For the first time in history of Ukrainian independence, the country’s metallurgical mills have enough ferrous scrap for their needs. This has become true owing to dynamic efforts of the Ukrainian Association of Metal Scrap with strong support of the Ukra
EQUILIBRIUM BETWEEN METALMAKERS AND SCRAP SUPPLIERS IS IN PLACE
For the first time in history of Ukrainian independence, the country’s metallurgical mills have enough ferrous scrap for their needs. This has become true owing to dynamic efforts of the Ukrainian Association of Metal Scrap with strong support of the Ukrainian Parliament’s Standing Committee for Industrial Policy and Entrepreneurship, and the State Committee for Industrial Policy of Ukraine. On July 21, 2000, the Ukrainian Assn. of Metal Scrap held its 3rd representation assembly. This time, the assembly summed up the achievements up to date. In this issue of The Metal, we fully dedicate the Industry column to coverage of events of the 3rd assembly of the Ukrainian Association of Metal Scrap.
It has been less than a year since the Ukrainian Association of Metal Scrap came to be (the official registration took place on April 2, 1999).
The Association was set up to coordinate efforts of companies that dealing in scrap (mainly, in ferrous scrap) on domestic and foreign markets; to settle the arising problems with scrap supplies to local consumers, e.g., metallurgical mills and machine-building factories; and to protect this sector’s business interests and act on its behalf in executive and legislative authorities.
Right now, all Ukraine-based businesses that collect and treat metal scrap are private. In fact, this Association is the only establishment that safeguards and coordinates the interests of all Ukrainian scrap companies at this point of time.
Similar institutions are widely practiced around the world, though their status and relations with the authorities have yet to be defined in Ukraine.
Today, the Association comprises 105 member companies and organizations, which collectively hold almost 80% of the Ukrainian market for ferrous scrap and engage in collection, processing, domestic sales, and foreign trade in this commodity.
Almost all administrative divisions of Ukraine have representation in the Association, with the largest number of representatives coming from Kiev, Odessa, Dnepropetrovsk, and Zaporozhye regions, and the smallest number coming from Volyn, Ivano-Frankovsk, Khmelnitsky, and Vinnitsa regions (one representative apiece).
At the moment, higher authorities have already acknowledged the Association. The Association takes part in executive decision-making and drafting of scrap-related legal acts. There are no issues involving metal scrap that are settled without the Association’s participation. Taking part in every scrap-related meeting and conference of the Cabinet, standing committees of the Ukrainian Parliament, and the State Committee for Industrial Policy, as well being member of the Licensing and Export Commission with the Committee for Industrial Policy, the Association has a great opportunity to give timely response to market adjustments, advance its positions, and exert influence on decisions being considered and approved.
One of the main challenges now is to give shape to coherent legal grounds and normal manufacturing environment for the sake of both the State and businesses.
For instance, last year certain people came up with a proposal not to reimburse the value-added tax paid on metal scrap exports. The Ukrainian Parliament even began to consider a relevant bill. It were the arguments put forth by the Association and efforts made in the standing committee that convinced the nation’s representatives of a posterior nature of this issue at that point of time. In fact, this question is not on the agenda anymore.
The 1999 situation with scrap supplies to Ukraine’s metallurgical mills was a true disaster. Around the last year, the Association targeted its efforts to find the optimal way to supply steelmaking mills with enough ferrous scrap in order to meet the scheduled steel outputs. This is a complicated issue, which is questioned even by the Association’s members. Metallurgical mills were short on metal scrap for the past 5 years, constantly addressing the country’s authorities with their claims and complaints on this issue. Metalmakers mainly argued that scrap exports were increasing, while domestic demands were not met year in, year out. Local capacities were kept idle, whereas raw materials were escaping from the country. Besides, such an export supported the Ukrainian rivals that manufactured cheaper metal in Turkey and other neighboring countries. Indeed, ferrous scrap exports from Ukraine grew from 200,000 tonnes in 1995 to 4.7 million tonnes in 1999.
