According to the latest short-term forecast published by the International Iron & Steel Institute (IISI) on 11.10.2001, in 2001 global consumption of finished steel products would drop to 613 million tonnes, as compared to 628 million tonnes reported in 2

Актуальная тема

GLOBAL MARKET FOR ROLLED STEEL CHANGES RULES OF PLAY

Vladimir PIKOVSKIY, Alexey SHAPOVAL, experts with DerzhZovnishInform

According to the latest short-term forecast published by
the International Iron & Steel Institute (IISI) on 11.10.2001, in 2001 global
consumption of finished steel products would drop to 613 million tonnes, as compared to
628 million tonnes reported in 2000. At the same time, such forecast disregarded China,
which gradually turned into a key player on steel market and started to seriously affect
the global pattern of steel consumption. In 2001, China is likely to boost steel
consumption to 160 million tonnes against 141 million tonnes registered in 2000 (+13.3%).
In such case, global consumption of steel would total some 773 million tonnes.

As regards the year 2002, experts forecasted that global
demand for steel would grow by 2.6% to 799 million tonnes (while China would account for
some 170 million tonnes of steel). At present, such forecast is regarded as quite
optimistic since no attention had been paid to growing recession of the US economy,
ubiquitous deceleration of economic growth reported by developed countries, and global
impact of events that struck the USA on September 11.

Today, anti-terror operation initiated by the USA in
Afghanistan still has a chance to grow into a full-scale military conflict to flare up by
the end of 2001. This situation brought in negative implications for global insurance
market and greatly affected the cost of contract insurance. So far, incremented cost of
insurance against military risks and compulsory insurance against terrorism spurred the
cost of air transportation. What is more, experts believe that cost of contract insurance
would see further augmentation spurred by ruthless statistical data and further course of
events. By all means, mentioned processes would also have an impact upon Ukrainian
exporters.

Negative implications for Ukrainian exports can be brightly
illustrated with the following notion: Iraq is going to discontinue its imports of
Ukrainian-made rebars in the nearest future. To compare, in 2001 Iraq-bound supplies of
rebars compensated general narrowing of foreign markets for Ukrainian commodities and
ensured stable augmentation of Ukrainian exports (to add, in the first six months of 2000
Iraq consumed some 830,000 tonnes of Ukrainian-made rebars). At present, forecasted
setback of Iraq’s imports would be stipulated by grown prices for rebars since
transportation companies were compelled to increase their tariffs by 20-25% trying to
compensate borne insurance against military risks. Besides, Iraq introduced new quality
standards that denied access to Iraq’s market for inappropriate types of rebars. As a
result, Iraq’s demand for foreign rebars is likely to drop by 30-50%. Despite its
present consumption of rebars totals 250,000 tonnes per month, experts insist that Iraq
has already managed to stockpile significant quantities of such commodity. What is more,
Iraq could have also accumulated strategic reserves of reinforcing steel to withstand
possible broadening of military conflict, which would curtail its import of reinforcing
steel as well.

Thus, escalation of international tension leads to negative
consequences since Ukrainian exporters may be unable to take advantage of new niches
suddenly appeared on global markets (recently accomplished program for residential
construction in Philippines, for instance) while traditional markets for Ukrainian
commodities can be importunately curbed (Iraq’s imports of rebars).

In other words, global market for steel showed first signs
of instability, and even short-term forecasting encounters severe obstacles. In such
circumstances, significance of natural market regulators features stable downward tendency
while major heed should be given to new market instruments able to sensibly regulate
global market for steel. This notion has little to do with current international tension
evoked by the beginning of military actions since even prior to these events regulating of
global steel market has been repeatedly put to discussion. Counting on stable
international relations, global steel community interlaced individual protection of
domestic markets with attempts aimed at increased predictability and controllability of
global market and avoidance of overproduction crisis.

What approaches have been currently proposed to regulate
global market for steel? At present, there are several such approaches differing in degree
of market’s self-organization, intentions of major market players, and time needed for
formation of market regulators. In other words, the situation is as follows.

Approach No.1

Liquidation of excessive capacities

Closer familiarization with the history of financial crises
happened in the past several decades shows that almost all such crises occurred in
countries lying on the periphery of global economy. What is more, further development of
such crises led to strengthening of central financial institutions in affected countries.
At the same time, developed countries always avoided significant losses due to profound
mechanism of market regulation and sufficient experience of its implementation. Today,
global overproduction accompanied with stagnation of regional markets, and vague
perspectives of steel industry in many countries worldwide seem to compel developed
countries to apply their successful experience of centralized financial regulation to
global market for steel.

