Why did the Balli Group decide to buy BBG Alum? How does it fit within its international strategy?
As you probably know Balli Group is a very strong international trading company, particularly in steel and non-ferrous metals. The group has many interests in a number of countries all over the world. Hence it was natural that Romania, an East European country with a very strong heavy metal industry attracted Balli. This was the initial reason for being in Romania. Based on the opportunities available at the time the group took interest in a number of branches: BBG is one. Convex, the largest bulk handling port in the black see Romania (Constanta) has also been purchased by the Balli Group. In addition a bank and an insurance company in Bucharest - were formed. A telecommunications interest and a trading company were further expansions in Romania. So as you can see the group has come to Romania not just for a short-term visit and quick profits but rather, it is ready to stay and make a long-term investment to benefit itself and to also help the country.
Is BBG Alum fully owned by the Balli Group?
No. As you know under Romania's privatization laws the state keeps certain shares in different forms. In our case the Balli Group owns about 63% of BBG Alum, the remaining 26% is owned by SIF (Societate Investitii Financiare) and by some individual shareholders.
Do you have any plans to increase BBG's interest in Romania?
We concentrate mostly on what is of interest for us as part of our vertical integration program in the aluminum industry in Romania. We are of course trying to see how we can integrate BBG as a producer of alumina with ALRO Slatina, the local smelter. In fact, the Balli Group obtained the first right of refusal for the purchase of ALRO, right after purchasing BBG in 1996. This privatization was to take place 3 months later. The strategy was clear that without ALRO, BBG was a risky investment. Now almost four years later the government still is not ready to privatize ALRO. Should the privatization of ALRO go ahead this year we would pursue the acquisition. At the same time we are trying to buy 10 percent of ALRO's shares through other channels. This acquisition will give us a board seat in ALRO.
One of the most spectacular changes of the company has been the export orientation given to BBG Alum. Could you tell us what countries do you import bauxite from and what countries do you export alumina to?
BBG ensures its bauxite supply by long term contracts and also from mines that we operate.
Regarding exports, for the first time we have signed fixed price contracts with two major trading companies, important players in the aluminum market. We are supplying each of these two groups with 10.000 tons of alumina per month. These contracts encompass a period of 15 months, starting October 1999 and finalizing at the end of the year 2000. All our exports go through a small port in Tulcea, presently under privatization. We are going to purchase that port as soon as the documentations is presented, scheduled for March-April 2000.
You just mentioned you have dramatically increased your production destined for exports...
50% of our production goes for export. We will hopefully increase production by another 100,000 tons this year. All of this will be exported. The ratio of shipment will swing to 60% for exports and 40% for the local market.
It seems that after a long time dormant, (BBG Alum is 27 years old), BBG has suddenly woken up and efficiency has taken over in a very short time. What is the secret of your success?
Investment always plays a role for success. But as we all know you can invest all the money you want without results. Romania has a very efficient skilled workforce, but two things are lacking: western style management, and the creation of the right environment in the organization. People have to learn that at work place there is one common objective that is defined by the organization. Unless all are in intensive interactive communication with each other's, both vertically and horizontally in pursuing the common objective, the aim will not be achieved. Even if each individual has the best skills, if there is no interactive communication, it will not work. We have to learn the concept of teamwork in a culture adaptable to the Romanian cultural background. We in BBG have started this transformation, which is the biggest challenge for Romania and for any company that wants to operate in Romania.
Pouring money alone into a country does not resolve any problem. Unless you create the human infrastructure, the right organization and right management and motivated people, you cannot successfully help the economies of the host country. Money injection alone will only increase the debts of those nations without any result. Romania needs to train more people and to educate them differently. The foreign companies that come here must bring the management and financial skills with them until the Romanian counterparts can carry it out by themselves.
Lately there has been a large increase in the alumina prices in the international market. Why is that so, how are you to benefiting from it and are you part of that international price scheme?
To start with the last partwe are not part of the international price scheme. We are too small to play a role in shaping the market. We are rather the victims of the policies and manipulations the big players that can afford to make. However, every factory on an individual level has a certain relative advantage, which it can utilize to profit from. Tulcea has an excellent strategic position in terms of its closeness to the Danube River, and its proximity to the largest ports in the Black Sea. This means that we have a transportation infrastructure by sea, and for this particular industry today it is the only way. Based on this we can certainly increase our market share. Looking into specialized chemical alumina and diversifying our production is another way of taking advantage of our small size and proximity to industrial European countries.
The price increase trend started in early 1999, when a large refinery in the USA (the Gramercy plant) went out of production. The delay in commissioning the Worsley plant in Australia, that was due for operations early 2000, has been other reason for creating a shortage in the world market. These two elements hand in hand with the increasing demand for metal, brought about a shortage of alumina in the market that led to a substantial price increase.