Over the three recent years, this situation has brought about enforcement of the Law on Metal Scrap and approval of more than 20 various resolutions and decrees of the Cabinet of Ministers and relevant agencies that directly or directly aimed at redirecting scrap shipments to local steelmaking mills.
Proposing a mechanism of balance supply, the Association presented its approach to cope with this problem of domestic metallurgists. Keeping in mind that Ukrainian government has committed to refrain from any limitation of EU-bound ferrous scrap exports, the Association came up with an alternative to regulate internal and external scrap supplies with no strictly defined limits, basing the new system on balance of scrap collection and sufficiency of scrap for domestic steel mills. This mechanism has been launched since 1 March 2000. The result is a true role model; namely, in the first half of 2000 Ukrainian steelmaking mills received 1.8 times as much scrap as in the 6 months of 1999. In fact, local metalmakers even obtained 6% more scrap than demanded. At the same time, scrap exports featured an upward trend. Therefore, Ukraine keeps its commitments and engagements to international institutions and gets an opportunity to negotiate more intensive metal trade with the European Union.
In other words, there is no problem with ferrous scrap supplies to local companies and one can export as much as he wishes to. This means that the country still earns the desperately needed foreign currency receipts.
The first 6 months of 2000 saw ferrous scrap supplies to Ukrainian steel mills surpassing the demand for the first time in 10 years.
Lately, the Association has been making tremendous efforts to balance supply and demand of metal scrap and to make metallurgical mills timely pay for the scrap purchased. We also keep an eye on maintenance of optimal scrap exports. Greater exports pose a threat of blowing the market up, like the Russians did in May 2000 (Russian companies supplied 1 to 1.3 million tonnes of scrap priced US$/tonne 8-10, i.e. 12 to 15% below the market price back then).
Optimal actions of Ukrainian scrap businesses were among the main issues on the agenda of this assembly. This August, all companies that collect metal scrap should make more stocks for the coming autumn. This would be the smartest thing to do.
It turns out that strict regulation of raw material supplies to local manufacturers contradicts the economic liberalization policy and pending market reforms.
Hence, we constantly run into disputes on the very same questions. Inconsistency leads to different approaches practiced by different regional companies and various authorities, thus affecting the final decision-making. This is how the things were during passage of the Law on Metal Scrap and approval of the balance regulation of scrap supplies, and this is how the things are now, when amendments are being made to the Law on Metal Scrap.
Enforcement of the Law on Metal Scrap gave birth to a new business term, i.e. a specialized enterprise. The former Vtormet (Secondary metal) companies that have enough manufacturing facilities pose the highest requirements to these specialized enterprises.
The newcomers in this business reasonably argue that lease of idle industrial capacities is more economically justified for a stagnating economy than building of new capacities. Meanwhile, it is this part of businessmen that accounts for the bulk of scrap collection now. Thus, one simply has to take account of this opinion.
At this point of time, the Standing Committee of Ukrainian Parliament has prepared a bill on Amendments to the Law on Metal Scrap and Several Other Laws of Ukraine for the first reading. This bill proposes, firstly, imposition of a 30% export duty on ferrous scrap and, secondly, nothing but a double licensing of transactions in scrap (the first license to be issued to head companies by higher executive bodies and the second to be issued to their regional branch offices by local authorities). Meanwhile, there is no provision on wholesale trade in metal scrap, which violates the Constitution of Ukraine and a number of the country’s laws, as well as denies the widely accepted international principles of commerce.
Without any doubt, approval of the present version of amendments to the Law on Metal Scrap will disturb the optimal balance that is traced now and will damage interests of all the parties involved.
The Association strongly opposes imposition of a 30% duty on scrap exports beyond Ukraine, proposed by a group of deputies. The effective Law on Metal Scrap already mentions limitation of scrap export (it provides for an opportunity to apply quotas up to complete embargo on ferrous scrap exports).
