The ten years of persistent attempts made by Ukraine’s metallurgical mills and authorities yielded returns in the first half of 2000. According to the latest statistics, Ukrainian metallurgical mills purchased 2.92 million tonnes of ferrous scrap in the 6

SCRAPPY HORIZONS

Veniamin KRAMER, executive director with the Ukrainian Association of Metal Scrap

The ten years of persistent attempts made by Ukraine’s metallurgical mills and authorities yielded returns in the first half of 2000. According to the latest statistics, Ukrainian metallurgical mills purchased 2.92 million tonnes of ferrous scrap in the 6 months of 2000, 6.2% in excess of demand and 1.7 times more than in the first half of 1999. Steel output responded by gaining 16.4% or 2.12 million tonnes.

There are several reasons for the unheard-of growth in ferrous scrap supplies, namely:

implementation of a mechanism of balance scrap supplies to domestic and foreign consumers (initiated by the Ukrainian Association of Metal Scrap);

improved situation on the iron and steel markets, which called forth better solvency of Ukrainian mills;

higher purchase prices set by metallurgical mills and settlement of their outstanding accounts payable for scrap;

reduction in the number of licensees, who can trade in ferrous scrap, owing to endless inspections and revocation of quite a few licenses;

administrative methods, often such emergency ones as 3 to 4-step mandatory procedure of export contracts’ registration, regional restrictions imposed on transactions in scrap, and higher railway freightage rates charged for metal scrap delivery within Ukraine.

It stands out that, by practicing administrative intrusion in the scrap business matters, the Ukrainian State, which currently remains in control over just one integrated mill (i.e. Krivorozhstal Iron and Steel Works), does its best to protect the metalmakers’ interests, simultaneously throttling the scrap market operators. This definitely suggests that the State purposefully infringes upon interests of one business group in favor of another.

Well, there are several answers to this situation. Firstly, integrated mills are still the typical company towns that account for the bulk of employment in a number of densely populated areas. Secondly, unlike specialized scrap enterprises, metallurgical mills are the largest taxpayers in Ukraine. Thirdly, integrated mills are backed or legally owned by mighty business circles that have the closest contacts with central and local executive officials.

On the whole, preamble to the Law on Metal Scrap gives a graphic picture to the State’s attitude towards scrap market operators, namely, it says that, "the law regulates relations that originate in the process of transactions in scrap, which is the most strategically-important and power-saving raw material for the metal industry, and aims at protecting interests of domestic metallurgical enterprises…"

No comment is needed here. The ones who have dared to work on the scrap market have to bank on themselves, protecting and coordinating their common interests via the Ukrainian Association of Metal Scrap. Meanwhile, the authorities easily permit the growing exports of iron ore, though this raw material is rather scarce on the domestic market. Moreover, the railway charges transportation of iron ore several times less than it takes for metal scrap delivery.

Yet, let’s revert to the main topic and consider scrap supplies to individual integrated mills of Ukraine proceeding from the Estimate Metal Scrap Balance for 2000, which was compiled and approved by the Ministry for Industrial Policy on 28 February 2000 and agreed with the Ukrainian Assn. of Metal Scrap.

Bearing in mind that Ukraine’s Ministry of Economy has committed to produce 27.52 million tonnes of steel in 2000 and that it takes 182.9 kg of purchased ferrous scrap to make a tonne of steel, the Ministry for Industrial Policy has estimated that Ukrainian metallurgical mills need a total of 10.035 million tonnes of scrap, of which 5 million tonnes will originate within these mills as scrap returns and 5.035 million tonnes will have to be purchased on the market.

Meanwhile, Ukrainian metallurgical mills managed to get substantial orders by March 2000, while outlooks for the rolled steel market are nothing but favorable for the rest of 2000. Considering all this, the Ministry for Industrial Policy started discussing output of 30 million tonnes of steel, which shall take 5.49 million tonnes of purchased scrap and 5.45 million tonnes of in-house scrap returns.

