That’s what Ukrainian ferrous scrap supplies are finally doing

SWITCHING TO DOMESTIC CONSUMERS

That’s what Ukrainian ferrous scrap supplies are finally doing

Ivan ZAITSEV, the Ukrainian Association of Metal Scrap

Open-hearth steel has been the major steelmaking product in Ukraine for a long time (the Ukrainian metallurgical mills scored the record-high steel output of 53 million tonnes back in 1978). As industrial recession severed and the new, more economical basic oxygen and electric arc furnaces were becoming popular, the deteriorated open-hearth furnaces were phased out and the steel production pattern became subject to changes.

Some 84 open-hearth furnaces were in operation in Ukraine as of January 1, 199o, whereas this number went down to 55 furnaces as of January 1, 2000. The portion of open-hearth steel decreased from 54.4% to 47.6% of the total steel output in Ukraine over this period, while the share of converter steel increased from 42.5% to 49.3% respectively (see table 1).

Table 1. The pattern of steel output in Ukraine

Ferrous scrap is one of the key and comparatively cheap components of the furnace charge fed in open-hearth steelmaking.

In spite of large scrap formation in Ukraine, scrap supplies to Ukrainian steelmaking have always been a problem causing a number of difficulties. The collapse of the Soviet planned-production system has made this problem even more complicated. The old system of scrap procurement was no longer viable in the new market environment. The quantity of scrap stocked and treated by Vtormet (Secondary metal) enterprises avalanched.

Beginning the second half of 1996 when the prohibiting duty on scrap export was revoked, the present-day system of collection, procurement, and processing of ferrous scrap has started taking shape. Over a short period of time, a large number of businessmen got engaged in the uncontrolled scrap business (e.g. collection, storage, and sales). Various offenses became more frequent in this business.

Along with that, owing to financial hardships experienced by metallurgical mills, lack of in-house current assets, and the resulting inability of domestic metalmakers to settle accounts payable in money, scrap exports boosted and the amounts of scrap supplied to domestic producers went down (see table 2).

Table 2. Ferrous scrap supplies

Steelmaking mills had to compensate shortage of scrap with increased consumption of iron, thus driving up the end product costs. In the open-hearth steelmaking, steel scrap accounted for 42% of the total furnace charge in 1990, whereas in 1999 this figure lowered to 36%. Respectively, the share of iron increased from 54% to 60% over the same period.

It might be useful to recollect that a metallurgical mill should keep enough stocks of its own scrap returns for 7 to 9 business days and stocks of purchased scrap for 20-25 days in order to make steel without interruptions now.

The so-called old scrap (i.e. discarded machinery, equipment, buildings, and structures), and the scrap originating from metalworking, processing of slag heaps, and from other sources account for the bulk of commercial metal scrap in Ukraine now. In addition, nearly a half of scrap consumed by metallurgical mills is formed during their own production processes and is referred to as scrap returns, i.e. refuse coming from rolling, steelmaking, tube-making, metal product manufacture, casting, further treatment, etc.

Large scrap-treating enterprises directly supply metallurgical mills with some of the required commercial scrap. Another portion comes from companies dealing in metal scrap. However, quite a few firms own no facilities and have to lease sites, weighing, and transportation equipment. These ones are not inclined to invest in production development.

Thus, it is largely the base professional companies that balance up the ferrous scrap market in Ukraine.

To bring the scrap business in proper order, the law of Ukraine “On entrepreneurship” was amended with introduction of state licensing for metal scrap transactions.

Stricter control over licensees’ activities has somewhat improved the situation with scrap collection and storage since 1996. Around 2,700 licenses for business transactions in ferrous scrap have been issued up to date. However, regulation of scrap exports was next to absent, thus resulting in almost equal amounts of scrap exported and sold domestically in 1998 (3.4 million tonnes and 3.5 million tonnes respectively). Meanwhile, domestic metallurgical mills actually received only 67% of the scrap required for their operations at that time.

It was only in 1999 when the law “On metal scrap” was passed to regulate business relations involving scrap transactions and to protect the interests of Ukrainian metalmakers.

Alas, even after the law had taken effect, the problem of scrap supplies to local mills was not resolved completely. The 1999 scrap exports exceeded domestic scrap sales 1.2 times. As a result, last year metallurgical mills ran into shortage of 900,000 tonnes of scrap, which means that some 710,000 tonnes of steel were not produced.