The USA turned into a key player in this sphere that
initiated the talks on such regulation and then took control over its accomplishing. For
the most part, the so-called �steel initiatives’ proposed by the two latter Presidents
of the USA made provision for privileged position of the US steel industry on domestic
market. Paris meeting in September 2001 demonstrated that many developed countries
advocate such control over steel production since inexpensive import supplies assail their
markets as well. On the contrary, some other countries (South Korea and several EU
countries, for instance) opposed certain proposals related to curtailment of productive
capacities. Being fully aware of the fact that the US proposals have every prospect of
success, the latter countries are still trying to maneuver but sooner or later they would
certainly adhere to the US position. Russia – as well as Ukraine – seems to have chosen
such approach as well.

Pursuant to decisions of the meeting devoted to global
steel market, all participating countries would have to determine their position towards
their own steel industry and existing productive capacities, and present their point of
view on the second session to be held on December 17-18, 2001. At the same time, the US
representatives do their best to stimulate the process of excessive capacities’
detection. In the late-October 2001, the US deputy Minister of Trade in the issues of
import F. Shirzahd visited Ukraine. He informed Ukraine’s governmental authorities that
the US government embarked on additional collection of data to be presented by domestic
metallurgical enterprises and dealing with their productive capacities, manufacturing
output, and business-plans. In turn, Ukraine informed its US counterparts on measures
aimed at restructuring of domestic steel industry, which had been initiated by Ukrainian
government in 1991. In the past ten years, productive capacities of iron-making
enterprises dropped by 9.4%, steel-making capacities were reduced by 12.3% while
productive capacities of enterprises engaged in production of rolled steel shrank by 3.3%.
In the first ten days of December 2001, Ukraine and the USA would negotiate on liquidation
of excessive capacities possessed by Ukrainian metallurgical enterprises (in a European
country not specified yet) while final decision to the point would be made on special
meeting to be arranged in mid-December 2001.

So, what are the perspectives of directory and centralized
regulation of steel output? In our opinion, such regulation would never be successful
unless its participants possess such quality as altruism. At the same time, liquidation of
�excessive’ capacities would be accompanied with partial confinement of leading steel
producers to their own markets. By now, tendency towards closure of certain consolidated
markets (EU, USA) via introduction of quotas and duties became quite apparent. Major
obstacle hampering the accomplishment of such approach relates to the following notion:
almost all largest producers of steel would have to acknowledge the existence of �excessive’
capacities and give consent to their liquidation. However, definition of the term �excessive
capacities’ and proportions of their curtailment have not been elaborated yet. Along
with this, such approach would also bring in some positive implications including
inventory of global steel industry (made for the first time ever) and more clear
comprehension of interdependencies existed on global market for steel.

Unfortunately, the USA proposed to consider such term as
�ineffective and obsolete’ capacities as an attribute of �excessive’ capacities
described previously. As a result, the USA seems to recoup its possible losses at the
expense of technologically underdeveloped countries (including Ukraine, which also
contributes a lot to global steel output). At the same time, it should be noted that the
USA also possessed sufficient amounts of such �excessive’ capacities. Thus, due to
unwillingness of developed countries to curtail their �high-tech’ steel-producing
capacities, and position of minor steel producers (which suspect that developed countries
play false), such process would definitely reach a deadlock.

In such circumstances, talks on liquidation of excessive
capacities may be transformed into political pressure exerted on some of their
participants (no doubt, Ukraine would be among such countries as well as South Korea, and
Taiwan). Besides, temporary failure of measures initiated by the USA in summer 2000 to
introduce total protection of domestic market (such measures were reanimated in summer
2001) would compel it to intensify its protectionist policy, which can lead to crisis in
the framework of WTO. Thus, introduction of centralized control over global market for
steel is quite improbable.

Should even such decision be made, it would never be put
into practice since mentioned centralized control runs counter to natural desire of an
average consumer willing to purchase high-quality commodities at lower prices. In such
conditions, exporting countries would have a chance to fully demonstrate their creativity
and quick wit. World media has already published reports on smuggling and fraud on the US
steel market committed to avoid high customs duty. Benefiting from customs’ inability to
thoroughly examine steel flows (and check conformity of such commodity’s chemical
content and characteristics with attendant documentation), separate importers change their
commodities’ name and country of origin while large corporations insignificantly alter
chemical content of supplied steel to transfer it to the category with lower customs duty.
No doubt, such practice can gain in a worldwide popularity.