Illegal intrusion of local authorities in the scrap business has become especially evident recently. Proclaiming a good slogan of introducing order in the regions, local authorities make illegal actions. They prohibit scrap exports beyond their regions, disallow businessmen to work with scrap, voluntarily selecting the lucky ones who can do scrap commerce in their regions.
For instance, Sumy Regional State Administration allowed only 6 companies, namely, 4 Sumy-based firms and 2 Donetsk-based ones, to work with metal scrap in Sumy region.
Quite a lot of local authorities pin many hopes to the opportunity to issue regional licenses. If this proposal is approved, local authorities will make the best bribery use of this advantage.
We simply have to point out the growing number of authorized agencies that control transactions in scrap. Today there are plenty of controlling agencies, e.g., radiologists, ecologists, explosion experts, people from the State Standard Committee, and the like. It is really hard to deal with metal scrap because sanitary-epidemiological services of Ukrzaliznytsya (Ukrainian Railway) ill
Regulation No.999 of the Cabinet of Ministers and the Law on Metal Scrap rule different procedures of ecological control over ferrous scrap exports. The procedure must be simplified.
One has to consider a number of other pending problems that hamper the scrap business in Ukraine, notably, extraordinarily high railway freightage rates charged on transportation of metal scrap in Ukraine. At the same time, Ukrzaliznytsya does its best to avoid any responsibility for safety of cargo, though our companies pay the hig freightage charges in advance. Well, average theft rate currently reaches 15% of the cargo transported by railway in Ukraine.
Criminal offences in scrap collection are among the worst problems, which irritate the Ukrainian society and upset statesmen. All the violations in nonferrous scrap collection are automatically treated as illegal actions of all the scrap-collecting businesses. Businessmen who have made up their mind to work with scrap in the long run have to fight the criminals back themselves. There have already been prepared additional measures to heighten civil and criminal responsibility for scrap collection, new amendments to the Law on Metal Scrap, and proposals for stricter requirements to specialized enterprises.
The Association will not only stand for common interests, but also protect the interests of every individual member.
Some 2,600 licensors do business in Ukraine now. All of them will not become members with the Association, though the ones who want to do serious business in this sphere can count on our help and assistance.
Today, when the Association is acknowledged by the country’s authorities, we will aim to secure our achievements in the short run and improve activities of our local representative offices.
Here is one more aspect. It is time for us to emerge on the international level and partake in making of vital decisions involving Ukrainian businessmen.
The assembly approved a resolution and an address to the Ukrainian Parliament and the Cabinet of Ministers (both documents are reprinted below).
Timetable of licensing in Ukraine
Prior to July 1995 the metal scrap business was not licensed, while scrap exporters were the only ones to be subject to licenses and quotas.
Ukraine’s Cabinet of Ministers ruled void imposition of quotas and issuance of licenses on metal scrap on 31 March 1995. As a result, there swiftly emerged a great number of businessmen, who collected scrap under no control on the basis of the Law on Entrepreneurship. This business quickly proved to be mostly illegal, especially, as regards nonferrous scrap collection.
Simultaneously, scrap exports skyrocketed, while scrap supplies to Ukrainian metallurgical mills deteriorated. Certain facts and figures on this phenomenon are quoted in this report.
To bring order to this business, on 13 July 1995 the State enforced a law on licensing of transactions in scrap. It became possible to keep track of and control the scrap business, though this step failed to change the situation for the better.
To indirectly limit exports, in 1997 the government approved a notorious Regulation No.1262, subsequently passing a number of other governmental and agency acts, e.g., introducing ecological control and the State Standard Committee’s control over export shipments; limiting export of military scrap; starting to treat nonferrous scrap as a double-purpose exportable commodity; limiting nonferrous scrap exports under tolling deals; etc. Besides, local inspections in 1998 led to re-registration of the previously issued licenses.
Yet, there was virtually no change of the situation.
To further improve the scrap business, the Parliament passed the Law on Metal Scrap in May 1999. This law approved almost all the previous by-laws and introduced stricter treatment of scrap exports. In particular, nonferrous scrap exports were banned and alloy-steel scrap exports were limited. The Law mentioned an opportunity to impose quotas on ferrous scrap exports up to a total embargo depending on the situation with domestic supply.
