Donetsk region is the home for enterprises representing various industries, namely metalmaking, fuel industry, chemical and petrochemical, machine-building and metalworking, light, food processing, processing, etc.

INVESTORS’ PARADISE IN DONETSK REGION

Elena SALIKHOVA, the Statistics Scientific Research Institute with the State Statistics Committee of Ukraine

Donetsk region is the home for enterprises representing various industries, namely metalmaking, fuel industry, chemical and petrochemical, machine-building and metalworking, light, food processing, processing, etc.

The region’s fuel industry is represented by 105 coal-mining enterprises with aggregate productive capacity for 59 million tonnes, 12 mine-construction companies, and 25 concentrating factories. As of January 1, 1999, balance-sheet coal inventories totaled 14.5 billion tonnes, including 7.5 billion tonnes of coking coal.

Electric power sector is represented by a complex of generating, transmission network, and maintenance companies. The engineered capacity of 7 thermal electric power plants of the region equals to over 10,000 MW, which is enough to completely satisfy the region’s demands for power and to transmit some of the electricity beyond the region.

Chemical industry comprises 15 enterprises with different specialties manufacturing fertilizers, plastics, soda, acids, explosives, and household chemicals. Productive capacities are enough to make 1.3 million tonnes of ammonia, 780,000 tonnes of urea, 220,000 tonnes of ammonium nitrate, and 900,000 tonnes of sulfuric acid.

A considerable portion of manufactured products is bound for export.

200 machine-building enterprises located in Donetsk region completely cover the country’s needs in mining machinery, mine lifting machines and winders, mining units and borers, as well as satisfy 96% of the needs in rolling equipment, 76% of the needs in main-line railway freight cars, and over 44% of the needs in blast-furnace and steel-casting equipment.

The region’s agriculture with its 2 million hectares of land, including 1.6 million ha of arable land, ought to be noted too. Pursuant to the Land Reform, Donetsk region has completed allotment of collective farms’ land. Individual agricultural enterprises and farms account for 40% of the total farm produce. The rest is made by collectively-run agricultural companies. Agricultural firms of Donetsk region cultivate cereals, oilseed crops, vegetables, and cucurbitaceous plants, as well as breed cattle, pigs, sheep, and poultry.

Food processing industry of the region comprises more than 150 large companies, namely flavoring, meat-processing, dairy, fruit and vegetable processing, flour and cereal making companies, bakeries, macaroni makers, butter-making and fat-producing companies, confectioneries, fish-processing, salt-mining, margarine-producing companies, distilleries, wineries, breweries, soft drink makers, etc.

More than 400 enterprises of the region are engaged in production of consumer goods. They manufacture furniture, refrigerators, gas ovens, washing machines, crockery, textiles, ready-made garments, knitwear, footwear, and other products.

Along with that, a significant portion of consumer goods is purchased in other regions of Ukraine (imports from other regions of Ukraine are twice as big as exports). Further development of this industry is stalled owing to lack of the required investments.

Still, despite the huge contribution of the mentioned industries to the region’s economy, metallurgy remains the region’s backbone industry employing 21.2% of the population and accounting for 46.4% of the total commercial products made in Donetsk region.

Metalmaking is the main business for 3 iron and steel works, namely Mariupol-based Ilyich, Azovstal, and Makeyevka Iron and Steel Works; 4 metallurgical mills, namely Yenakievo, Donetsk, Kramatorsk and Constantinovka mills; two metalware enterprises, namely Khartsyzsk-based JSC Silur and Druzhkovka Metalware Works; Khartsyzsk Tube Works; Makeyevka Tube-Casting Works; and Donetsk Metal-Rolling Works. It should be noted that the aggregate capacity of these mills accounts for over a half of the total ferrous-metalmaking capacities of Ukraine.

The mentioned enterprises mainly produce conversion and cast iron; ferromanganese; steel rounds, squares, bands, equal and unequal angles; reinforcing steel for ferroconcrete structures; wire rods; channels; beams; wide and narrow-gauge rails; hot-rolled and cold-rolled sheets; galvanized sheets; plates made of structural, alloy, and low-alloy steels for boilers, shipbuilding, and construction; strips; steel and iron tubes and pipes; special sections for shipbuilding, automotive, tractors, and agricultural equipment; steel cables, wires, and other metal products.

Many metallurgical mills of the region have been awarded international prizes and titles for manufacturing of competitive and top-quality products, as well as for participation in development of the Ukrainian economy and integration into the world economic environment. Mariupol-based Ilyich Iron and Steel Works was awarded the Gold Globe international trophy in 1993, JSC Silur obtained the Arch of Europe international prize in 1994 and the Prize for Technology and Quality in 1994. Khartsyzsk Tube Works was honored with the title of the European Laureate of International Golden Quality Star back in 1992.

