Interview with Fadi Hraibi, CEO Interpipe (Die Welt, February’19)

Interpipe is a Dnipro-based company that is among the world’s top ten producers of seamless pipes and is the third largest producer of solid rolled railway wheels. Fadi Hraibi, the company’s CEO since 2016, provided oversight on Interpipe’s historic joint venture with Vallourec, a French company and industry leader, to produce carbon seamless tubes for the European market. With this joint venture, the company has gained fresh competitive advantages, filling gaps in perception, quality management and technology. Hraibi is also overseeing the restructuring of the company’s debt and has put the company on a path to strong growth by diversifying markets and products away from Russia and establishing a strong presence in the Americas, Europe and the Middle East. Interpipe’s new facilities, a modern plant with 5 largescale art objects designed by Olafur Eliasson, reflect the new trends and philosophy of the company which, Hraibi points out, has people at its center

What have been your main priorities as CEO?

From the first day, the main priority for this company has been people, ensuring we have a team with a can-do attitude that is optimistic despite the challenges. Starting in 2008-2009 Ukraine went through a series of difficult times. The financial crisis had a big impact on the Ukrainian economy and then, when it started to recover, we had the revolution and the war. We lost two very productive regions – Crimea and parts of Donetsk and Luhansk. Donetsk and Luhansk were one of the biggest metallurgy regions in Ukraine. Therefore when I joined in the company’s people’s morale was a bit pessimistic. Year after year of turmoil had a negative impact on the company financially. We announce a standstill on our payments to creditors back in around 2015. So my biggest challenge was to make sure that people could see the future and were motivated. The results were good. The 2017 profits approximately doubled those of 2016.

Do you expect the same progress for 2018?

Not at the same proportion but we have a positive dynamic. I would say that in the second half of 2018 we reached our target capacity utilization. We expected around 500,000 tons of steel to be produced in July-December period. In 2019, we anticipate our output to be one million tons throughout the year. We want to stay at this level even though plant capacity is slightly bigger.

How has the company changed over the last years?

First of all, Interpipe underwent the process of diversification. Prior to 2012-2013, more than half of our sales were directed to Russia and what we call the Customs Union, which also includes Belarus, Kazakhstan, Armenia and Kyrgyzstan. Russia holds the majority, however. With the war we had to make a great push for the diversification both in products and markets. This company was founded to produce according to the post-soviet technical standards, so we focused on new product development as well as sales and marketing in other markets. Today, Russia has a very small portion in our portfolio, especially in pipe sales – it’s just a few percentage points. In 2017, the Customs Union accounted for some 40 percent of our wheel sales. But in 2018 this share will be around 30 percent and in 2019 it is going to plunge even more.

Such a strong diversification process requires investments and focusing on quality management. We have invested a lot in debottlenecking the railway wheel production to deliver wheels according to European standards. We also did a lot in terms of pipes. Today, Ukraine is our biggest market, which is around 25 percent of our sales. In 2016, more than half of our sales were in export markets such as the Americas, Europe and the Middle East. Within four years we’ve completely diversified so I think it’s quite an achievement. You may twig many companies in Ukraine, especially in the railway sector, were unable to diversify and went out of business. And in steel industry too. Companies that were highly dependent on the Russian or post-Soviet markets didn’t manage to adapt to new reality. I think we were forward-looking enough. For example, we built a new steel mill which is the most modern in Europe. We could have built it in a much more modest way, but the idea was to be an example for the other company’s divisions to reach the same level. For last six to eight years our total investments in new steel production, modernization of pipe and railway wheels facilities exceeded $1 billion.

Interpipe is in talks with creditors about restructuring its debts. What would you like to say about the sustainability and financial stability of this company?

Investors shouldn’t be concerned because financially we’re very stable. Yes, we have a high level of debt but we are restructuring it. That will make the structure of our balance sheet very healthy. In terms of market and overall stability of the company we are no longer tied to any single market. So if any of our markets see a downturn, it will not affect us gravely. Our diversification has mitigated risks and made us resilient. This diversification is not only geographical but also industrial. We are in the railway industry producing wheels, axles and wheelsets. We are in the energy industry with our pipes. We are also in the construction industry. Every third building in Dubai has our pipes inside of them. The airport, the metro, they’re all built using our pipes.

How important is the German market?

Germany is the biggest market in Europe, but I don’t think Germany is our top European client. I think Poland is bigger in terms of volume, but our sales in Germany hit around 25,000 tons in 2018 including mostly pipes and some railways wheels. In Germany, we sell in two ways, either as an end product or to German manufacturers who process them further. We have a small representative office in Frankfurt that can follow up with clients. We used to have a centralized sales organization for Europe which was based in Switzerland. However, after we signed the joint venture with Vallourec we no longer sell most of our pipes directly to Europe, as they go through Vallourec. We do continue to directly sell some tubular products that are not included in the scope of joint venture, and also we have direct sales for railway products.