Further developing provisions of the Law, there have been approved 7 various executive acts, notably, the government approved a list of household scrap, prohibited exports of military scrap, started treating exportable alloy-steel scrap as a double-purpose commodity, introduced statistical statements on transactions in metal scrap, approved the balance method of domestic supplies, and so on.
COMMENTS OF THE ASSEMBLY’S SPEAKERS:
Dmitriy DERKACH, chief of the Metallurgical Department with the State Committee for Industrial Policy
Quality of metal scrap supplied to metallurgical mills is one of the paramount issues today.
All of us remember that the end of 1999 was marked with notable claims for normal scrap collection and commerce. Activity in this sphere is a national problem, which the Association and its president can cope with.
Performance results of the six months of 2000 indicate that problems of ferrous scrap supplies to metallurgical mills are not on the agenda anymore. The Association is an equal partner of central executive bodies. Not a decision relating to metal scrap can be made without the Association’s participation.
At present, the State Committee for Industrial Policy and the Association have approached a new organizational level of their joint efforts. The experience of relations among the State Committee for Industrial Policy, the Ukrainian Association of Metal Scrap, and the Ukrainian Association of Ferrous Metallurgical Enterprises is applied to decide on the scrap collection and commerce strategy on both domestic and foreign markets.
The first six months of 2000 were rather efficient for mining and metallurgical companies in Ukraine, i.e. production growth rates amounted to some 16-17% against the first half of 1999, while financial health of most Ukrainian metallurgical mills improved. Output of commercial products has increased 160% today. Now we have the qualitative figures, which indicate enhanced business performance, operation above the breakeven, making of net profits, and reduction in product costs per one hryvnya of commercial products down to 90 kopecks or even less (the most successful companies spend 75 kopecks at the present time). There would have been no such improvements without good contacts among metallurgical mills and metal scrap businesses that are members of the Association. Currently, for the first time in seven years, metallurgists may boast achieving the 1993 level of output. Ukraine is expected to manufacture some 30 million tonnes of steel this year. Scrap companies supply enough scrap to satisfy 115-117% of the claimed demand and about 107% of actual consumption figures.
In turn, metalmakers start changing their attitude towards scrap operators. Stabilization of financial and business situation fostered a cessation of complaints on improper and untimely payments for scrap supplies (previously, all these complaints were addressed to the Committee for Industrial Policy). Presently, metallurgical mills make 100% pre-payments for electric power, fuel, and railway freightage, as well as pay in full all the due taxes, wages, and salaries. Even under such hard conditions, metallurgical enterprises efficiently cooperate with scrap suppliers. This should encourage further recovery on the domestic scrap market.
A burning question for today is the quality of metal scrap supplied. Previously, metallurgical mills dealt with ferrous scrap, some 0.95 tonnes/m3 in bulk weight density, whereas now this figure amounts to 0.75-0.8 tonnes/m3. This suggests a significant amount of light metal in scrap, which easily burns out impeding the efficient smelting procedures. Such a situation worsens operational performance of Ukrainian steelmaking mills. Western rivals obtain nice capital scrap, and domestic steel mills want to consume metal scrap of the equal quality.
Anatoly GOLUBCHENKO, president of the Ukrainian Association of Ferrous Metallurgical Enterprises
All prohibitions are a waste of time and efforts, if proper economic interests are not involved.
The Association of Metal Scrap has proved its right for existence. Yet, it is only on condition that the Association pursues the proper policy and supports its members, its opinion will become a weighty argument for both legislative and executive power, as well as for local authorities in Ukraine. The time will come when international institutions will pay attention the Association’s policy.
Since the Soviet times, all sub-industries, specifically the ones that make raw materials, including metal scrap, have been working for the metal industry. The latter sets the rules. Presently, the market treats every industry and sub-industry as an equal partner with reciprocal interests based on the principles of equality and mutual benefits. The time has come to change positions and define the priority tasks for metal scrap operators. The choice is between domestic consumption and export business.
