Dedicated to continuation of construction works at Krivoy Rog Oxidized Ore Mining and Concentrating Works.

INEXPLICABLE GENEROSITY

Vladimir TERESHCHENKO, CEO with the Ukrainian Association of Ferrous Metallurgic Enterprises

Dedicated to continuation of construction works at Krivoy Rog Oxidized Ore Mining and Concentrating Works.

In October 1999, the Ukraine’s Cabinet of Ministers published a regulation ruling that construction of the first functioning stage of Krivoy Rog Oxidized Ore Mining and Concentrating Works (KROOMCW) should be completed in 2001 and the complex itself should commence functioning in 2002. One can be a hundred percent positive that the Cabinet of Ministers based this decision on calculations and reports of the respective ministries, as well as on reasoning presented by scientists and manufacturers, i.e. on preliminary analysis of the current situation and outlooks performed by skilled specialists. This also means that the analysis led to a conclusion that completion of construction works is advisable and that investment in construction will pay off owing to anticipated demand for the Works’ products.

As a person representing the interests of ferrous metallurgic mills, I would really like to trust all these forecasts. However, there are extremely serious grounds making one disbelieve such nice prospects.

At the outset, one should recall the recent history to trace down the situation, which brought about the extremely tangled problem of the KROOMCW construction.

During the meeting in Berlin back on October 20, 1983, member-states with the Council for Mutual Economic Assistance (namely the USSR, Czechoslovak Socialistic Republic, German Democratic Republic, Bulgaria and Romania) signed an agreement to construct a large integrated plant in the Soviet Union. After settling of the organizational issues and signing of bilateral agreements in 1986-1988, the construction works were launched in Kirovograd region. Table 1 shows the data on contributions of each participating country to the overall investments.

Table 1. Participants’ stakes in the KROOMCW construction as of October 20, 1983

Each country based its stake on its own forecast volumes of pellet consumption, since pellets are the main commodity to be produced at the Works. One of the provisos of the agreements stipulated that, after constructing and commissioning the Works, the Soviet Union undertakes to supply up to 40% of the total commodity output to the other participating countries for 10 years. Moreover, all the supplies had to be made free of charge as a settlement for initial investments in construction incurred by these countries. It was schemed that the Works’ expenditures on making these supplies would be reimbursed from the state budget or from any other centralized fund. This is how it all started.

The notorious events followed. Ukraine has become independent and simultaneously has taken upon itself all the rights and obligations implied in international treaties signed by the former USSR. As a matter of fact, Ukraine became an assignee of the USSR on the grounds of Decree of the Presidium of Supreme Soviet "On assignment of Ukraine", as well as on the basis of the Law dated September 12, 1991 and named exactly the same as the Decree. With its deed of conveyance dated January 8, 1992, the State Property Fund of Ukraine made the KROOMCW one of the companies subordinate to the Ukraine’s Ministry for Metallurgic Industry. In August 1993, the Cabinet of Ministers approved Regulation No.650 "On measures to complete construction of the KROOMCW". The appropriate ministries conducted all the necessary negotiations with foreign participants in the construction. As a result, Ukraine signed mutual protocols with Romania and Slovakia. Germany officially refused from further participation in the construction works. Bulgaria laid down unacceptable demands and the bargain was not struck.

What happened next and what is the current situation with the construction process? Table 2 below illustrates the situation as of January 1, 1999, after the participating countries redistributed their stakes.

Table 2. Participants’ stakes in the KROOMCW construction as of January 1, 1999

One should keep in mind that the construction works have been virtually suspended during the recent couple of years because the Ukrainian party does not finance its portion of the construction expenses. The Slovakian party has not been making any works for more than three years because Ukraine has yet to make its mind on the construction completion terms and to fulfil its commitments on settling for the commissioned structures. Furthermore, the Romanian party stipulates that the existing treaty should be revised to clearly define the construction completion terms in order to continue the project works (though this country has allocated all the necessary funds for this purpose in its 1999 state budget).

One can see that the situation is truly complicated. It is easy to understand what kind of a dilemma the Ukrainian executive authorities faced. Large investments are required to complete the construction whereas the country really needs this money to finance other important projects. On the other hand, if the decision on suspension of construction is made, Ukraine will need roughly UAH 6 bln. to square up its debts to foreign participants and to temporarily close down or eliminate the construction-in-progress.

Finally, it was decided to continue construction of the Works. Legitimate expectations of Kirovograd Regional State Administration were yet another pro for continuation of construction works since the new functioning company would give new jobs and considerably mollify the social tension in the region. One can sincerely perceive and concur with all this.

However, adherence to the state interests also means that all kinds of decisions should be made with the best possible impartiality. This is especially true for making long-term forecasts because any wrong conclusion may result in the state wasting large amounts of money in the future.