Metalmaking companies continuously work on quality enhancement and on launching of new products. In recent years there have been phased in such products as high-performance heat-insulating materials based on mullite-siliceous fiber, large-diameter tubes with three-layer polymeric corrosion-resistant coating for main gas and oil pipelines, grooved hexagonal rolled steel, various metal products, etc. Performance figures of selected metallurgical mills prove the region’s high potential.

Joint-stock company Azovstal Iron and Steel Works (ISW) is one of the largest integrated mills of Ukraine accounting for around 13% of the country’s output of metal products. Azovstal was built back in 1933. A number of its workshops, notably rolling mill, basic oxygen furnaces, and electric arc furnaces, were constructed in the 1970s. In 1991 Azovstal acquired a certificate on structural sheet steel issued by Germany’s TUF Rheinland, which gave the ISW new opportunities for exports of structural steels. Azovstal’s sheets and plates have been tested and approved by 6 certification societies, namely British Lloyd’s Register, German Lloyd’s, TUF Rheinland of Germany, Det Norske Veritas of Norway, the American Shipping Bureau, and the Russia’s Marine Register of Shipping. Azovstal is planning to push for certification of its strips and to complete ISO certification of its quality system in the near future. Industrial Union of Donbass corporation is one of the main business partners of Azovstal today.

Azovstal has worked out a number of investment projects, notably reconstruction and upgrade of the oxygen workshop (project cost is USD 60 million), reconstruction and modernization of thermal electric power plant to save considerable amounts of power (USD 50 million), project for recycling of metallurgical slag and tailings (USD 20 million), upgrade of the rolling mill (USD 60 million).

Private joint-stock company Trading House Azovstal was set up on September 20, 1997 in order to consolidate shares in Azovstal ISW owned by its staff and management. An agreement between private JSC Trading House Azovstal and public JSC Azovstal Iron and Steel Works stipulates that the former shall annually receive 10% of Azovstal’s net profit and a compensation for lease of property belonging to Trading House Azovstal. On June 24, 1997, the State Commission for Securities and Stock Market registered new authorized capital of public joint-stock company Azovstal, which is 12.7% greater than the previous amount. As a result, the state-owned stake reduced from 52.75% to 48.30%, that of outsider investors lowered to 8.22%, whereas the interest held by Trading House Azovstal went from 37.94% up to 43.48%.

Back in 1999 the State Property Fund of Ukraine entered Azovstal into the list of enterprises that are to be put up for sale in 2000 to bring in the scheduled privatization revenues of UAH 2.5 billion. The State Property Fund is planning to sell 23.26% in Azovstal to raise at least UAH 184,579,000.

Joint-stock company Ilyich Iron and Steel Works contributes significantly to the region’s economy. This integrated mill has a complete metalmaking cycle and holds the monopoly on production of skelp for oil and gas-conveyance tubes and pipes; plates; galvanized, aluminum-coated, lead-coated, and tin-coated sheet steel; metal-filled plastic; tin; oil-conveyance seamless steel tubes; and cold-rolled steel bands on the Ukrainian market.

Krivoy Rog-based Komintern and Kirov enterprises, Donetsk Coke Chemical Recovery Works, Nikopol and Constantinovka Ferroalloy Works, and several others are the primary suppliers of raw materials to Ilyich ISW, e.g. iron ore concentrate, sintered ores, coke, fluxes, metal scrap, etc.

It is worth mentioning that Ilyich ISW has generated a USD 75.1 million investment project for reconstruction of the basic oxygen furnace workshop with renewal of two continuous casters. Execution of this project will enhance the quality of semi-finished sheet steel.

Ilyich ISW keeps on repairing the continuous pickling line in the cold-rolling shop. The repair is to be completed by the beginning of November. Repair staff mends mechanical equipment, completely replaces acid baths and floor covers over the area of 1,500 square meters. Approximately 700 tonnes of acid-proof bricks will be lined in the cold-rolling shop. Ilyich ISW has already expended UAH 250,000 to train employees how to do lining.

Ilyich ISW continues implementation of the pollution control program. Specialists with France’s Spake firm should do startup-and-adjustment works at the gas-cleanup units of Ilyich’s sintering plant.

This integrated mill is getting ready to phase in a limekiln workshop. The first furnace of the limekiln shops is scheduled to start operations on April 1, 2000. Ilyich ISW plans to put into operation two furnaces, each having the capacity for 600 tonnes of quicklime per day. Each furnace will make around 1 million tonnes of lime per year for production of high-quality steels. Slovakia’s Psherovski Stroyirni firm has manufactured the equipment for these furnaces. Ilyich ISW purchased most of the equipment using its own financial resources back in 1995. Experts believe that the payback period on construction of the limekiln shop will amount to 5 years. So far, Ilyich ISW purchases lime from JSC Azovstal and Slavyansky Lime and Chalk Plant. Ilyich ISW produced 1,608,500 tonnes of semi-finished steel in the first 11 months of 1999, 10.4% more than in the respective 1998’ period.

