformations in teaching technique in educational institutions. The holding renders the sponsor's help to university of Astana for purchase the multimedia and presentation equipment, computers, interactive systems, 3D video projective systems and other means. Besides it the company had allocated considerable sums for buying books and special manuals by known authors, world known scientists, whose works are used in the most promoted high schools of Europe and America.

The considerable part of charities of SAT&Company is connected with active participation in intellectual renaissance of the people of Kazakhstan. The company helps to build new mosques in Karaganda, Almaty and Atyrau area, and has published and presented to religious people several thousands of copies of Koran, sacred writing for all Moslems, in translation by theologians Iman Valeria Porohova and Elmira Kulieva.

Also SAT&Company supports young and talented tennis players, football players and boxers, renders the essential help to domestic amateur and professional sportsmen in close cooperation with Football Federation of RK, Box Federation of Almaty and the Kazakhstan federation of professional boxing.

Social responsibility of SAT&Company includes also care of friendly ecological environment. Standards systems of quality management, ecological management, management of professional safety and health are introduced at the majority of the enterprises of the company.

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