Certain results, difficulties, and tasks of privatization of Ukraine’s mining companies and metallurgical mills
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Certain results, difficulties, and tasks of privatization of Ukraine’s mining companies and metallurgical mills
It is pretty much true that privatization of Ukrainian industrial factories is one of the hottest issues on view of the country’s public today. Both the mass media and almost all the types of state and local authorities and public institutions have completely different and sometimes opposite opinions on this topic and run into severe debate on the issue. All this is quite natural. Transformations involving property rights are the hardest social and political processes that lead to a clash of interests of virtually all the social strata. This is precisely what one traces observing privatization of Ukraine’s mining and metallurgical complex.
It looks like the country’s metal industry has gone through virtually everything over the past 8 years. There have been times of making excess revenues due to inflation and low cost of power; a great mark-up in prices for fuel and power and depletion of current assets; export of capital beyond the country and dumping practices; loss of the domestic market and breakthrough to the global market; barter and bankruptcy, and the like.
The 1991 events strongly impacted metal consumption in the Ukrainian industry. Experts have estimated that state-owned companies consumed 15 to 16 million tonnes of rolled steel per year back in 1990-91. Today, consumption hardly amounts to 3-3.5 million tpy. Meanwhile, the available capacities can roll some 30 million tpy of steel! Blast furnace shops and rolling mills suffer the most from this outrageous difference between market demands and available capacities.
The opportunity to do foreign trade independently has proven to be rather costly for local metallurgical mills. Though many hopes and high spirits accompanied this process in the past, things have turned out harder than expected. Prior to 1991, Ukraine’s metallurgical mills could trade with the outer world only via centralized agencies, such as Promsyrieexport, and had no experience of how to run foreign trade on their own. That is why, after finally getting a chance to enter foreign markets, quite a few managers made gross mistakes leading to great financial losses of their companies.
Yet, the metal industry suffered the greatest damage from the so-called clingfish, i.e. unfair metal traders who have been taking away the mills’ current assets and making big money on difference between the prices for raw materials and the cost of the end products, and on capital exports. Sometimes, top management of metallurgical mills connived in this practice together with unfair traders.
Starting with lease relations as far back as in 1991, the transformation process gradually moved to real privatization in 2000 as the wealth of nation grew and gained volume.
At the moment, privatization of mining companies and metallurgical mills has already achieved some impressive results. For instance, about 80% of mining and metallurgical companies have been privatized. These companies employ 400,000 people and account for 80% of the total commercial mining and metal products made in the country. As one can see, a rather powerful private sector has already emerged in Ukraine.
However, these are the quantitative numbers only. Let’s try to make a more profound qualitative analysis (see table 1).
Whether we want it or not, technical performance of metalmaking assets is rapidly deteriorating, while the machines themselves are quickly aging owing to the feeble national capital, lack of favorable preconditions for investment, and willingness of quite a few owners to make the biggest quick profits on the capitals invested. On average, depreciation of tangible fixed assets reaches 55.3% in the Ukrainian metal industry now.
These unfavorable trends are further encouraged by the high dispersion of companies’ stocks (see table 2). As one can see, this is yet another serious nuisance of the metal industry in Ukraine, i.e. there are too many owners and not enough efficient ones.
It is worth highlighting that the first stage of privatization led to appearance of negligible and scattered stakes held by individuals. Moreover, the country had no experience of corporate rights management and lacked proper laws that should define and protect the rights of petty shareholders. It is no wonder that performance of these companies was so lamentable.
During the second stage, when interests held by individuals were converted considerably, shareholders became directly interested in nice performance of their enterprises. Together with a slight recovery on the metal markets and auspicious influence of the economic experiment under way in the mining and metallurgical complex, this has greatly improved the manufacturing and financial performance. Almost all the companies settle full amounts of taxes and obligatory charges payable on time.
For example, all the 100% of shares in Yenakievo Metallurgical Works belong to a single shareholder. Though running into various problems with supplies of the necessary materials to keep the manufacturing process going, the owner is now undertaking serious reconstruction efforts and has contributed much investment money fully acknowledging that these steps are a must for future competitiveness of this metallurgical mill.
Some 92% of shares in Azovstal have also been consolidated, though almost nothing has been invested in this integrated mill over the past 2 to 3 years. One can just assume that the owner is getting ready for future investments, while actively acquiring various allied companies today. Azovstal plans to issue depositary receipts, which may become a true source of new capital for this company.
