The hardware sector manufactures a wide range of products that are in a great demand within Ukraine and abroad. In 1998 more than 28% of the sector’s output was directly exported. Approximately two thirds of this amount were dispatched to non-CIS member-s

HARDWARE PRODUCTS: MODERNIZATION NEEDS FINANCIAL BACKUP

Igor BURAVLYOV, Director-General with Ukrmetiz Association of Ukrainian Hardware Companies

The hardware sector manufactures a wide range of products that are in a great demand within Ukraine and abroad. In 1998 more than 28% of the sector’s output was directly exported. Approximately two thirds of this amount were dispatched to non-CIS member-states.

In fact, the hardware sector has a much greater export potential. It is impossible to give an exact export estimate for the reason that shortage of current assets forces producers to get into tolling transactions with raw materials (42.2% of the total feedstock in 1998) and use barter operations to settle their accounts (51.3% of the total trade turnover in 1998). After supplying raw materials to producers, most intermediary companies purchase ready-made metal products and sell them to foreign consumers. This indicates that Ukrainian hardware products have a potential market abroad.

It is Krivoy Rog and Makeyevka Iron & Steel Works that supply billets for hardware production in Ukraine. Table 1 shows the correlation between rolled metal production and hardware output in Ukraine, whereas table 2 gives the production dynamics. According to these data, in the past few years only 50-65% of the hardware sector’s demands for wire rod were satisfied with direct supplies. Foreign producers (in Moldova, Russia and Belarus), as well as intermediary business entities, supply the remaining amount of billets priced 1.5-2 times lower than billets purchased from local iron & steel works. Generally, only 30% of the Ukrainian metallurgic billet production potential is used. Iron & steel works export the rest of raw materials abroad, thus contributing to creation of new jobs at competitor companies. Such a policy resulted in rolled metal output dropping as low as 1.36 times and hardware production – as low as 3.2 times during the period under review (and 2.0 and 5.5 times down respectively against the 1990 figures).

Table 1. Output of rolled metal, hardware products and drawn metal products in Ukraine, mln. tons

* – based on Metallurgprom association data and forecast data with Ukrainian hardware manufacturers.

As of January 01, 1999 the following hardware manufacturers operated in Ukraine: Open Joint-Stock Company Dneprometiz (former Dnepropetrovsk Hardware Manufacturing Association) with the potential output of 450,000 tons per year; OJSC Zaporozhye Steel-Rolling Plant (former Zaporozhye Hardware Plant) – approximately 300,000 tons per year; Druzhkovka Hardware Plant – some 190,000 tons per year; Closed Joint-Stock Company Stalmetiz (former Odessa Steel-Rolling Plant named after F.E. Dzerzhinsky) together with CJSC Zvarmet – approximately 130,000 tons per year; OJSC Stalkanat (former Odessa Steel Wire and Cable Plant) – roughly 80,000 tons per year; Kiev-based Pismenny Hardware Plant – some 20,000 tons per year; Chernovtsy Hardware Plant – about 6,000 tons per year; OJSC Silur (former Khartsyzsk Steel Wire and Cable Plant) together with LLC Ukrmetallocord – 320,000 tons per year and Kharkov Hardware Plant – some 3,000 tons per year.

Being members with Ukrmetiz association, Dnepropetrovsk city, these manufacturers produce 98% of average-quality wire, 100% of medium- and high-carbon wire, 100% of steel wire cables, 82% of bracing and fasteners, 88% of steel netting and 42% of welding materials (electrodes, welding and flux-cored wire) in Ukraine.

In other industrial sectors some manufacturers have workshops that produce consumer hardware products as well. For example, Yuzhny Machine-Building Plant produces special bracing for the needs of mechanical engineering; Dnepropetrovsk Welding Materials Research Plant produces electrodes and flux-cored welding wire etc.