There actually is a document, which most probably became the basis for the aforementioned decision. According to the attesting signatures of officials, this document was generated by Krivbasproekt institute, by employees of OJSC MechanObrCherMet and by upper management with the KROOMCW. I have neither the grounds nor the need to discuss the whole document; however, I strongly disagree with one key conclusion.

It comes to outlooks for demand of Ukrainian metallurgic mills (i.e. of the internal market) for iron ore in the upcoming 10 years. Based on the attached data of Metallurgprom association (it is planned to make 23.9 mln. tons of iron per year in 2000-2010), the authors of the document conclude that the Ukrainian market will see shortage of 7.3 mln. tons of iron ore and scheme to offset this shortage by commissioning the Works currently under construction.

Naturally, such a conclusion is a solid ground for the Cabinet’s decision to transform the KROOMCW into a joint-stock company, which could embrace the interested metallurgic mills willing to contribute financing in order to back most of the construction costs.

Unfortunately, this forecast for demands of metallurgic companies in the KROOMCW’s commodities is way off the track. Let’s examine the statistics to trace the pellet output dynamics at Severny, Tsentralny and Poltava Ore Mining and Concentrating Works:

in 1985 these companies produced 28,288 ths. tons of pellets;

in 1986 — 28,199 ths. tons;

in 1987 – 28,978 ths. tons;

in 1988 — 28,601 ths. tons;

in 1989 — 28,701 ths. tons;

in 1990 — 27,917 ths. tons;

in 1991 — 22,144 ths. tons,

in 1992 — 19,680 ths. tons;

in 1993 — 15,248.3 ths. tons;

in 1994 — 12,392.7 ths. tons;

in 1995 — 14,584.8 ths. tons;

in 1996 — 14,737 ths. tons;

in 1997 — 14,959.4 ths. tons; and,

in 1998 — 12,840 ths. tons.

According to unbiased estimates, the presently available Ukrainian capacities are enough to produce 20-21 mln. tons of pellets per year. One should also consider that Ukrainian metallurgic companies purchased only 6.140 mln. tons of pellets out of the 12.840 mln. tons manufactured in 1998. The point is that metallurgic mills (which have their own sintering plants capable of satisfying 100% of companies’ demands for feedstock used in ironmaking) produced some 16.104 mln. tons of pellets on the own.

It is marvelous indeed what actually served as ground for conclusion that there would be a shortage 7.3 mln. tons of pellets in the years to come. However, this is not all. For technological and economic reasons, the pellet component in ironmaking simply can’t make up more than 30% of the furnace charge, which means that the annual demand for pellets will be roughly at 2.4 mln. tons.

Metallurgists know well that, if pellets constitute more than 30% of the charge, the durability of furnaces and of charging equipment deteriorates, whereas coke consumption goes up. As a result, iron becomes more expensive. Some put forward the argument that utilization of pellets in blast-furnace charge means higher iron contents. Well, this does not really seem cogent because scaling down to metal concentrate gives the same metal contents in iron made of pellets as in iron made of agglomerate. Since agglomerate is a feedstock, which does not additionally require use of limestone, its utilization is more efficient and the cost of iron made from agglomerate (provided other equal conditions) is always lower.

All the aforementioned gives ground to conclude that the existing capacities are capable of producing much more pellets than metallurgic mills actually require. Even at the moment it has become rather complicated to sell pellets. It is easy to imagine how difficult it will be after the KROOMCW starts working at the planned volume. Moreover, production cost of the KROOMCW pellets will be 20-30% greater that the cost of pellets made at the currently available capacities.

To be fair, it should be mentioned that design institutes are currently ascertaining the volume of investments required for construction of the first functioning stage of the Works. In particular, it is provided for the opportunity to manufacture sinter cake, i.e. a new type of commodity. However, only following completion of the corresponding technological tests and trials one could argue the efficiency of using this sinter cake in ironmaking. Besides, financial performance of the Works in the new economic conditions is still being specified. Only afterwards it will be possible to impartially assess the opportunity and the necessity of completing the construction works.

Once again it should be mentioned that the KROOMCW problem is extremely tangled and extraordinarily expensive. This problem should definitely be given a constructive approach.

At present metallurgic mills, which should logically become affiliated with the joint-stock company established to finance the construction works, are facing an ambiguous situation. On the one hand, there exists a directive, which should definitely be executed. This means that managers of joint-stock metallurgic mills should convince themselves (as well as convince their shareholders) that it is reasonable and necessary to contribute the earned revenues, which are desperately required to develop their own companies. Besides, this money will never be returned back. The fact that metallurgic mills hardly make any profits or simply suffer losses further aggravates this paradox.

At the moment, all kinds of authorities talk a great deal about their devotion to laissez fair, to market regulation of business contacts. One should admit that this statement definitely contradicts this forced and inexplicable generosity of the State.

Comment of the Editorial Office. In the next issue we plan to revert to the problem of the KROOMCW construction in order to present the opinion of the other interested party, i.e. of scientific institutions and manufacturers.