Table 1. Privatization of mining companies, ironmaking, and steelmaking mills
Gross revenue (‘000,000 Ukrainian hryvnyas) |
Profitability rate (%) |
|||
1999 |
1999 |
1st quarter of 2000 |
||
Yenakievo Metallurgical Works (Yenakiyevsky metallurgiyny zavod) |
100.00 |
399.40 |
2.58 |
3.83 |
Petrovsky Metallurgical Works of Dnepropetrovsk (Dnepropetrivsky metallurgiyny zavod im. Petrovskogo) |
39.72 |
391.40 |
2.36 |
5.22 |
Comintern Works of Dnepropetrovsk (Dnepropetrivsky zavod im. Cominterna) |
65.00 |
323.80 |
-19.39 |
-12.98 |
Ilyich Iron & Steel Works of Mariupol (Mariupolsky metallurgiyny kombinat im. Ilyicha) |
50.00 |
3,148.70 |
8.80 |
32.97 |
Dneprovsky Iron & Steel Works named after Dzerzhinsky (Dniprovsky metallurgiyny kombinat im. Dzerzhinskogo) |
1.20 |
1,257.90 |
-2.81 |
1.11 |
Donetsk Metallurgical Works (Donetsky metallurgiyny zavod) |
83.97 |
524.90 |
-1.34 |
27.64 |
Dneprospetsstal |
90.00 |
472.20 |
7.34 |
10.82 |
Zaporozhstal Iron & Steel Works of Zaporozhye (Zaporizhsky metallurgiyny kombinat "Zaporozhstal") |
75.00 |
2,006.20 |
19.06 |
39.59 |
Azovstal Iron & Steel Works (Metallurgiyny kombinat "Azovstal") |
54.44 |
2,519.20 |
2.48 |
13.07 |
Alchevsk Iron & Steel Works (Alchevsky metallurgiyny kombinat) |
50.00 |
1,571.80 |
6.62 |
1.99 |
Makeyevka Iron & Steel Works (Makeyevsky metallurgiyny kombinat) |
39.14 |
556.05 |
-8.02 |
-9.25 |
Krivorozhstal State Iron & Steel Works of Krivoy Rog (Kryvorizsky derzhavny metallurgiyny kombinat "Krivorozhstal") |
0.00 |
- |
14.82 |
35.59 |
Companies are sorted by percentage of stock realization compared to profitability rates and annual revenues
Table 2. Allocation of shares in ironmaking and steelmaking mills
Percentage of shares held by |
||
Individuals (%) |
Legal entities (%) |
|
Yenakievo Metallurgical Works |
91.15 |
8.85 |
Petrovsky Metallurgical Works of Dnepropetrovsk |
39.72 |
- |
Comintern Works of Dnepropetrovsk |
39.00 |
26.00 |
Ilyich Iron & Steel Works of Mariupol |
48.57 |
1.43 |
Dneprovsky Iron & Steel Works named after Dzerzhinsky |
1.20 |
- |
Donetsk Metallurgical Works |
43.97 |
40.00 |
Dneprospetsstal |
34.80 |
40.20 |
Zaporozhstal Iron & Steel Works of Zaporozhye |
37.97 |
37.03 |
Azovstal Iron & Steel Works |
51.74 |
2.70 |
Alchevsk Iron & Steel Works |
19.99 |
30.10 |
Makeyevka Iron & Steel Works |
39.14 |
- |
Donetsk Metallurgical Works, 62% in which belong to MetalsRussia, shows a pretty good performance now. Along with enhancement of the management architecture, the works’ new owners make actual investment to reconstruct its manufacturing facilities.
Unfortunately, there are way many more unfavorable examples. One of the worst cases of mismanagement is the example of Almaznyansk Metallurgical Works (Almaznyansky metallurgiyny zavod). This works has been simply squandered by its owner, who got the shares in the company almost for free.
Table 3 illustrates the process of privatization involving ore mining and concentrating works of Ukraine.