Predictions for the future are always difficult because there are so many factors. According to the specialists, the spot prices for this year will be reducing in the third quarter of the year 2000. For the next year predictions are more difficult. Forecasters say that the prices will remain fairly high. The expansion of Worsley will come on line but all this alumina is spoken for by the new MOSAL smelter and the Gramercy plant will produce only some 850'000 ton per year. | As far as BBG Alum is concerned we will be able to have new contracts for the years 2001 and 2002 at reasonably good prices.
You are starting a joint venture in order to produce specialized alumina. What niche are you trying to get into in order to be able to compete with the large players?
Specialized alumina is a type of product that is used by specialized industries, and since our products are very specific the market is prepared to pay a higher price for a very well defined specification of alumina. Specialized alumina is fetching prices of US$ 200-300/MT more than alumina. Paradoxically production costs are not much higher. It makes perfect economical sense to do it if you can and if you have the market. We found a partner who has the market, who wants to expand and to replace his supplier. We have been its choice because of a number of reasons. The merit of this joint venture is that here we have the infrastructure, skilled labor and a strategic location for transportation. What our partner provides is a niche market, know-how and, of course, cash for new investments. With this combination we will create a new joint venture. Our joint venture will make three new groups of products that will be sold mostly on the American markets and in other markets where our partner has been successfully selling its products for more than 20 years.
Do you have any plans for doing such strategic alliances with European companies?
This decision is based on what our partners can offer. The best partner is always our choice. We could have similar ideas with European bauxite mines. We may also do some joint ventures in the future in order to sell our products at a higher price.
What are your plans for the future?
All the plans I have exposed to you today are strategic ones and will be implemented by the end of 2000. The next phase will be to make a feasibility study of whether it would be viable to produce 800.000 tons/year. If it proves to be affirmative, that will be our next step. Of course, we will improve production costs, the management, and we will reduce waste through a better use of the plant and an optimization of the process.
What final message would you like to convey to our readers?
Companies come here and struggle to make things happen. It is in the nature of an investor to be entrepreneurial, and an entrepreneur endeavors to make something happen in any environment. However, the more the environment provides the background and favors that endeavor, the better that project can flourish.
In most countries with problems to attract foreign investors, one of the main barriers is the banking industry. Romania is no exception. It is not sufficient to just privatize banks. You need to reactivate and reeducate the banking community because traditionally in this country bankers sit back waiting for orders or just simply favor friends. This is not how business can flourish. You have to adopt the American attitude where bank managers go out to chase customers and encourage them to work with their bank. Unless a country manages to have progressive banks with individuals who understand banking and who are able to think and make decisions, there is little hope that the general economy can revive. If you do not have that, not even hundreds of investors are sufficient to move the economy of a country forward. You need to move the individuals towards entrepreneurial small and medium size projects. This is where the strength of the economy of a country is made. This can only be done through a better banking industry. The more this fabric is shaped in a constructive way the more attraction for investment will be. Besides a progressive banking industry protects the country's benefits, because a good banker prevents the entrance of businesses that would turn out to be a disaster. Their contribution encourages investors to engage in new projects.
Secondly the laws and regulations governing the business are important. Romania has started a number of measures to address this issue. For instance, the Government has reduced VAT from 22% to 19%. However, it is not only the amount of VAT that you impose, but also how you handle it. Today VAT is levied from purchases as well as from sales. Reconciling VAT is open and at the discretion of the authorities. For a company with a huge import-export profile like ours, it means large sums of extra cash, which could be saved.
The cost of utilities such as electricity and rail transport must also be addressed. In this country there is a comprehensive railway network but it is underutilized, the rates are too high, and all together it discourages potential customers to use it. When I approached the railroad authority CFR and suggested that if they gave me a better rate I would move 1 million tons by rail, they answered back that they would give me a 10% rebate. Rates must be competitive with road transportation. If railways cannot be competitive by land, then they do not stand a chance since I can move my material cheaper by truck.
Electricity is for an industry such ours a major cost. It is not fair to ask a strategic industry to pay the same price as other small consumers. If the Government wishes to keep Romania's strategic industries competitive it must either provide special tariffs for strategic industries or open up competition. You cannot restrict us within the Romanian borders and then have full power to dictate us the prices. So either they allow us to shop around or they have to provide us with competitive rates. You have to liberalize utilities in order to make strategic industries survive.
Labor and Unions are also an issue, not a difficult one because Romanians are generally peaceful people but still, this is an issue that requires attention. Recently there have been a number of strikes, including a rail workers and teachers strike. Strikes are not a good example for any country. The Government should think and come up with alternative plans. If CFR wants to go on strike, as it did, they should bring in the army to take over and supply the strategic industries. We just simply cannot afford to be paralyzed and lose millions of dollars due to a problem that is not ours.
Thus my final advise to investors/entrepreneurs that want to come to Romania is not only to focus on the project itself but actively force the industrial and governmental environment to adapt to make the investment (and the country) successful.
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