Manufacturing performance in the first half of 2000 proved that Ukrainian metalmakers indeed aim at producing 30 million tonnes of steel this year. Therefore, they had to acquire 2.75 million tonnes of scrap on the market in order to run steelmaking activities for half a year. At the same time, the statistics reports that Ukrainian metallurgical mills actually purchased 2.924 million tonnes of scrap in the first 6 months, about 7% in excess of demand. Altogether, scrap supplies to domestic mills increased 1.28 million tonnes against the first half of 1999, whereas steel outputs climbed 2.12 million tonnes.

Technical figures say that it takes 182.9 kg of purchased ferrous scrap and 181.7 kg of in-house scrap returns to produce a tonne of steel. Therefore, application of 1.28 million tonnes of extra ferrous scrap should have resulted in 3.51-million-tonne increment of steel output. Apparently, most of additional scrap was applied to replace expensive iron and boost profitability rates in the iron and steel industry. This assumption is backed by the numbers, namely, iron output increased from 11.23 million tonnes in the 6 months of 1999 to 12.55 million tonnes in the first half of 2000, i.e. +11.2%, although steel production grew 16.4%, while a good portion of this iron was exported…

In the upshot, domestic supplies of ferrous scrap skyrocketed, while application of ferrous scrap boosted. Steelmaking mills that used to apply 129.6 kg of scrap per tonne of steel in the first half of 1999, nowadays use some 194.2 kg. Hence, a number of companies managed to put together additional stocks of this raw material in December 1999 – April 2000, taking advantage of a mark-up in purchase prices from US$/tonne 40-50 to $/t 60-78 (hryvnya value, VAT and railway freightage included). Almost all around Ukraine, metallurgical mills paid off the outstanding payables for scrap consumed. However, all these are nothing but average figures, while the state of affairs in each particular integrated mill is rather peculiar.

Krivorozhstal Iron and Steel Works (Metallurgiyny kombinat "Kryvorizhstal") produced 13.6% more steel and 7% more iron, while amplifying scrap purchases 4.8 times. Well, in the first half of 1999, this integrated mill obtained only 37.3% of the required amount of scrap, while this year the demand is covered by 158.5%. As regards procurement prices, this integrated mill purchased A3 scrap at US$/tonne 65-67 (VAT and delivery included) in June 2000. Since early July, scrap suppliers have been receiving US$/t 3-4 less because Krivorozhstal fails to discharge all the arriving ferrous scrap cargo. Most likely, Krivorozhstal will be reducing scrap purchases and procurement prices till September. Consuming an average of 30,600 tonnes of ferrous scrap per month, this integrated mill purchased 291,700 tonnes of scrap in the first half of 2000, thus stocking some 107,000 tonnes for 3.5 months in advance. It is worth pointing out that we estimate scrap stocks for each particular company basing our calculation on pure theory, because Ukrainian metallurgical mills refuse to share the true scrap consumption figures.

Ilyich Iron and Steel Works (Metallurgiyny kombinat im. Ilyicha) boosted steel output 19.9% and iron output 11.5%, while acquiring 87% more ferrous scrap. Scrap demands of this integrated mill were satisfied by 82.5% in the first half of 1999 and by 128.7% in the first half of this year. This company offers perhaps the best procurement terms in Ukraine. When a purchase shipment exceeds 20,000 tonnes of scrap per month, this mill pays up to US$/tonne 68, whereas if a shipment is less than 5,000 tonnes, the procurement price equals US$/t 63 (VAT and railway freightage charge included). Consuming an average of 76,600 tonnes per month, Ilyich Iron and Steel Works purchased some 590,000 tonnes of scrap in the first half of 2000, thus stocking 132,000 tonnes as of July 1, 2000 (this stock is enough for 1.72 months of manufacturing operations). Afterwards, the company started dragging out the settlement dates.

Zaporozhstal Iron and Steel Works (Metallurgiyny kombinat "Zaporizhstal") enhanced output of steel 11.8% and that of iron 10.6%, while purchasing 45.2% more ferrous scrap. This company received enough scrap to cover only some 89.6% of its demand in the first half of 1999, while now the demands are covered by 116.3%, namely, the company purchased 356,700 tonnes of ferrous scrap in the first 6 months of 2000. Since an average of 51,100 tonnes of ferrous scrap is consumed monthly, Zaporozhstal has already stocked 50,000 tonnes of ferrous scrap. Posing higher requirements for scrap quality, Zaporozhstal bought A3 scrap at US$/tonne 62-64 (VAT and delivery included) in early July 2000.

