Despite the war that Russia is waging against Ukraine and the constant enemy attacks on Ukrainian infrastructure, Interpipe has managed not only to maintain its position on the European market of railway wheels, but also to increase its exports.
In an interview with the CFTS portal, Oleksandr Garkavij, Director of the Railway Products Division at Interpipe, talks about how the company managed to achieve these results, the impact of power supply restrictions on production, the problems with certification and their impact on cooperation with the German national railway company Deutsche Bahn or the French rolling stock manufacturer Alstom, as well as wartime logistics and new large contracts.
How has the business model of the company's Railway Products Division changed and have supplies been redirected since the beginning of the full-scale war?
The business model of Interpipe's Railway Products Division has changed because of several factors. Firstly, the Ukrainian market has been in recession for three consecutive years. Secondly, the war has led to the loss of markets in some CIS countries, such as Kazakhstan and Uzbekistan, because of a significant increase in the cost of transportation of railway products, which now have to be transported across the Black and Caspian Seas. As a result, the company was forced to focus primarily on the EU market and several overseas markets, including North America, South America, the Middle East, and Asia.
In the first few months after the 2022 Russian invasion of Ukraine, Interpipe was unable to ship products to these overseas markets because of the blockade of Ukrainian ports on the Black Sea. However, the company later found ways to export its products through Romanian and Bulgarian ports. Our railway products were first delivered to these countries and then shipped in containers to the USA, Mexico, Saudi Arabia, India, and Pakistan.
Although the share of these markets in the company's total sales volume was relatively insignificant in 2022, it started to increase in 2023, thus balancing the overall sales structure of the Railway Products Division.
You said that the Ukrainian market is currently in recession. What is the current situation?
Unfortunately, demand in Ukraine is currently low. We continue to work with the Ukrainian Railways joint-stock company (Ukrzaliznytsia) and railcar manufacturing plants to supply wheels for railcars and tires for locomotives. We are also mastering and establishing the production of new types of products, such as small- and medium-diameter wheels for special trains.
Is the European market your primary market, or even your home market?
Yes, it is. It is important to note that this applies to the segment of freight wagons and trains. In this segment, Interpipe is a significant player in the EU market. The geography of our sales extends from Spain in the west to Slovakia in the east, and from the Scandinavian countries in the north to Greece in the south. Essentially, Interpipe supplies its railway products to all European countries, except that there is no direct supply to Portugal.
I should note that Interpipe started this diversification a long time ago, in the early 2000s. It certainly took a long time, but now, thanks to this work, we have a very strong position in Europe.
Of course, the production stoppages following the full-scale Russian invasion caused some concern among our customers about our ability to fulfill long-term contracts. It was difficult, but we managed to keep everything going. Moreover, the company has been able to sign new medium- and long-term contracts because, despite the war, our flexibility and ability to deliver products in the shortest possible time are still greater than those of our competitors.
Who are your main competitors in Europe?
Bonatrans Group (Czech Republic), Lucchini Piombino (Italy), BVV (Germany), CAF (Spain), and Valdunes (France).
Are there any Russian products on the European market at the moment? Do they compete with Ukrainian wheels and hubs?
Yes, there are. This is paradoxical because the EU has imposed sanctions on almost all metal products of Russian origin. Surprisingly, however, railway wheels and wheelsets have been spared.
No European manufacturer is against these sanctions, but no one is initiating measures to remove Russian products, delivered at dumping prices, from the market.
The EU has imposed sanctions on almost all Russian-made metal products. But railroad wheels and wheelsets have been surprisingly spared.
What are the most successful contracts you have signed in the past two years?
Interpipe signed the biggest contract with Greenbrier, the largest railcar manufacturer in Europe. Its parent company is American, but the plant to which we will supply a significant volume of wheelsets is in Poland.
I can also highlight contracts with customers in Spain and Finland. These are countries with track gauges different from the European track gauge.
It is well known that Interpipe has traditionally supplied mainly wheelsets to the EU. Now you say that Greenbrier will receive wheels and axles separately. How are such deliveries distributed in Europe: how many wheels and how many axles do you supply separately?
If the trend of the first half of the year continues until the end of this year, we will supply 20,000 wheelsets to the freight car segment of the European market. This is equivalent to 40,000 wheels. In addition, almost 105,000 wheels will be delivered under other contracts.
Interpipe has signed a contract with Greenbrier, the largest railcar manufacturer in Europe.
Let us compare this figure with the figures before the full-scale invasion...
This year we will most likely exceed the pre-war sales volume. However, further development will require large investments in capacity expansion. At present, Interpipe's existing facilities for the production of railway products for the EU market are working at full capacity. In addition, we are facing a significant personnel problem.
How are the problems in the energy sector affecting production?
The most severe power supply problems occurred in December 2022. We also operated under strict limits in the first months of 2023. At present, the Railway Products Division's facilities are operating more or less normally. However, we understand that the limits may become more stringent as we approach the fall and winter periods. We are also extremely concerned by the new government regulation that requires the importation of 80% of electricity to avoid shutdowns, which is virtually impossible to comply with and needs to be revised.
This begs the question: have you considered the possibility of relocating production outside Ukraine?