By and large, here is how the new owners meet their investment commitments (in fact, only $3 million of the scheduled $10 million have been transferred to Ukrainian companies so far):
commitments have been met regarding public joint-stock company Dneprospetsstal;
met regarding public JSC Donetsk Metallurgical Works;
met regarding public JSC Alchevsk Iron & Steel Works;
failed to meet regarding public JSC Comintern Works of Dnepropetrovsk.
Therefore, despite certain good cases and advantageous trends, one has to admit that the Ukrainian metal industry is in a deep investment crisis now. It is also obvious that most employees of mining companies and metallurgical mills are only the nominal owners because small stakes keep these people away from having a representation in management bodies, from control over decision-making, and from generation of investment policies.
Restructuring is a priority task determining the future of the Ukrainian metal industry. The modern business practice shows that motivated owners succeed the best in restructuring. There have already been plenty of examples proving that this is the most efficient way.
It is no surprise that the issue of whether the State should resume its regulation of the privatized mining and metallurgical companies is, perhaps, the focal point of debates now. It is notable that control over the metal industry can be slackened as a result of the natural willingness of executive authorities to reduce administrative expenses. In fact, the President has already issued a decree "On changes in central executive bodies", while the Ministry for Industrial Policy has been transformed into the Committee for Industrial Policy, dismissing quite a few officials. It is becoming more urgent for the State to delegate some of the power to specific contractual institutions that should tackle the current problems in order to provide for control over the metal industry and greater cost efficiency. At the moment, this is becoming a reality owing to a contract between the State Committee for Industrial Policy and the Ukrainian Association of Ferrous Metallurgical Enterprises.
Table 3. Privatization of ore mining and concentrating works
Percentage of shares held by |
|||||
Individuals (%) |
Legal entities (%) |
||||
Severny State Ore Mining and Concentrating Works (Severny derzhavny girnozbagachuvalny kombinat) |
14.26 |
323.000 |
-33.2 |
2.00 |
12.26 |
Marganets State Ore Mining and Concentrating Works (Marganetsky derzhavny girnozbagachuvalny kombinat) |
75.00 |
82.232 |
-8.5 |
5.00 |
70.00 |
Ingulets State Ore Mining and Concentrating Works (Inguletsky derzhavny girnozbagachuvalny kombinat) |
32.72 |
659.000 |
26.8 |
12.00 |
20.72 |
Yuzhny State Ore Mining and Concentrating Works (Yuzhny derzhavny girnozbagachuvalny kombinat) |
74.22 |
871.000 |
35.2 |
74.22 |
- |
Ordzhonikidze State Ore Mining and Concentrating Works (Ordzhonikidzovsky derzhavny girnozbagachuvalny kombinat) |
66.71 |
178.000 |
2.4 |
17.71 |
49.00 |
Sukhaya Balka |
74.90 |
151.000 |
13.9 |
9.00 |
65.90 |
Tsentralny State Ore Mining and Concentrating Works (Tsentralny derzhavny girnozbagachuvalny kombinat) |
12.57 |
276.000 |
-1.7 |
4.00 |
8.57 |
Poltava State Ore Mining and Concentrating Works (Poltavsky derzhavny girnozbagachuvalny kombinat) |
68.41 |
483.000 |
-0.5 |
7.00 |
61.41 |
Each month, people from Metallurgprom Association, the State Committee for Industrial Policy, Ukrrudprom, Ukrkoks, Ukrtruboprom, Ukrogneupor, and Ukrvtormet Associations hold meetings to compile the schedules of material supplies to metallurgical mills, and to make decisions on urgent issues. This approach makes it possible to keep closer contacts between authorities and individual companies. In the long run, it enhances profitability of metallurgical mills and, consequently, boosts the amounts of taxes payable, as well as nourishes the necessary preconditions for reconstruction and renewal of productive assets.
If one keeps no notice of the interests of those who want things to remain messy and confused, then participation of the State is definitely required. However, the methods of this participation in business of strategically vital industries should correspond to the nature of market relations. It is a pity that the well-discussed development and stabilization of the market infrastructure lags behind the pace of privatization so far. Inevitably, this holds back emergence of efficient owners, who understand the urgency of investments. Yet, this adverse factor alone can not slow down the new privatization stage. It is much more important that alterations of privatization approaches should safeguard the Ukrainian society against mistakes, and finally facilitate free transfer of capital from deficient owners to efficient ones, who are capable of dealing with manufacturing and employee benefit issues on a due level.
the Metal