In the course of half a year, Azovstal Iron and Steel Works (Metallurgiyny kombinat "Azovstal") produced 19.8% more steel and 16.2% more iron. This integrated mill purchased three times as much scrap as it did in the first half of 1999, and coverage of its scrap demands improved from 47.9% to 120.4%. During the first six months, Azovstal purchased 336,000 tonnes of ferrous scrap and consumed 233,100 tonnes, thus leaving 103,000 tonnes of ferrous scrap in stock.

Procurement prices, which were lowered to US$/tonne 60-63 (VAT and delivery included) in early July, are likely to be marked down to some US$/t 60 or lower.

Alchevsk Iron and Steel Works (Alchevsky metallurgiyny kombinat) augmented its steel output 18.4% and iron output 12.3%, while buying 24% more scrap in the first half of 2000. In July 2000, when procurement prices settled at some US$/tonne 57-60 (VAT and railroad freightage rate included), this integrated mill once again started acquiring a shady reputation of the leading debtor for scrap. Preliminary estimates show that Alchevsk Iron and Steel Works already holds accounts payable for more than 1.5 months of scrap supplies.

Though requiring some 404,700 tonnes of ferrous scrap to keep production going for half a year, this integrated mill actually purchased only 274,500 tonnes of scrap, or 67.8% of the required quantity.

Dneprovsky Iron and Steel Works named after Dzerzhinsky (Dniprovsky metallurgiyny kombinat im. Dzerzhynskogo) is among the industry’s outsiders in terms of steel output growth (only +2%). Meanwhile, iron output there even reduced 3.3%, though the integrated mill purchased 32.2% more ferrous scrap. Unofficial sources insist that afterwards the integrated mill abruptly curtailed its scrap purchases. It is noteworthy that this integrated mill, which consumes 182,100 tonnes of scrap per half a year, actually acquired only 173,300 tonnes in the first half of 2000, thus covering 95.1% of its demand against 74% in the first 6 months of 1999.

Yenakievo Metallurgical Works (Yenakiyivsky metallurgiyny zavod) has been paying the least for scrap over the past 2 years. In mid-July, this company purchased scrap at US$/tonne 55 (VAT and railroad freightage rates included). At the same time, Yenakievo Metallurgical Works managed to drive its steel output 29.3% up and iron output 26.9% up in the first half of 2000. Thanks to efforts made by its owners, this mill purchased almost 4.6 times more ferrous scrap, thus covering 90.3% of its demands compared to 25.5% covered in the respective period of 1999. This situation proves that the company is not making any scrap stocks for wintertime so far.

All these changes in structure and replacements in management of Donetsk Metallurgical Works (Donetsky metallurgiyny zavod) led to a 7.4% drop in steel outputs and a 1.2% recession in iron output, while scrap purchases increased 18.5%. As a result, Donetsk Metallurgical Works covered 109.8% of its demands for scrap against 85.9% back in the first half of 1999. Consequently, this company should have some 31,000 tonnes of scrap in stock, which is enough for one month of operation. In early July, this company purchased A3 scrap at some US$/tonne 60 (VAT and railroad freightage rates included).

Makeyevka Iron and Steel Works (Makiyivsky metallurgiyny kombinat) is an absolute Ukrainian leader in terms of manufacturing output recovery. This company boosted steel output 50.5% and iron output 54.1%, simultaneously purchasing almost 2.5 times more ferrous scrap in the first half of 2000. Based on the actual steel production, Makeyevka Iron and Steel Works should have consumed some 70,500 tonnes of scrap, thus retaining about 63,000 tonnes for future use. This integrated mill purchased A3 scrap at US$/tonne 58-60 and A5 scrap at US$/tonne 50-52 (VAT and railroad freightage included) at the beginning of July 2000.