No. We manufacture railway products from our own steel, and this vertical integration makes Interpipe highly competitive. If we were to buy steel in the EU, import it into Ukraine, and export the finished products, they would be completely uncompetitive.
Theoretically, it is possible to relocate the wheel machining lines, but it makes no sense without relocating the hot-rolling lines. Relocating the hot-rolling production facilities requires significant funds and time.
Recently, the TAS Group became the majority shareholder of TransAnt, an Austrian manufacturer of innovative railcars. The Dniprovahonmash railcar manufacturing plant supplies its railcars to the EU through this company. This is one model for entering the European market. You have another model, as you have already captured a significant share of the wheel market in the freight segment. Have you considered acquiring a European company to gain an even larger share of the European market?
Of course, we have considered various options. But we believe that increasing our capacity in Ukraine offers us the best prospects.
You said that you were developing routes for delivering products by road to Romania and Bulgaria at the beginning of the full-scale invasion. Has the need for this diminished with the opening of the sea corridor?
We continue to export our products through ports in neighboring countries, but the situation with shipments directly from Ukrainian ports has objectively improved. We have tested a new route from Chornomorsk to Houston (United States), loading a bulk carrier with pipes and wheels. As of today, it is a functioning route.
However, it should be noted that problems related to shipping do not occur only in the Black Sea. For example, Yemeni Houthis fired on a ship carrying our products in the Red Sea, forcing it to dock in Jeddah, a city on the west coast of Saudi Arabia. To deliver the cargo to India, we had to unload the goods in Jeddah, ship them in containers to a port on the kingdom's east coast, and ship them from there to the customer.
We have tested a new route from Chornomorsk to Houston. As of today, it is a functioning route.
How significant is the proportion of Interpipe's railway products exported to North America and Asia?
We ship an average of 60,000 to 70,000 wheels to overseas markets per year. I am talking about train wheels and not wheelsets. The fact is that ocean shipping uses containers, which can hold ten times fewer wheelsets than wheels. Therefore, from the point of view of economic feasibility, it is profitable to sell wheels to overseas markets.
Can you provide figures for the production of railway products since the beginning of 2024? What are your expectations for the first half of this year?
Preliminarily, we produced nearly 43,500 tons of wheels, about 11,000 tons of wheelsets, and 2,200 tons of axles in the first half of this year. This production volume significantly exceeds the volume in the same period in 2023.
Last year, Interpipe mastered the production of 24 standard wheel sizes. How many new products do you have in development this year?
At this stage, it is very difficult to develop new products in the passenger segment, as our customers in this segment are state-owned companies or companies with significant state ownership. Nevertheless, we have orders from Siemens to supply products for various trains in the UK, Thailand, and India. We have recently received a new order for trains in Germany.
We also have a contract with Alstom to supply locomotive wheels to India. So far, we have only one order, although we are ready to expand our cooperation. However, this customer is very cautious for obvious reasons.
In general, our share of the passenger segment of the European market is small, around 5%.
What is the reason for this?
The market for freight car wheels is limited and standardized to 10-15 types of wheels and wheelsets. Manufacturers conclude spot contracts for the supply of these products for 1-2 years. The situation in the passenger segment is different. Each passenger train has its own wheel design, which may require the development of a separate steel grade. In addition, long-term contracts of 10-20 years are concluded in the passenger segment. Contractors need a clear workload for their production lines for years into the future.
Just a few years ago, Interpipe supplied significant volumes for Deutsche Bahn's high-speed trains. Our certificate expired this year, but the Germans cannot renew it without a physical audit of our facilities. The last time Deutsche Bahn representatives were in Dnipro was before the COVID quarantine. Now, we are trying to solve this problem, but there are not many options.
Is this because German experts are afraid to travel to Ukraine because of the war?
Yes. The Deutsche Bahn auditors are civil servants and have to follow a directive that prohibits them from traveling to our country in connection with the war. We are trying to engage Bureau Veritas representatives who could act as Deutsche Bahn employees. Another difficulty is that our production facility is located in the frontline area.
Of course, a virtual audit can be performed. Unfortunately, this is not enough for companies that purchase wheels for high-speed trains. They have to send specialists for the audit and even an inspector for the acceptance of the first product. Only after these conditions have been met can serial delivery begin.
So, when you talk about Alstom's caution, you are talking about the same problem?
Yes, but there is another factor. Alstom manufactures trains on a just-in-time basis and does not hold large inventories. Therefore, the company expects its subcontractors, including Interpipe, to deliver components on time. However, power supplies to us can be restricted at any time, resulting in long production stoppages. Of course, this has not happened yet, but it is theoretically possible.
In summary, I would say that companies like Deutsche Bahn will not stop trains because of power cuts in Ukraine.
Earlier, you mentioned investments. Could you elaborate on the company's plans?
Interpipe has adopted an investment program for the development of its railway products division with a focus on increasing the capacity for machining wheels. At the same time, we have a special investment program for the passenger segment until 2032.
However, under the current circumstances, we need to invest only in those projects that pay off the fastest. As I mentioned earlier, the production lines for export wheels are currently operating at 100% capacity. Of course, the equipment is wearing out faster, so we are replacing parts and components. We are also investing selectively in small projects worth USD 5-6 million.