Donetsk Metallurgical Works (DMW) is one of the oldest Ukrainian factories. The DMW was founded as far back as in 1872 by joint-stock company Novorossiysk Association for Coal, Iron, and Rails Production. Currently the DMW is an enterprise with complete metallurgical cycle that specializes in production of conversion iron, bars and sheets, skelp and hollow sections made of structural and carbon alloy steels. The DMW ranks the 4th to the 7th among the top Ukrainian metallurgical mills in terms of different performance characteristics.

During the initial share issue in the DMW, the employees purchased 25% of the company’s stock, 13% were sold at a certificate auction, 2% were sold in exchange for compensation certificates at a specialized auction, while MetalsRussia Corp. Ltd acquired a 40% interest in exchange for property privatization certificates at a non-commercial tender and under investment commitments. The other 20% remained state-owned. Later, MetalsRussia Corp. Ltd has managed to increase its stake in the DMW to 57%.

Afterwards, the stockholders’ meeting made a decision in favor of the mill’s restructuring, which led to transformation of the main production lines into separate legal entities. Limited liability company Istil-DMZ is now among these new entities.

According to the terms of the investment contest, furnace No.1 of the electric arc furnace workshop should be partially upgraded in Donetsk Metallurgical Works. Experts estimate that this upgrade will drive electrical steel output up and will reduce steelmaking costs. Greater output of electrical steel will enable the DMW to increase production of vacuum-degassed ball-bearing steel more than fivefold. Russian and Belorussian enterprises are the primary consumers of this type of steel.

After completion of the investment project, Donetsk Metallurgical Works will be able to deduct some UAH 150-155 from the current metalmaking cost of approximately UAH 300, boost output of electrical steel by 75 to 80%, significantly expand the markets, launch production of one-of-a-kind metal products, give new jobs, enhance pollution control, and create a stable secondary market for its stocks.

To execute the investment program, MetalsRussia has already invested USD 55 million in the DMW in form of equipment and execution of particular assignments. In addition, this company intends to invest some more USD 22 million in construction of an electric arc furnace. According to Alexander Ryzhenkov, chairman of the board with the DMW, the enterprise is currently completing upgrade of steelmaking shops in compliance with the long-term plan of the company’s development. This plan mentions a 120% increase in steel output and a 130-135% growth of iron output. This increase will be further assisted by completed assemblage and installation of a ladle furnace and continuous caster and by quick assemblage of the new electric arc furnace. Upgrade of the DMW’s electric steelmaking complex is scheduled for completion in 2005. Donetsk Metallurgical Works will triple steel output up to 1,000,000 tonnes per year. Steel will be of a significantly higher quality to widen export opportunities. Steelmaking cost will be reduced by a quarter.

The DMW has recently reported a 25% profitability. The company manufactured UAH 624.2 million worth of products in the first 9 months of 1999. Exports accounted for 45.7% and barter transactions for 43.4% of the total sales. The enterprise has already signed contracts for more than USD 1 million.

Public joint-stock company Makeyevka Iron and Steel Works is an enterprise with complete metalmaking cycle and comprises more than 30 workshops. This integrated mill manufactures rolled steel, steel ingots, iron, rail braces, different-diameter wire rod made of ordinary and structural steels, angles, and rebars. Makeyevka ISW has been designed to make 3.4 million tonnes of finished rolled steel, 4 million tonnes of open-hearth steel, and 3.3 million tonnes of iron per year.

The State Property Fund of Ukraine will put up a 50% interest in Makeyevka ISW for public tendering. A 10.86% stake in Makeyevka mill will be floated on the PFTS over-the-counter trading system within a year. Some 37.98% of stocks are held by lessees, 0.86% of shares have been sold on privileged subscription terms, and other 0.3% have been sold at certificate auctions.

With such a huge potential, the region successfully participates in international trade. Products made in Donetsk region were exported to 87 countries in 1999. China, Russia, Italy, Turkey, and Taiwan are among the major trade partners consuming products outbound from Donetsk region. The region did import transactions involving 58 countries, notably, the most fruitful trade relations exist with Russian, Polish, German, Slovak, and American companies.

According to the Donetsk Regional Statistics Committee, the region’s foreign trade turnover amounted to USD 658.6 million in 1999 (86% compared to 1998), namely USD 436.4 million of exports (76% of the 1998’ figure) and USD 222.2 million of exports (118% of the 1998’ figure). Thus, the favorable balance of trade equaled USD 214.2 million.