Recovery of the Russian market brought about an output growth in Nizhnedneprovsk Tube Works (Nyzhnyodniprovsky trubny zavod), notably, steel output gained 22.2%. Owing to low product costs, this company purchased almost 2.5 more ferrous scrap, thus satisfying almost 149% of its demands for scrap against 74.8% covered in the first half of 1999. Some 45,400 tonnes of ferrous scrap were stocked for future.

Since foreign markets for specialty steels have been showing greater business activity lately, Dneprospetsstal managed to produce 32% more steel, while purchasing 11.4% more ferrous scrap. Approximately 25 companies supply ferrous scrap to Dneprospetsstal. This mill always pays the due amounts on time, though preferring primary raw materials and alloys as feedstock. Consequently, its demand for ferrous scrap was covered by only 74.8% against 77.7% in the first half of 1999.

Table 1. Ferrous scrap supplies to Ukraine’s metallurgical mills

* Source: Metal of Ukraine (Metall Ukrayiny) magazine

Let’s try to sum up the half-a-year performance of Ukrainian companies in terms of steel, iron, and ferrous scrap.

Firstly, preliminary estimates show that Krivorozhstal, Ilyich Iron and Steel Works, Azovstal, Zaporozhstal, Makeyevka Iron and Steel Works, Nizhnedneprovsk Tube Works, and Donetsk Metallurgical Works should have accumulated the aggregate scrap stocks of 530,000 tonnes, while Alchevsk Iron and Steel Works, Dneprospetsstal, Yenakievo Metallurgical Works, and Dneprovsky Iron and Steel Works named after Dzerzhinsky are short of the total of 186,000 tonnes of ferrous scrap.

Secondly, virtually all integrated mills have reduced scrap purchases and marked down procurement prices. Depending on each individual mill and business contacts with scrap suppliers, this markdown ranged between US$/tonne 12 to 18 in May-July 2000.

Thirdly, almost all integrated mills abridged the list of their scrap suppliers and introduced something similar to purchase quotas for each particular supplier company. Official and unofficial owners of Azovstal, Zaporozhstal, and Alchevsk Iron and Steel Works have launched a system of general suppliers, and these integrated mills now purchase scrap only from the general suppliers selected. Naturally, this means that the rest of suppliers have to trade via these mandatory intermediary companies.

Fourthly, the downward trend in domestic scrap demand can be further encouraged by the traditional summer recession on the global markets for iron and steel and by frequent power cuts in Ukraine. Meanwhile, a lot of scrap companies have already scheduled their businesses for a year in advance on the basis of contracts and agreements with domestic clients (responding to urgent demands of Ukrainian metallurgical mills) and lowered export activity to their own or their foreign clients’ detriment.

According to preliminary statistics, ferrous scrap export amounted to roughly 2.3 million tonnes in the first 6 months of 2000, 2-3% greater than in the first half of the last year. Exports of alloy steel scrap accounted for 45,000 tonnes (almost all this amount was shipped to the Netherlands, Germany, and Sweden). As for regular steel scrap, preliminary statistics shows that Turkey purchased almost 48% of this Ukrainian commodity. Italy accounted for 12.7%, Taiwan 8.9%, Moldova 8.4%, Egypt 7.4%, and South Korea 6.3% of the total. Notably, Ukraine exported some 250,000-290,000 tonnes of ferrous scrap in January 2000; 389,000-400,000 tonnes in February; 225,000-245,000 t in March; 322,000-340,000 t in April; 398,000-415,000 t in May; and some 550,000 tonnes in June 2000. This trend clearly reveals an upswing in export activity, while situation on the domestic scrap market changed for the worse.

As a matter of fact, specialized scrap enterprises frequently had no other opportunity, but to export. First of all, preliminary data indicate that exportable ferrous scrap (save for group 7204.21 of the Commodity Nomenclature for Foreign Economic Relations) was priced US$/tonne 77.2 FOB and US$/t 69.4 DAF in mid-June 2000. This is more or less acceptable against the background of lower world prices, though the author thinks that prices for scrap delivered by dry land could have been at least US$/tonne 10 higher.