Prices for oil, grain, nonferrous metals, gold, and platinum determine the global economy today. Let us face the truth: until the OPEC member-countries agreed to lower oil production and raised the price for oil, thus giving a push to the world economy, Ukraine had reported no recovery of the metal industry. As of today, we can see that metallurgical mills start working and involve some internal reserves. In fact, all these reserves are nothing but greater global demand for ferrous metals after recovery of the world economy. Well, has anyone seen an increase in domestic metal consumption in Ukraine? If only domestic construction consumed ten times as much metal and demand for structural shapes and sections grew 10-20 times, it would mean that we have found our own solution to the problem and that we have internal reserves. The OPEC countries were only able to concur and safeguard their corporate rights in a way that fostered a rise of the world economy. Ukrainian metallurgical mills have simply taken advantage of this situation.
Metal scrap will always be exported to places, which pay more and better. The same laws regulate flows of grain, oil, natural gas, and metals. A metallurgical mill sells its products to where it gets the most benefit. Just try to take away this competitive metal, try to buy it for cash. You, metal scrap companies, try to pay a visit to metallurgical mills and buy 10,000 tonnes of billets for cash. I think you will fail. What balance are you talking about? Try to make metalmakers come to you and talk to you and negotiate on equal terms. In the present situation, the scrap market is restrained everywhere under corporate pressure of metallurgical mills. The entrepreneurs are forced into a narrow one-way passage.
Now, strict distribution of internal scrap flows in Donetsk region becomes understandable. Big profits are made not in the scrap businesses, but in large integrated mills, which have real owners. This adds protection of every enterprise to functions of the Association. Scrap recycling and treating companies (Vtormet) overloaded with inefficient productive assets lose competition to small firms, which have none of these fixed assets. Small firms only have the signed shipment contracts, 5 to 6 employees, a computer, a small office space, and do half of their business in the shadow economy. Well, large Vtormet companies are too prominent to work in the shadow. I stress that I do not want to offend anyone because I believe both types of companies must work on equal terms. In this situation, Vtormet companies should completely revise their attitude toward business, should become competitive and cost-efficient. Prohibitions are a waste of time if proper economic interests are not in place. Duly arranged economic interests are the only things that can create the conditions, when this negative effect disappears of its own accord. Only the Association can protect concerns of both Vtormet companies and small-sized firms.
Oversupply of metal scrap on the market will last till wintertime, I suppose. As soon as it starts snowing, consumers will stand in lines for ferrous scrap. It is only when the Association lobbies a decision on summer scrap stocks and everyone carries it out, when you find warehouses, lower scrap supplies to metallurgical mills, and create scrap reserves instead of following the price markdown alternative, that you will be able to supply ferrous scrap at new higher prices in time and metalmakers will have to pay your price. Will you be able to withstand governmental officials? The right alternative now is to create warehouses, arrange for scrap storage, and show self-control. This is how the entire world does business. Specifically, similar situation occurred with aluminum, when ports were overstocked with this commodity till the price went up.
One should make good use of the mentioned examples. At a certain period of time, excess of metal scrap led to a price decrease on foreign markets. Similar situation happened with domestic prices. In order to survive everyone must abide by the same rules. If someone starts cheating, everyone will lose.
Vadim GURZHOS, deputy chairman of the Businessmen Council with the Cabinet of Ministers of Ukraine
Introduction of a 30% duty will finally unsettle businessmen, who collect and recycle metal scrap, and will disturb the existing fragile equilibrium between production and consumption.
Within a year of its activities, the Association, unfortunately, has not yet acquired the desirable heft and authority with executive power. Today, executive authorities still do not pay much attention to opinion of the Ukrainian Association of Metal Scrap.
Regrettably, executive officials have the warped information about business of scrap processing and collection. It is necessary to enhance efforts to create a positive image of the Association and all its members.