Yet, it is true that poor solvency of Ukrainian scrap consumers is a weighty factor affecting domestic consumption of secondary ferrous metals.

This is how the situation was when the Ukrainian Association of Metal Scrap (Ukraiybska assotsiatsiya metalevogo brukhtu) was established in late 1999. The Association is a voluntary, non-profit-making establishment bringing together the companies and organizations engaged in metal scrap transactions. The Association comprises over 100 companies that specialize in this business and hold around 80% of the Ukrainian scrap market.

Back at that time, i.e. at the end of 1999, the former Ministry for Industrial Policy of Ukraine analyzed all the underlying factors and estimated the 2000 steel output at 27.5 million tonnes. This led to the scrap demand estimate of over 10 million tonnes, including 5 million tonnes to be purchased from the third parties.

However, January 2000 was a letdown, namely, just some 292,300 tonnes of scrap were sold to local metallurgical mills. This meant that purchases covered only 61.1% of the scheduled amounts of scrap. At the same time, scrap export amounted to 260,700 tonnes.

The Ukrainian government authorized our Association and the Ukrainian Association of Ferrous Metallurgical Enterprises (Ukraiynska assotsiatsiya pidpryyemst chornoyi metallurgiyi), together with the State Committee for Industrial Policy, to suggest a mechanism of how to balance domestic and external scrap supplies to give an upper hand to domestic producers. Our proposal was considered and supported at a meeting of the Ukrainian Parliament’s standing committee for industrial policy and entrepreneurship.

The proposed mechanism of balancing regulation does not leave direct regulation to executive authorities, but rather to a non-governmental body. In this case, it is the companies’ intentions and abilities that regulate export quantities. This is a commonly applied practice in the world and it does not give legal grounds to charge Ukraine of violating its international commitments and engagements.

Redirection of much exportable scrap to domestic producers, along with an opportunity of local steelmaking mills to pay in money, has significantly encouraged greater scrap supplies to Ukrainian metalmakers. As early as in February 2000, Ukrainian steelmakers got 86.6% of the required scrap. Beginning March 2000, when the balancing regulation mechanism started functioning in full swing, the actual supplies to metallurgical mills have exceeded their demands for the first time recently and have come to 114.4% of the required amounts. This trend persisted in April 2000 (160.7% of the demand) and in May 2000 (131.9%).

On the whole, Ukraine’s metallurgical mills received 2,336,700 tonnes of scrap in the 5 months of 2000, which completely covered the steelmaking demands taking into account the present scrap consumption rates. Scrap supplies have gained 77.5% against the corresponding last year’s figure. Consumption of purchased scrap per tonne of steel has increased from 122 kg to 186 kg over the indicated period, whereas at some enterprises it grew 2 to 4 times (see table 3).

Thus, the problem of scrap supplies to Ukrainian steelmaking has been almost settled now. Metallurgical mills have become more concerned with the quality of metal scrap and its bulk weight.

However, these improvements should not lead to complacency. Despite the large potential reserves of old scrap, it is more than difficult to estimate the more or less precise stocks. All the branches of the economy lack money, thus running the technical re-equipment outrageously slow. There is no clear program of equipment upgrades, while exports of finished metals are increasing year on year. All these tendencies affect formation of metal scrap.

Finally, in conclusion here are some forecasts for consumption of ferrous scrap and refuse in 2000. The Ukrainian metalmaking performance in the 5 months of 2000 allows stating that steel output is expected at 30.5 million tonnes and production of general rolled steel can come to 26.0 million tonnes. The aggregate consumption of scrap in steelmaking will total 11.0 million tonnes. Scrap returns are anticipated to total 5.8 million tonnes. Consequently, metallurgical mills will have to acquire 5.75 million tonnes of secondary ferrous scrap (taking into account the amount needed for the other manufacturing needs). The total amount of scrap formation in Ukraine may reach 15.5 million tonnes in 2000.

The industry’s results in the first half-year of 2000 will give enough grounds to forecast the amount of exportable ferrous scrap.

Table 3. Scrap supplies to Ukrainian metallurgical mills in the 5 months of 2000

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