Attempted introduction of centralized control over global
steel output would bring tragic consequences for Ukraine. Ukraine’s dependence on export
revenues stipulated continuous augmentation of manufacturing output and boosted export
supplies of metal products. As a result, Ukraine laudably became world’s seventh largest
producer of steel. At the same time, foreign markets are currently shrinking (due to
introduced quotas and duties) while appearance of new spontaneous niches (Iraq, for
instance) is improbable. In such circumstances, Ukraine would have to maintain
negotiations on centralized regulation of global steel market proposed by the USA. Sooner
or later, such negotiations would lead to curtailment of its productive capacities.
Naturally, Ukraine would liquidate non-maintainable enterprises at first but lack of funds
needed to modernize other metallurgical enterprises would lead to their closure as well.
Besides, the USA would greatly benefit from suspension of economic experiment in Ukrainian
metallurgy. Such experiment has been repeatedly criticized for excessive attraction of
subsidies though in reality, such critics fell short of reality.

Approach No.2

Globalization of steel output

In the recent years, regulation of global steel flows is
also accomplished via �natural and evolutionary’ establishing of giant multinational
corporations. However, it should be noted that 80% of announced mergers has never been
realized since their participants were startled of future difficulties accompanying
formation of unified corporate culture. As regards global steel industry (bearing a burden
of overproduction and excessive capacities), experts believe that such consolidation is a
quite positive phenomenon while control over steel output exercised by several companies
is much better than independent existence of numerous market players.

It is worth mentioning that similar tendencies were typical
for global aluminum market, when aluminum prices featured abrupt upswing caused by certain
objective and subjective factors. Since then, �aluminum crisis’ has been successfully
settled, and vast damping capacities of newly established super-companies played crucial
role in such process. It should be noted that global tendency towards establishing of
giant companies has been followed by consolidation of Russia’s aluminum industry. At
present, Russia embarked on creation of large-scale integrated companies able to take
dense control over domestic market for steel.

In 2001, the US companies expressed growing interest in
mergers with their European counterparts. Apparently, the USA realized that any delay
could throw it overboard of inner corporate consolidation being under way in Europe. In
November 2000, the US Steel company merged with Slovakian steel-producing company VSZ,
which became the first operation of the US investors on European market for steel for the
past ten years. Such merger incremented productive capacity of US Steel by 35% while total
capacity of newly established giant (US Steel Kosice) amounted to 4 million tonnes of
rolled metal products. Forthcoming modernization would transform this company into the
largest supplier of food-canning enterprises located in Central Europe. What is more, in
several years US Steel Kosice would stand on a par with largest German and Austrian
producers of steel sheets and plates.

Czech Republic demonstrated keen interest to processes
taking place in neighboring Slovakia. In particular, Czech Republic is likely to approve
the merger of domestic metallurgical works (located in the city of Nova Gora) with the US
company USX although the latter company had not announced its plans yet. Besides, Czech
Republic debated about merger of its three largest steel-producing enterprises (total
productive capacity of such amalgamation would amount to 6 million tonnes of metal
products per year). Such restructuring would also comply with requirements of European
Commission since in such case, possible curtailment of productive capacities would exceed
850,000 tonnes. At the same time, its adversaries claim that such merger would be unable
to solve long-existing problems of Czech steel industry while possible sharing of
state-owned interest and its consequent sale to reliable strategic partners would bring in
more optimistic results.