Second of all, the Ukrainian scrap market is in the agony of suspense awaiting new amendments to the Law on Metal Scrap. This means that traders become unleashed acting on the principle of ‘the one who is late loses’.

Third of all, since late April – mid May, Ukrainian metallurgical mills have been purchasing less scrap and offering lower procurement prices. Therefore, scrap traders faced a difficult dilemma: whether to reduce supplies and leave the business in selected regions, or stay on the market getting along with the minimal profits.

All in all, scrap-trading firms chose the second alternative, despite the fact that scrap prices were reduced some US$/tonne 8-12 on the European, Turkish, US, Korean, Taiwanese, and Japanese markets. In fact, the situation on the European market was largely brought about by abundant and cheap scrap exports coming from Russia, Ukraine, Romania, and Bulgaria.

Table 2. Recovery of iron output in Ukraine

* Source: Metal of Ukraine (Metall Ukrayiny) magazine

According to preliminary data, during the duty-free month of May, Russian scrap exporters supplied 1 to 1.3 million tonnes of ferrous scrap priced some US$/tonne 10 less than the Ukrainian commodity. After export duties had been once again imposed against Russia in late May 2000, Russian ferrous scrap was offered in Turkey at US$/tonne 62-63 FOB, and in Italy at US$/t 63-64 FOB (scrap from Rostov) and US$/t 60-61 FOB (from Novorossiysk).

Moldova’s steelmaking mills make the best use of competition among Russian, Romanian, and Ukrainian scrap traders. For instance, managers of Moldova-based Rybnitsa Metallurgical Works (Rybnitsky metallurgichesky zavod) arranged ferrous scrap supplies from Ukraine at about the same prices as Ukraine-based Krivorozhstal and Makeyevka Iron and Steel Works.

In July 2000, Romanian traders offered HMS1 and shredded mix at US$/tonne 52-53 FOB in Turkey, while Bulgarian companies exported superb-quality ferrous scrap at some US$/t 70 FOB to Southeast Asia.

Hence, as of early July 2000, European shredded scrap was exported from Rotterdam at US$/tonne 85-86 FOB, HMS1 scrap at US$/t 81-83 FOB, and HMS1&2 scrap at US$/t 70-71 FOB. That was precisely the time when ferrous scrap became US$/t 3-8 cheaper in Italy, Spain, France, and Greece.

Japan’s customs bulletin The Tax Report indicated that in the second half of June South Korean metallurgical mills signed contracts for August supplies of 115,000 tonnes of ferrous scrap from the Black Sea ports (including CIS member-states) at US$/tonne 108-112.25 CIF, while Taiwan-based Wei Chin Steel acquired 30,000 tonnes of CIS-origin scrap at US$/t 114 CIF to be delivered in July-August. Another Taiwanese company China Steel sealed a contract with Polish firms for August supplies of 35,000 tonnes of shredded and HMS1 scrap at the average price of US$/tonne 109.65 CIF. By the way, at the moment carriers charge US$/tonne 34-38 to deliver large shipments of ferrous scrap from the Black Sea ports to Southeast Asia.

In mid-July 2000, Ukrainian companies exported ferrous scrap to Turkey at US$/tonne 60-68 FOB and to Southeast Asia at US$/t 70-75 depending on delivery terms. If one tries to get down to the very heart of the situation, it becomes clear that there are no objective reasons for such low prices. The only reason is an artificial price reduction produced by excessive supply and overloaded seaports in May-June 2000. Ukraine could have well exported scrap at US$/tonne 68-72 FOB to Turkey and at US$/t 78-82 to Europe in July 2000. Nonetheless, export prices for Ukrainian semi-finished steel and especially those for finished rolled steel feature a much more remarkable difference from prices for similar foreign-made commodities, so one can hardly blame scrap exporters because quite a few companies in Ukraine are forced to make exports at low price nowadays.