The data in tables 1 and 2 prove a continuing depression in output of primary hardware commodities in the period under review. In the past couples of years, productive capacities of the hardware sector were utilized by only some 19-23%. The main production setback occurred in 1993-1994. It was in 1996-1998 when the sector experienced a certain stabilization particularly in production of such items as galvanized wire, cold-drawn died reinforcing wire, medium- and high-carbon steel wire, steel wire cable, steel netting, mechanical and rail bracing. However, financial and economic performance of the Ukrainian hardware sector (see table 3) is not too good.

Table 2. Actual output of selected metal products at Ukrainian specialized companies, ths. tons

Table 3. Financial and economic performance of Ukrainian hardware companies

In terms of monetary figures, hardware production has been indicating a continuous decline with a tendency for stabilization at UAH 300-330 mln. per year. (Spasmodic changes in cost figures in 1993-1995 were caused by transition to the new national currency). At the same time, the stabilization tendency of physical output (see table 2) is less prominent. Indicating a constant increase, the average price of 1 ton of hardware products has been unstable.

Production cost increase is mainly called forth by growth in material (feedstock) costs. Wages and salaries make up less than 10% of the total production costs and thus do not influence the latter considerably.

Production costs are very high and, consequently, the rate of return on production is low (during the period under review, production profitability lowered 25 times from 51.2% to 2.2%)

The average prices for hardware products exceed the world market prices by 20-50%. Besides, Ukrainian by-law requirements in many a case do not meet foreign standards. The resulting effect is that Ukrainian metal products are not competitive enough on foreign markets.

The number of workers in the hardware sector fell 1.75 times in 1993-1998. This number dropped 1.4 times during 1995-1998, whereas the average monthly income per worker increased 1.6 times. This was caused mainly by inflation and by devaluation of the national currency. Average wages in hardware manufacturing are 1.5 times as low as the average wages in ferrous metallurgy. On the other hand, taking into account profitability drop from 8.7% to 2.2% during this period, these data prove deterioration of production efficiency.

The situation is greatly influenced by innovation activities in the hardware sector (see table 4).

Only 13-17% of innovation funding is spent on production development whereas re-equipment expenditures rise year-to-year. In particular, this lowered rate of return on production, but hopefully this will pay off in the near future.

According to table 4, creative potential of the sector is being used and developed deficiently. Intellectual property protection, particularly invention patenting, is next to absent. In average, one manufacturing enterprise introduces only 8 to 10 innovations per year. Application of innovations in production processes indicates the same situation.

Table 4. Innovations in Ukrainian hardware companies

The actual suspension of scientific research and increase in re-equipment expenditures evidence that currently Ukrainian companies employ obsolete equipment and outdated technologies. However, the growth in capital investments correlates with the number of certified products manufactured. The production pattern indicates that it is foreign consumers who are the primary target for manufacturers.

Analysis of the current situation has found out the following causes for recession in production and absence of production recovery tendency. The causes can be split into internal and external ones.

The external causes include:

loss of business contacts with traditional consumers (first of all with those in Russia) owing to protectionism policy pursued in CIS countries;

low competitiveness of Ukrainian products on non-CIS markets.

The internal causes include:

low quality of feedstock, its permanent shortage and high cost, all of which worsen the consumer qualities of end products;

tax burden, nonpayment crisis and shortage of current assets at manufacturers’ disposal;

depression in allied sectors that are traditional consumers of metal products, for example, construction industry, mechanical engineering etc.

The following objective and subjective factors are also the reasons for low hardware production effectiveness:

inadequate quality of marketing and advertising projects and inefficient management;

equipment obsolescence and mechanical deterioration (above 55%);

high power consumption (according to Giprometiz data, this figure is 3 times as high as that in metal-rolling);

unsatisfactory quality control and low automation and mechanization of hardware manufacturing;

scarce funding for scientific research & development.

It is hardly possible to alter the external factors. Adequate use of manufacturers’ internal reserves can improve technical and economic performance of individual manufacturers, as well as of the industry on the whole. It is important to note that all the hardware producers changed their type of ownership during the transition period. In several instances, during transition to joint-stock ownership one individual or one business entity purchased the controlling interest in a hardware company. Under efficient management and far-seeing policy, this allows flexibly meeting market challenges via application of preventive reconstructive measures.