In the end of 2001, Europe will see a merger of its three
largest steel-producing enterprises, stipulated by global slackening of steel prices and
their need in more sound participation in global trade (European Commission is likely to
approve such confluence in the beginning of December). In particular, Usinor company
(France) holds the leadership in production of flat-rolled steel among EU countries and
spread its influence over Belgium, Germany, Italy, Spain, and the USA. Arbed company
(Luxembourg) has also established its subsidiaries in the mentioned countries and
currently specializes in production of long-length rolled steel (including construction
steel as well). Aceralia company (Spain) became the leading steel producer on domestic
market, and also familiarized itself with the whole assortment of rolled products
manufactured by Usinor and Arbed. As a result, tripartite merger would give birth to world’s
largest supplier of steel with its annual productive capacities totaling 40-46 million
tonnes, possible sales amounting to EUR 30 billion, and total quantity of employees being
equal 110,000 individuals). As regards manufacturing output, this amalgamation would
outpace such steel-producing giants as Posco (South Korea) and Nippon Steel (Japan). Thus,
newly establishing company (temporarily called NewCo) would dominate the markets for
flat-rolled steel (including coated automobile steel) and long-length rolled steel (needed
for construction activity and railways’ maintenance). Besides, its productive capacities
would be three times higher than capacities of its powerful European rivals, namely
Thyssen-Krupp (Germany) and Corus Group (Britain-Netherlands). Although NewCo does not
intend to increase its market share in other geographic regions (Asian market, for
instance), these three companies would be able to dominate steel markets of certain
European countries accounting for 70% of their steel output. Experts believe that further
rationalization of this company would lower the load of its capacities and boost its
savings to EUR 300 million by the year 2003 and EUR 700 million by the year 2006. Besides,
such merger would lead to globalization of automobile industry being its largest consumer.

In April 2000, Japanese companies NKK and Kawasaki Steel
(the second and the third largest producers of steel in Japan) announced their plans to
establish unified holding in the next 18 months (such merger would be accompanied with
simultaneous confluence of banks being in charge of their commercial activity).
Previously, to save their money mentioned companies had already participated in joint
activities related to logistics, repair works, maintenance of warehouses, and introduction
of technologies. In such circumstances, final merging would greatly lower their production
and employment expenditures (by now, these two corporations employed 69,000 individuals).
Experts believe that such amalgamation would demonstrate the benefits of rationalization
to Japanese companies (generally known for their aversion to such transformations) and
would help them to withstand further augmentation of production expenses and reduction of
steel prices. Simultaneously, NKK carried on negotiations with German giant Thyssen Krupp
to strengthen their alliance in production of automobile steel. As a result, this merging
would give birth to world’s third largest amalgamation of steel producers with annual
output of crude steel being equal 33 million tonnes. Besides, such confluence had no
analogues since 1970, when Nippon Steel had been established. In turn, Nippon Steel formed
strategic union with Usinor, purchased an insignificant interest in Posco (South Korea),
and thought over possible cooperation with Baoshan Steel company (China).

Metal trade is notable for similar tendencies. Trading
houses Marubeni and Itochu decided to join their steel-trading branches, which would
result in appearance of the second largest metal trader on Japanese market. Such
amalgamation should increment their competitiveness and boost sales volumes. According to
forecasts, their revenues would exceed USD 80 million by the year 2006. However, first
merging of metal-trading companies in Japan had been accomplished by their largest rivals,
namely Mitsubishi and Nissho Iwai, which joined their efforts on steel market and
established the largest metal-trading company in Japan. As a result, such metal-trading
giants as Mitsui and Sumitomo became only the third and the fourth largest traders on
Japanese market.

Smaller steel markets are also notable for merging of
steel-producing companies (especially those burdened with debts). In 2000, Thailand
reported a confluence of its four steel producers into the unified Millenium Steel
company. Another merger would embrace such companies as NTS Group and Siam Cement, which
would lead to appearance of the largest steel-producing group in Thailand (forthcoming
restructuring of their indebtedness would increase productive capacity of newly
established amalgamation to 1.5 million tonnes of steel per year). To compare, annual
capacity of Thailand’s steel market totals 7 million tonnes. Previously, productive
capacities of mentioned enterprises were loaded by 30-40% while successfully accomplished
merging would boost their load to 50-60% and considerably lower manufacturing
expenditures. Administration of these companies insisted that Thailand would not advance
its construction industry in the near future. Therefore, strategic plans of such
amalgamation would relate to diversification of its activity, i.e. rearrangement of its
capacities would allow production of billets, long-length rolled steel, and wire rod made
of high-carbon steel. To accomplish technological updating, new company would seek for
strategic foreign partners (cost of planned modernization would exceed USD 10 million).
After that, it would likely to enter new steel markets.

Merger of steel-producing companies may have nothing in
common with direct obtaining of commercial benefits. Russian Steel (Russkaya Stahl)
consortium, for instance, has been established by Novolipetsk and Nizhniy Tagil
Metallurgical Works to lobby their interests in governmental institutions, analyze and
forecast further development of Russia’s ferrous metallurgy, and contribute to civilized
evolution of Russian market. Besides, they would back each other on European and US
markets, and on domestic market. To add, establishing of this consortium demonstrated the
end of confrontation caused by proprietary redistribution in Russia and proclaimed the
epoch of cooperation.