The ones who sell scrap to domestic metallurgical mills should be aware of the following factors. Firstly, managers of metallurgical mills have definitely noticed the global downward trend in ferrous scrap prices. Secondly, taking advantage of superfluous scrap supply, metallurgical mills have been able to turn the domestic scrap market into the buyers’ one, dictating their will as regards prices, quantities, suitable suppliers, etc. Thirdly, local authorities have imposed artificial administrative barriers to prohibit ferrous scrap exports beyond the limits of all the metalmaking and some other regions of Ukraine. This is a definite sequel of repartition of domestic scrap market, which started on the very top level. Naturally, these events have lowered the number of exporters and the scope of exports. Fourthly, Ukrainian authorities practice a system of export contracts’ registration and other means to keep scrap export under tight control. Fifthly, scrap market operators fail to act in accord with one another, despite certain changes for the better owing to renowned efforts of the Ukrainian Association of Metal Scrap.

Protecting their financial interests in negotiations with metallurgical mills, scrap suppliers can well mention that export prices for billets gained US$/tonne 12-15 and those for slabs increased US$/t 30-35 in June and July against the March prices (when foreign markets had featured the highest prices for ferrous scrap). Meanwhile, semi-finished steel accounts for some 35 to 40% of the total metal exports from Ukraine. It is also a good point that long products are priced about the same as before or even US$/t 3-7 greater.

A considerable recovery of steel and iron outputs, along with a sharp increase in metalmaking profitability rates in the first half of 2000, is yet another argument in favor of scrap suppliers. Steel output in Ukraine gained 16.4% mainly owing to much greater output of semi-finished steel, not the finished rolled metal. Therefore, metallurgical mills get less scrap returns from their own manufacturing processes and require more scrap from the third parties. So, they should not have practiced a subjective pricing approach at the end of the first half of 2000. Well, metallurgical mills will figure all this out as soon as the vacation season is over, stocks become depleted, and it is time to make new stocks for the winter.

The very beginning of August saw two exactly opposite trends. A continuing trend to greater scrap purchases by Ukrainian mills at worse purchase terms was the first one. The second trend was a recovery of foreign markets and a slight growth in scrap prices in Turkey and Southeast Asia, which can set off the situation on the Ukrainian market. The first signs are on hand. Ukraine’s metallurgical mills purchased 556,500 tonnes of ferrous scrap in May 2000, some 557,500 tonnes in June, and 474,800 tonnes in July, i.e. 31.9%, 36.4%, and 17.3% in excess of their average monthly demands respectively. Preliminary statistics for the first week of August show that this figure barely equaled to 89%. Meanwhile, scrap exports do not tend to go downhill due to regular market factors.

Once again we have to highlight that collection and processing of ferrous scrap and waste gained 1.32 million tonnes or 33.7% in the first half of 2000 (of which some 1.28 million tonnes were sold to domestic consumers). After this, demands of domestic metalmaking clients were covered by 106.2% compared to 70.9% in the respective period of 1999. It is estimated that some 530,000 tonnes of ferrous scrap returns could have emerged from manufacturing activities of a number of metallurgical mills.

Secondly, the downswing of business activity and a period of low prices on foreign scrap markets, which were traced till early August, are finally over. It looks like the growing European and S.E. Asian economies, along with high oil prices and strong metal demands in the USA, have produced the market recovery a month ahead of schedule (experts used to forecast the recovery in the second half of September). By the way, the USA has good odds of turning from a net exporter into a net importer of ferrous scrap for the first time in its history.

These events can affect the domestic scrap market of Ukraine. On the one hand, people become more encouraged to spontaneously boost export activity. On the other hand, if metallurgical mills try to hold on to the present purchase terms, they will be the ones to suffer.

Consequently, there is a need in making new efforts to coordinate the scrap business within Ukraine in favor of scrap suppliers, consumers, and exporters. In the light of favorable experience of the Ukrainian Association of Metal Scrap, it looks like private businesses will be able to cope with this problem on their own without administrative intrusion of the authorities.

Table 3. Minimum prices for iron and steel exported from Ukraine in 2000 (US$ per tonne, FOB)

Note: * reference and/or indicative prices; ** Metal Bulletin data (FOB the Black Sea)

the Metal