461 enterprises located in Donetsk region exported their products, whereas 625 enterprises engaged in imports. In 1999 the primary exporters were Ilyich ISW of Mariupol, Azovstal ISW, Yenakievo ISW, Stirol Concern, Donetsk Metallurgical Works, and Khartsyzsk Tube Works.

These enterprises altogether accounted for two thirds of the region’s total export.

Nearly 56% of the total imports to Donetsk region were made by 6 companies, namely Ilyich ISW, Azovstal ISW, Stirol Concern, Industrial Union of Donbass corp., Avdeyevka Coke Chemical Recovery Works, and Donbassenergo.

Export breakdown indicates that raw materials and other feedstock remain the most important goods exported making up 89% of the total exports from the region. Machinery and equipment exports barely reach 7% of the total. Among the raw materials exported, ferrous metals lead the way with 72% of the total figure.

The pattern of imports of goods is also dominated by raw materials and other feedstock with 74% of the total and machinery and equipment with 18%. Fuel and mineral resources are the main raw materials imported.

Donetsk region has received only 5.95% of the aggregate foreign investments in the Ukrainian economy. Foreign companies invested USD 34 million in enterprises of Donetsk region in the first half of 1999, which is equal to 13% of the total investments in the country during this period, that is USD 265 million. This ranks Donetsk region the 4th among regions of Ukraine, posterior to the city of Kiev, Zaporozhye region, and Kiev region.

Outputs of metallurgical mills in Donetsk region in the first 10 months of 1999 (tonnes)

Nearly a half of the investments in the first half-year of 1999, i.e. around USD 16 million, came from the Virgin Islands. The mentioned MetalsRussia, which owns the largest interest in the DMW, is the main investor from this offshore zone. Owing to activities of this company, the Virgin Islands remain the biggest investor in the economy of Donetsk region having already invested more than USD 73 million. Another offshore zone, that is Cyprus, invested approximately USD 6 million in Donetsk region during the first half of 1999. Therefore, investments from this country doubled coming to more than USD 11 million as of July 1, and approaching the investment amounts coming from such large investors as Germany and UK. Investments from latter two countries increased insignificantly during the half of 1999 (around USD 2 million), despite the fact that these countries were among the chief investors in the Ukrainian economy during the first half of 1999. The USA is still the second largest investor after the Virgin Islands. During half a year the USA invested more than USD 7 million in the region. The cumulative investments from this country reached USD 43 million. It is noteworthy that the USA and UK invest primarily in manufacturing companies, whereas Germany and Cyprus aim at expansion of commercial activities in the region.

As regards the by-sector distribution of investments, the bulk of investments was made in the region’s most attractive industries. For example, ferrous metallurgy received the largest amount of investments in the first half of the year. Besides, investments in trade, food processing, and financial sector went up. Growth of investments in agriculture is a very pleasant fact. It means that there are the investors who dared investing in agriculture despite a complete decline in almost all the agricultural businesses now and pending problems with private ownership of land.

What are the further prospects for investments in Donetsk region? This question hardly has a simple answer because there are many factors shaping the situation, e.g. the continuing economic recession that affects investment attractiveness of Ukrainian enterprises. One factor is of special importance in this regard. To attract investments more actively, the law of Ukraine No.356-XIV “On special economic zones and special regime of investment activities in Donetsk region” was passed on December 24, 1998. In fact, this law came into force in January 1999. During this period, Donetsk and Azov special economic zones have been set up and special treatment of investment activities has been introduced in the priority development areas, namely in Ugledar, Gorlovka, Dzerzhinsk, Dimitrov, Dobropolye, Donetsk, Yenakievo, Zhdanovka, Kirovskoye, Krasnoarmeysk, Makeyevka, Mariupol, Novogrodovka, Selidovo, Snezhnoye, Torez, Shakhtersk as well as Volnovakha and Maryino districts.

It should also be noted that the Council for Special Economic Zones and Special Regime of Investment Activities in Donetsk region has approved 65 investment projects costing USD 539.5 million during the period of the law’s effect. 36 projects totaling USD 314.5 million will be executed in metallurgy, coal mining, and chemical industry; 16 projects costing USD 146.7 million will be introduced in light and food-processing industries; and 5 projects worth USD 10.8 million in agriculture. 7 projects totaling more than USD 60 million have already been carried out in coal mining and mining machine-building, owing to which this sector managed to mine 500,000 tonnes of coal in 1999. 15 more investment projects involving coal mining are being prepared for execution in 2000. As a result, coal output is expected at 700,000 tonnes.

Thus, Donetsk region is now facing the primary task of speeding up the development via raising investments and setting up competitive and export-oriented manufacturing companies to move out of the economic recession in the region and in the whole Ukraine.

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