In other words, global steel industry recently featured
distinct tendency towards consolidation. The US and German economies endure hard times
while their investment banks frequently propose new schemes to merge the companies being
on the verge of bankruptcy. Although such point of view has never been discussed in
public, it seems possible to lower tension on global steel market in case giant
steel-producing companies are allowed to regulate regional markets and take control over
distributing processes. Unfortunately, the choice of such markets is quite narrow and
includes only EU countries, the USA, and probably Russia.

As it has been described above, consolidation trends in
Europe are currently under way though the USA is unlikely to accept this approach. At
present, the US market embraces significant quantity of small-scale and large-scale
companies, which had long ago determined their market share and would reluctantly respond
to any changes on domestic market. Another obstacle hampering such consolidation
(sometimes perceived as a major hindrance to this process) relates to exorbitant and
burdensome obligations of the US companies in the sphere of social maintenance of their
numerous pensioners (to some extent, such obligations stipulate high prices for steel on
domestic market). Thus, being the center of global economy and policy, the USA turned to
centralized control over global steel market.

Positive implications of the second approach (integration
model) relate to the fact that such mergers would immediately curtail transaction costs,
increase mobility of modernization funds, and rationalize the assortment of produced
commodities. Maintaining strong ties with service centers, giant companies would be able
to take control over commodity flows and thus regulate pricing policy. Regulating
manufacturing output and prices on regional markets, new corporations would confine steel
production to domestic markets and divert previously imported steel to other (open)
markets. In such case, the problem of excessive capacities’ liquidation would be
naturally settled at the expense of bankrupted producers, which would lose their market
share (it goes without saying that Ukrainian enterprises would be among the first such
bankrupts). Fortunately, such process is quite slow, and steel-producing companies located
in the Third World have a good chance to adjust to new conditions. On the whole, Ukraine’s
steel industry possesses vast potential for consolidation and establishing of integrated
steel-producing companies. In our opinion, such approach may help Ukraine to overcome the
deadlock impending in the nearest future.

Approach No. 3

Elements of exchange trade

It is common knowledge that steel prices are subject to
comparatively strong fluctuations embracing short periods of stability and long periods of
changing. Thus, it would be a natural desire of consumers to seal forward contracts for
steel in the framework of certain regulating authority (similar to London Metal Exchange,
for instance). In such case, correct forecasting would be able to indemnify concluded
contracts from abrupt price fluctuations. Hitherto, such institution has never been
established, which was mainly stipulated by great variety of steel grades, broad
assortment of steel products, predominance of �immediate’ contracts, insignificant
quantity of long-term and bulky contracts, and absence of an association embracing steel
producers and suppliers and able to initiate the establishing of mentioned exchange.

Indisputable advantages of exchange trade consist in
possible conclusion of long-term and forward contracts, and day-to-day indication of
prices existed on free market (since forward contracts are based on forecasting while spot
contracts take into account current economic situation on global and regional markets).
Besides, exchange trade almost fully corresponds to the so-called �free’ model of
trade, and global steel market is likely to adjoin such model in future. At the same time,
absence of such exchange and a strong need in its functioning led to situation when
exchange trade on steel market had been assumed by a single US company Enron (though
notable for its vast financial resources).

Enron was established in 1985. Currently, Enron holds the
leadership on the markets for electric power and gas, trades in ferrous metals, steel and
some other commodities, and maintains powerful Internet portal Business to Business
designed for real-time trade. In the end of October 2001, its trade in metal products
reached the high of 2.36 million tonnes compared to 969,000 tonnes registered in 2000. At
the same time, steel trade grew to 650,000 tonnes while in 2000 Enron did not trade in
steel at all. In 2000, revenues of the company amounted to USD 101 billion (while its
assets equaled USD 67 billion). Today, Enron operates in more than 40 countries worldwide
and employs 20,000 individuals. According to the estimates with Fortune magazine, for the
six years in succession Enron remained the most innovative company in the USA.

Arranging new form of trade, Enron proceeded from the
assumption that global steel market is the second largest market worldwide (giving way to
oil market only) although it is insignificantly transparent, operates with scarce variety
of financial products and lacks forward contracts. At the same time, statistical data
covering the past two-three years show that steel prices are subject to severer
fluctuations, as compared to prices for other commodities. However, only a few people
understand that currency regulation is quite insufficient to fully protect steel market
while long-term contracts concluded by large corporations for steel sheets and plates, and
long-length steel also contribute to this end.