What have been the challenges of this joint venture?

French and German production traditions and cultures are very different from what we have in Ukraine. Bridging that gap and creating trust between the two companies was the biggest challenge. We started the negotiations in 2016, and in February 2018, we officially finished. During this time people in the negotiations adapted to the changes. But expanding mutual confidence across both companies was not easy. I think we overcame this cultural gap by nearly 90 percent, but there is yet some work in front of us. Still, there are some aspects that are considered differently by my team and Vallourec one. However, fortunately Vallourec also went in with the joint venture understanding the challenge. Top-management from both companies are working together to smooth any potential differences and communicate to both sides the advantages of what we’re doing.

What are the advantages for Interpipe?

To be successful in the international markets we had to bridge multiple gaps – the technology gap, the quality management gap and the perception gap. We had to work with someone who is a leader in those three areas. Vallourec is the best of the best in terms of quality, technology and client perception.

How has this changed the perception of Interpipe?

If you looked at us 10 to 12 years ago, the perception was that Interpipe was a low-cost producer from a developing company. Nobody had expectations in terms of quality or product sophistication. The markets, as a result, were limited because no one would consider Interpipe as a product for critical applications. I think we’ve changed it a lot over those twelve years. Now we are definitely not considered to be a low-cost producer form a developing country. We are actually on par with mainstream European producers competing with them and not with pipe from countries like India, Korea or China. In the Middle East, for example, we have a big problem concerning our pipe being counterfeited by the Chinese producers. On one hand, it’s a problem. On the other hand, it is a proof that we are in a Champions league. In the pipe industry there are two leaders: Vallourec and Tenaris. We want to be perceived the same as those two companies.

The geopolitics of the steel industry has been challenging with US tariffs, EU quotas and the Russian conflict. What are your thoughts on those developments?

Indeed, it started with Russia but then the US put on 25 percent tariffs. Historically, Europe also adds 13 percent duties. Last year, there was a review and we hoped that the European Commission would make a decision to abolish the levies because of the Association Agreement and political considerations. Unfortunately, however, the European Commission still has not made a decision and the duties are in place. Starting February, we will also have quotas that will limit our volume.

There are a lot of challenges. Every country and every block is trying to limit access to its markets. Ten years ago everyone was talking about globalization, and now we see a bit of withdrawal. The steel industry, like the oil industry, is global. The majority of iron ore is located in just a few regions in the world – Ukraine, Australia, Brazil. It is better to produce steel where iron ore is located because you don’t want to move a lot of low value-added product around the world – it’s too costly, inefficient and bad for the environment. There is oil in Saudi Arabia and there is oil in Texas, and no one expects to buy oil from Ukraine for example. We have a little, but people buy it from the big suppliers. The politicians around the world are treating the steel industry in a very different way compared to the energy industry. You rarely hear of someone introducing quotas or duties on oil imports, but it’s always the case with steel. It goes back to historical reasons because in the middle of the 20th century, steel was strategic because you needed it for military, construction and so on. Now you look at developed economies, and you see that’s no longer the case. You don’t really need steel, not even for cars anymore.

In 2014, Ukraine made a decision to move West. The aspiration of Ukrainian people is to be part of the western culture, values, democracy, and economy. But we have seen western countries putting barriers on our integration. The West supports Ukraine cutting ties with Russia, but we need to build economic ties with those countries. There is a reluctance, I would say, on the political level to open the markets, to create the free flow of capital and products. At the business level, there is an openness, but people view Ukraine with caution.

Does the joint venture with Vallourec put you in a better position for new deals or partnerships with international companies?

I hope so. I think the biggest barrier is not us as a company, as Vallourec sees us as a good reliable partner, but the barrier is more so the perception of Ukraine. I think our deals with Vallourec will be the first icebreaker for European companies to enter Ukraine on a massive scale, with big investments and projects.

The most fundamental thing for successful investors is to buy low and sell high. Today, in Ukraine, assets are quite cheap and nobody doubts that Ukraine will be much more closely integrated into Europe within the next decade. Investors have a unique opportunity right now to get in on this early. Down the road, assets will be more and more expensive. Today around 99 percent of the Ukrainian population wants to go West, so we will go West. It may go slower or faster, but if you’re not a speculator and you’re a serious investor looking at the five-to-ten-year perspective now is the time to invest in Ukraine. There is no scenario in which Ukraine will change its course. You look at the political agendas and programs of everyone who is competing for the presidency, and they all want to go towards Europe, democracy and open markets.

http://ukraine.globalfdireports.com/interview/fadi-hraibi/ 
string(5) "en_US" NULL