The results of the largest metallurgical companies in Bulgaria for 2020 reflect metal pricing. The rise in the price of copper and gold is clearly visible in the turnover of the mining companies, as is the decline in the production of lead, zinc and aluminum. However, the decline in ferrous metallurgy is the most significant, as the subsector is among the most affected by the legislative failure to introduce carbon emission offsets in the price of electricity. And the big risk thereof is the freezing of investments, which can lead to damage to the industry that is difficult to recover from.
Nonetheless, the big picture shows that regardless of the pandemic and the blocked supply chains last spring the average sales of the 15 leading companies are up 5.3%.
The double-digit growth of the sector leader, the copper smelter Aurubis Bulgaria, is one of the reasons why for the first time it topped Capital's K100 overall ranking as the leading company in the country. However, the most impressive leap forward belongs to the gold mining company Dundee Precious Metals Krumovgrad, which in 2020 reported its first full year of activity, followed by its affiliate in Chelopech. Their combined results make the Canadian-based Dundee Precious Metals (DPM) the largest mining company in Bulgaria.
Last year was not the first time Aurubis Bulgaria, part of German-based Aurubis group, crossed the 5 billion levs (2.5 billion euro) turnover mark, but combined with the decline of long-time leader Lukoil Neftochim Burgas, robust sales propelled the copper plant from Pirdop to the leading spot in the general K100 ranking. The company's revenues in 2020 grew by close to 12%, driven primarily by rising metal prices.
"The main reason is the rise in the pricе of metals, not just copper, but also gold and silver, which we produce within the group and for which we also contribute," said CEO Tim Kurt (see interview). According to Kurt, demand for copper is growing on a global scale with the development of new industries such as electric mobility and renewable energy sources along with stable demand from traditional sector such as infrastructure and electrification. And this promises a good supply of raw materials in the coming decades, as high prices stimulate the development of new mining projects.
Copper producer Sofia Med reported 4% growth in sales and higher profit, albeit with a slight decline in total revenue. "We managed to find opportunities during the pandemic and, as a result, we did not follow the market's negative trend," the company said. Moreover, Sofia Med points out that demand has fully recovered in 2021, and the forecasts for end of the year are very positive.
Zinc and lead producer KCM - Plovdiv retained its third place in the sectoral rankings despite a 12% drop in revenues. "In 2020, there was a decline in the prices of our metals, which reduced our turnover. But we did not stop working, we kept selling throughout the period, although in some less profitable markets. For this reason, our suppliers, the mining companies, also did not stop", said the chairman of the supervisory board of KCM Rumen Tsonev. According to him, operating profit is slightly higher than the previous year's, and the fivefold increase in the net result is mainly accounted for by exchange rate differences. "The year was extremely challenging, but we showed how well prepared we are," Tsonev said, adding that the company had not taken advantage of state aid during the crisis.
This year, metal prices are higher than last year, although this means that KCM's raw materials are also more expensive. According to Tsonev, however, the big problem lies in huge energy costs. "Since the beginning of the year, natural gas has risen by 62%, and electricity - by 30%. It is absurd to produce metals under such price hikes taking place in the span of six months," said Tsonev, adding: "Energy prices are determined on the free market and no one wants to change that, but in the European Union there is a special directive related to the prevention of carbon leakage from Member States, which allows to offset part of the cost of carbon emissions in electricity prices. Not a penny is compensated in Bulgaria," he explained. At the same time, KCM is competing with companies from Western Europe, which benefit from carbon offsets and thus enjoy much lower energy prices, which are an essential part of the cost of metals.
High energy prices are also behind the sharp decline in ferrous metallurgy, where the main producer, Pernik-based Stomana Industry, had its revenues shrink by nearly a fifth. Burgas-based Promet Steel also saw a decline, albeit a smaller one. Last year, the Pernik steel mill announced that it was downsizing production and laying off workers due to reduced global demand combined with high electricity and carbon prices, which had reduced the competitiveness of its output, as well as due to uncertainty caused by the pandemic. Although the average annual number of employees did not change significantly, APIS data shows that the number of workers dwindled from nearly 1,200 at the beginning of 2020 to about 900 people at the end of the year.
"The only reason for ferrous metallurgy in Bulgaria to be downsizing production is the price of electricity and the lack of a carbon offset mechanism that exists in some form in all other EU countries we compete with," emphasized the chairman of the Bulgarian Association of Metallurgical Industry Anton Petrov. The European directive allows national governments to reimburse up to 75% of the cost of carbon dioxide emissions included in the price of electricity for structurally important and energy-intensive industries such as metallurgy, chemistry and others. The share proposed in Bulgaria is 30%. But even that much more modest percentage is still not a reality, after the necessary legal changes stalled in the 44th National Assembly. "The changes passed at first reading and then all political parties in the parliament's economic commission unanimously abstained, which is very strange. I think that this particular commission bears a huge responsibility," Petrov said.
What's more, the problem continues to worsen. "The reduction in output and employment in Stomana Industry occurred when emission prices were around 29-30 euro. To date, they have already risen to 54 euro and we expect them to reach 60 euro soon. This means that the downward trend will continue for the metallurgical enterprises in the country," Petrov. According to him, the negative trend is currently partially counteracted by higher demand and higher margins due to shortages, but this is temporary.
However, shrinking output is not the most dangerous consequence. "Production can recover, but a much more serious problem is the lack of foreign investment. Nobody invests in a company that is forced to cut its output. And even if the legislation is adjusted tomorrow, you need years to change your positioning because investment is a slow process," Petrov said.
The investment effect
The entry of new companies in the metallurgical ranking combined with a slight reported decline in revenue leave Alcomet in 11th place in 2020. The decline in turnover at the Shumen-based plant, however, is a result of lower aluminum prices last year, whereas sales have actually increased quantity-wise.