Enron proposed to introduce unified contracts for both
physical and financial trade in steel. Forward contracts were supposed to have unified
price base for all types of steel products. Availability of standardized contracts and
commonly accepted index would enable the establishing of equity market. Thus, Enron used
such instruments to introduce the elements of exchange trade on global market for steel.

Taking into account that greatest variety of finished
products is currently manufactured from HR steel coil, this commodity had been initially
taken in the capacity of commodity index (parameters of commodity index stipulate prices
for derivative products). Subsequently, another commodity index has been introduced on the
basis of CR steel coil while presently, some other commodities try on such capacity as
well. Such situation is quite similar to situation on oil market, which embraces hundreds
grades of oil although price formation there depends on two reference grades WTI and
Brent. Thus, experts with Enron claim that price indices for steel had been established
long ago while Enron’s innovation relates only to their utilization.

Enron utilizes mentioned contracts and indices for physical
trade in steel on the US market although its administration believes that financial trade
in steel would give more promising results while dollar exchange rate in such financial
trade would be incommensurably higher. This notion has been confirmed by Enron’s
experience on the US market (volumes of Enron’s financial trade in steel exceeded
physical trade in this commodity three-four times).

In Europe, Enron planned to start with physical trade in
steel to familiarize itself with peculiarities of European market (business, logistics,
and price formation) while introduction of financial trade in steel was scheduled for the
end of 2001. Generally speaking, potential European market for financial transactions is
notable for its significant capacity since European producers are quite experienced in
risk insurance though they confined themselves to exceptional utilization of currency and
tariff instruments. Besides, representatives of European automobile industry (which gained
in noteworthy significance for European market) unanimously admit that current
transactions go hand in hand with high risks. In such circumstances, no insurance would be
inflicted upon steel trade accomplished by large-scale and medium-scale companies. At the
same time, correlation between risks and insurance cost shows that 10-25% of steel trade
should be insured anyway.

In the end of October 2001, experts with Enron believed
that final delineation of their ideas related to steel business would require
approximately six months. Enron planned to conduct negotiations with more than a hundred
companies including largest producers of steel semis and finished products, independent
service and processing centers, and producers of equipment. Along with this, meetings with
representatives of banking circles (especially those granting credits for industrial
development) would be accomplished to create new structure for risk management.

As regards physical trade in steel, Enron is a large-scale
metal trader and thus does not try to reduce its business activity only to quick sales and
purchases. This company used to accumulate significant reserves of steel via optimization
of import and export contracts within single market since it is certain that such activity
would greatly enhance its power on the market for finished products (in such case, Enron
would buy steel at free prices, sell it at fixed prices and benefit from their spread). At
the same time, such activity lies beyond the power of average metal traders, and Enron is
compelled to attract its revenues obtained from trade in gas and electric power. Besides,
the company is seeking for new solutions as well. To add, certain bargains that promise
insignificant revenues may appear much more profitable in case they purchase a right to
accomplish a tolling contract.

To prevent negative implications caused by abrupt
fluctuations of spot prices, Enron decided to bring together existed manufacturing
programs and orders via purchase of shares, real property, and long-term contracts
belonging to the US steel producers. Steel department with Enron insisted that producers
would greatly benefit from long-term contracts since Enron would ensure stable purchase of
steel at basic or floating prices and protect them from any market disasters. At the same
time, steel producers expressed their discontent with such approach pointing at the fact
that only �real’ prices would contribute to strengthening of steel market while
insurance against price fluctuations is a nonsense since basic level of such prices
(USD/tonne 200, for instance) is quite insignificant. On the contrary, producers need
stable prices so that most effective enterprises could obtain sufficient revenues and
invest earned money in new technologies and equipment. Thus, producers seem to take no
care of steel consumers, which actually stipulate their existence. At the same time, in
such circumstances service centers would obtain immediate profits. To protect their
business, steel distributors accumulate vat reserves of steel, which requires credits,
cash, and available warehouses. To compare, Enron proposed the same market protection not
burdened with mentioned bustle. It seems that Enron decided to persuade market operators
that such trade is quite profitable (in such case, Enron would get financial profits
acting as intermediary for market transactions). Should Enron succeed in such activity, it
would turn into world’s first steel exchange.