Currently several manufacturers produce unique types of commodities. For example, OJSC Silur produces steel cords and multi-purpose wire cables, in particular cables for aircraft construction; Kiev Hardware Plant manufactures stainless steel netting, including the micrometre-size ones; Druzhkovka Hardware Plant produces rail bracing; OJSC Zaporozhye Steel-Rolling Plant and OJSC Silur manufacture aluminum and steel-aluminum wires etc.

To substitute imported products, it is planned to commence production of the following metal items:

wire made of bearing, corrosion-resistant and refractory steel (16,000 tons of such wire are to be made by 2010);

automobile bracing (up to 200 tons per year);

merchant bracing and fasteners for household appliances, instrument-making, furniture etc. (up to 3,000 tons per year);

high-strength bracing;

flatted tape;

section wire, 4-6 mm in diameter, for manufacturing of closed-construction large-diameter steel cables;

high-strength galvanized large-diameter cables for coal-mining;

slow-whirling shaft steel cables (up to 1,000 tons per year);

aluminum wire rod for steel-aluminum wire manufacturing (up to 6,000 tons per year).

To give an example, one should mention the following. OJSC Dneprometiz has put into operation a Koch galvanizing line for wires, 1-5 mm in diameter, installed 5 new Sket draw-benches, reconstructed the barbwire workshop and rearranged its general production structure (merged workshops into production units).

OJSC Silur is currently assembling and has already partially commissioned lines and units for thermal treatment of cable wire.

Generally, to synchronize output and sales, the production capacities are planned to be reduced to 870,000 tons by 2005 and to 710,000 tons by 2010. The ways of capacity reduction will be determined in each particular case and may include changes in the range of commodities manufactured, adjustment of equipment operating mode, equipment disassembling, disposal, liquidation etc.

Hardware producers do not plan to fire a large number of employees. Dismissal of the workers will occur due to the natural outflow, retirements from the office and rotation of workers within companies. The dismissed workers will be offered jobs in capital construction.

The following technical and technological directions of hardware production development are the most promising:

technical re-equipment of the industry with high-output economical machinery with advanced automation and mechanization level and production quality control;

design and development of combined production processes (rolling and drawing, coating and drawing, drawing and galvanizing, drawing and bracing production etc.);

introduction of lines for electrolytic coating including application of coating over small-size items;

development and financing of scientific research aimed at solving long-term technological tasks including reduction in power consumption, improvement of tool durability and enhancement of product quality;

standardization of local products based on accumulated international experience; product certification, giving priority to economical product types and technological research.

Environment protection measures:

switching to environment-safe and low-waste technologies, in particular, acid-free or hydrochloric-acid removal of scale;

dry galvanizing; utilization of non-oxidized wire rod;

efficient waste disposal, in particular sludge recycling and reclamation of waste slurry ponds; commencement of copper sulfate production;

reconstruction of dust-cleaning and gas-cleanup systems to minimize releases of hazardous wastes and substances.

Social and economic measures:

merging of enterprises and banks to form financial and industrial groups; targeted investment in technical re-equipment and current assets;

expansion of product mix to meet demands of specific local and foreign consumers.

Many projects dealing with capital construction and production modernization have been planned and prepared. Several such projects are already under way. Some UAH 360-380 mln. (i.e. USD 90-95 mln.) are necessary to back successful completion of these projects. According to technical and economic calculations, such investments will bring in USD 20 mln. per year.

Since hardware manufacturers lack current assets, as well as get no state financing, the necessary funding could be obtained via:

restoration and use of the sectoral innovation fund;

tax incentives for hardware production, as well as for research & development activities of hardware companies;

legal guarantees granted to foreign investors.

To facilitate execution of these tasks, the Board of Directors with Ukrainian hardware producers has established the Ukrainian Hardware Scientific Research and Design Institute.

(The author wants to specially thank Anatoly DOLZHANSKY from the State Metallurgic Academy of Ukraine for his kind assistance in preparation of this article).