There is double-digit growth in mill products as a result of increased production capacity of the press shop. In the case of rolled products, the company reported a decline in technical foil and finstock, which are used in sectors heavily affected by Covid-19, such as automotive and mechanical engineering. At the same time, the consumption of more packaged food and beverages during the pandemic has led to an increase in orders for household and converter film.
Reduced sales premiums are also a reason for the reported for 2020. "Due to the COVID crisis, the tightened markets have responded by reducing sales prices. In addition, the investments from recent years and the high depreciation costs set aside for them have led to an accounting loss," representatives of Alcomet explained.
The expectations for this year are that demand for aluminum press products on the European market will be on an upward trend. "Consumption of metals, including aluminum and aluminum products, is high worldwide. The decline in stocks during the pandemic have increased demand for all types of aluminum products," Alcomet points out. In value terms, sales are projected to reach 230-240 million euro, an increase of one-third in annual terms, which would return the company to profit. The reasons for this are the investments made in recent years, as the plant already has a new 2,500-tonne mill, and at the end of last year a new roller mill started operating. The main goal of the company is to direct 25-30% of rolling capacity to its new US market. Earlier this year, the company also launched a new workshop for machining profiles to finished products for the automotive industry. "The new production capacity is expected to increase the share of value-added products, and hence the company's profitability and turnover," Alcomet said.
One more factory
Of particular interest among the other metallurgical companies in the sector ranking is the significant increase in staff (by 43%) of Plovdiv-basedHuss. In recent years, the company has developed from a metal trader into a manufacturer of products such as moulds, welded construction mesh, , as well as metal pipes after building a new factory in Lom. In 2017, the company bought the assets of the bankrupt Polymers chemical plant in Devnya. Although the company did not announce its plans for the site at the time, a recent investment proposal shows that it is preparing to produce hot-rolled flat products, electric-welded pipes and hollow profiles. And that will probably mean hiring even more workers in the coming years. Against the backdrop of the prevailing declines in the sector in 2020, Huss also stands out with healthy revenue growth, as well as 2.5-times higher profit.
Both successors to aluminum product manufacturer Etem Bulgaria make their debut in the ranking for 2020. After entering into a partnership with Spain-based Gestamp, the company separated the production of extruded aluminum profiles in Etem Gestamp aluminum extrusions (14th place), and the car profile business was established in Gestamp Etem Automotive Bulgaria. The latter company is not in top 15, but for 2020 it reports a turnover of nearly 55 million levs and a small profit of 263,000 levs.
Golden Record Holders
The two Bulgarian gold mining companies of Dundee Precious Metals (DPM) are record holders in terms of growth for 2020. The three-digit increase in the revenues of Dundee Precious Metals Krumovgrad is not unexpected: the company started production from the Ada Tepe mine in 2019, so 2020 was practically the first full year of operation. However, the turnover of Dundee Precious Metals Chelopech grew at a double-digit pace, and the profit of both companies increased significantly. The strong results are underpinned by increased yield and high gold prices, which are the reason for the record profitability achieved by the sector.
"2020 was both very challenging and very successful," said DPM Vice President and CEO for Bulgaria Iliya Garkov. "This was the first full year of production of the Ada Tepe mine. New technologies and methodologies were introduced at the Chelopech mine," he said, adding that the company had managed to fulfill all its plans both in production and in implementation of its projects.
Despite the difficulties induced by the pandemic last year, the group began work on setting up a pilot fund to support and encourage micro, small and medium-sized businesses in the municipalities of Chelopech, Chavdar and Zlatitsa, which will work similarly to the already established fund in Krumovgrad. "Its main goal is to support local businesses, the activities of which are independent of the mining industry," Garkov said.
Success in extraordinary circumstances
With a 5% increase in revenues, the copper mining company Assarel-Medet maintains its 7th place, while also reporting stable profit growth. "Our good results were influenced by several factors, the main ones being the price of copper on international markets and our anti-crisis management. We have optimized costs compared to the previous year. This is the indicator that we can influence with the efficiency of our work, unlike the prices of the London Metal Exchange, over which we can't have any control", commented the CEO Delcho Nikolov.
Experience with previous crises helped the company to quickly optimize processes: it introduced a new organization of work and ensured continuity of supply and production, which is critical. "We managed to stay stable and fulfill our production plan under really extraordinary circumstances," Nikolov explained.
According to Nikolov, at the beginning of the pandemic there was a sharp drop in the price of copper, and expectations at the time were that the collapse in prices would last longer. "However, the combination of several factors led to a faster-than-expected V-shaped recovery in metal prices on international markets and to record metal prices, including copper, which has become a very attractive commodity for investors. On the one hand, there was an expectation of a rapid recovery. On the other hand, the quantitative easing promoted by the major central banks to rebuild the economy had a positive impact, and last but not least, the increased demand for copper from the development of new technologies for the green economy influenced this process strongly."
Assarel-Medet's main task this year will be to successfully complete its strategic project to modernize ore preparation in the concentrate factory, in which it has invested 50 million levs. This will ensure its long-term development and provide it with an opportunity to continue efficiently processing poor ores with an average content of 0.27% copper.
The company is moderately optimistic about global processes. "After record levels at which the price of copper quickly exceeded the psychological limit of 10 thousand dollars per tonne, in recent months the market has calmed down and plateaued. Perhaps one of the reasons is that the raw material is becoming too expensive for large economies and China, for example, has started using its copper reserves in order to maintain growth," Nikolov explained.
He is convinced that demand for copper induced by the development of the green economy will continue to rise, but there will be no shortage of challenges in the coming years. "In our opinion, it is still too early to say that we have a recovery of the world economy from the crisis. The major test is how processes will develop after central banks suspend incentives and start tightening policy."