In addition to service centers established previously, in
the first ten days of October 2001 Enron launched its first steel depot located near
Chicago and engaged in JIT (just-in-time) supplying of steel. Such steel depot can be
considered as a test ground for further proliferation of steel trade in three regions of
the USA, and its consequent transition to European market. Experts calculated that there
are 243 potential buyers of steel within a radius of 200 miles from Chicago. Companies
located in a radius of 50 miles from Chicago (more than 120 enterprises) may purchase
steel products at fixed prices while other companies would have to make additional payment
for transportation. At the same time, such servicing is quite profitable for all mentioned
enterprises since they do not pay for warehouse, curtail the term of banking credits and
enjoy greater controllability over concluded contracts.

Steel depot consists of three terminals while initial
reserves of steel totaled 20,000 tonnes of HR steel coil and 10,000 tonnes of CR steel
sheets and plates. In a week’s term, reserves of HR steel coil were augmented to 30,000
tonnes. Organizers claim that reliable sources of metal led to creation of spot market in
Chicago and also overcame �structural deficiency’ of this region. At present,
stability of prices set by steel depot for its products enjoys a 48-hour guarantee, and
does not depend on market trends towards deficiency or excessiveness, which had never been
achieved before.

Traders with Enron insist that consumers are able to
purchase both domestic and foreign high-quality steel at lowest prices there. So far, it
is quite difficult to estimate possible implications of such approach for the US steel
market although attempted establishing of reliable steel exchange can fundamentally change
steel business in future. The second steel depot would be launched in Houston and would
mostly deal with imported steel though such activity may interfere with governmental plans
aimed at full abridgement of import supplies. Enron did not vote for article 201
considering that such limitation should be approved by producers themselves. Specialists
with Enron are sure that market solutions can bring the most promising results for its
business activity while non-market methods is an appropriate tool for defending against
non-market forces.

Mentioned example demonstrated the intentions of
experienced metal-trading company with vast financial resources, which attempted to
introduce new modes of operation on steel market. Unfortunately, its plans will never be
accomplished since in the end of October 2001, Enron fell under investigation initiated by
the US Financial Commission (immediately after interviews made by Enron’s administration
and published by major journals dealing with metallurgy). Enron is charged with distortion
of financial accounting. What is more, one of its competitors (being five times smaller)
thought over possible purchase of Enron’s assets. In such circumstances, Enron’s
perspectives on steel market remain quite gloomy while the company itself can be
liquidated or reorganized.

So, does this approach have any perspectives in general?
Despite current failure suffered by Enron, it managed to make its presence felt and in our
opinion, such idea would not disappear in vain. However, its further advancing greatly
depends on benevolence to be expressed by major players on global market for steel. Along
with this, its promoters would have to withstand the stereotypes related to �protection
of domestic market’ (not without reason, Enron’s position during special conference
arranged by the US service centers in May 2001 gave rise to strong distrust and
irritation). Besides, consequent self-organization of global market for steel would cause
mass collapse of steel-producing companies. Thus, forthcoming establishing of global
exchange trade in steel is quite improbable. At the same time, first step towards such
changes can be accomplished via setting of index prices for steel (on the basis of certain
selected commodities) and financial servicing of price risks at the expense of separate
powerful corporations.

Conclusion

So, further regulating of global market for steel can be
accomplished via three different approaches. What will be the final model?

In our opinion, such regulating would be based upon
completely new relations and would maximally take into account the interests of ultimate
consumers since all necessary prerequisites for such transformation have already been
created.

The process of globalization laid foundation for closer and
more effective interaction of those branches of global economy, which previously were
isolated geographically or technologically. At present, there are no more obstacles
hampering information exchanges, financial flows would feature such freedom in the nearest
future while material and power exchanges would be next in turn. Besides, global market
gradually turns into a medium, which calls to life such quality of multi-behavioral
systems (including commodity markets) as self-organization (to add, pace of such
transformation features constant incrementing). Should global market be involved in
broadening military conflict in the following months, steel markets of large countries and
their amalgamations would function in regime of self-provision. Operations on regional
markets would be associated with high risks, which would spur global prices for steel and
curtail global trade in this commodity. In such circumstances, every exporting country
(including Ukraine) would independently define the volumes of its export supplies. At the
same time, such situation would not last forever, and Ukrainian metallurgy would have to
choose strategic way for its further development (what is more, perspectives of such
choice are quite clear today).