I would like to mention certain amendments to the Law on Metal Scrap, which are lobbied by the standing committee of the Ukrainian Parliament. Everything is focused on a 30% export duty. Final decision on this issue has been delayed until this autumn. If the amendments are accepted, there will be no need to discuss the rest. Imposition of this duty will push off the rails those businessmen, who are engaged in collection and recycling of metal scrap. The present equilibrium between production and consumption will be broken. Today, situation on the market is really healthy. Metallurgical mills are "stuffed", exporters are generally satisfied, there is a surplus of scrap, and even an oversupply on the domestic market. General situation on the international market gives an optimistic outlook for the future. In case any component of this equilibrium is removed, it will be broken. This is for sure, since businesses that do scrap exports, are engaged in domestic supplies as well. This equilibrium should not be disturbed in any case.
At present, authority of the Association and its members is not strong enough. It is necessary to involve the Ukrainian deputies to overcome negative trends that damage the interests of scrap-collecting businesses. In the old Law, the issues of wholesale trade and intermediary activity are simply omitted, and most people that run wholesale collection and recycling are regarded as outlaws today. They are forced to invent some fake lease contracts, contrive their activities to squeeze in the legislative gaps, and to exist semi-legally. Proposals regarding wholesale trade or intermediary activity have been forwarded to the Parliamentary standing committee that works on amendments to the Law on Metal Scrap. Unfortunately, this standing committee has not paid attention to our proposals so far.
At the moment, the State Inspection is being established. It will become yet another controlling organization, which will look after scrap-collecting and processing businesses. Along with that, the draft decree ruling its establishment does not abolish the authorities of ecologists, radiologists, the State Standard Committee of Ukraine, the Ministry of Internal Affairs, and other supervisory bodies. It will become just another organization with unlimited terms of reference. This means establishment of an institution with super authority.
Efforts in creation of regional representative offices can be mentioned as a shortcoming in the Association’s work. Our rep offices have not been introduced to regional state administrations. Regional state administrations have no idea about the existence of such representative offices, and have already created their own commissions to regulate operations of metal scrap procurement companies. Nobody pays attention to breaches of the Law on Entrepreneurship and antimonopoly laws. The Association has to bring its regional representatives to all regional state administrations, and they shall partake in activities of the scrap-regulating commissions, and establish feedback with these commissions.
Besides, a special group should be created to give quick and efficient response to complaints, claims, and various acts of oppression and discrimination against businessmen in the Ukrainian regions.
Albert ZHUMYKIN, chairman of the Board of Shareholders with private JSC Krymvtormet
The cornerstone principle goes like this: all businesses – both metallurgical mills and metal scrap companies – have equal rights now and their relations should be based on the market economy fundamentals.
We have joined in the Ukrainian Association of Metal Scrap in order to protect our interests in the market environment with consideration of the State interests and those of domestic metal industry.
The start can be treated as a success. This means that establishment of the Association was a correct move.
The following principle shall become the cornerstone of our work: all businesses – both metallurgical mills and metal scrap companies – have equal rights now and their relations should be based on the market economy fundamentals. So far, there are many questions that require urgent solution.
By now, many supervisory and controlling organizations have emerged, including ecologists, explosion experts, radiologists, the State Standard Committee, etc. Experience of the Soviet times has proved that companies have enough skilled experts to cope with these problems on their own.
I would like to mention an issue of railway services rendered for transportation of metal scrap to ports and to metallurgical mills. What is the big difference? Nothing, except for a little trifle – the tariff charged, which is 1.5 times higher for scrap destined to ports. Besides, the railroad is not responsible for cargo safety, for meeting of delivery schedules, and, what is more, scrap theft on the railway has become a regular source of income for a particular group of Ukrainian citizens. The Antimonopoly Committee and the police must examine this question.
Also, I would like to speak about imposition of a 30% export duty on ferrous scrap. Is it possible that the experience of 1996 when a 30% export duty was applied in Ukraine is forgotten? Back then, scrap supplies to the international market practically ceased, while exporting companies and firms incurred great financial and moral losses. The end of the story was that, in three months, the President of Ukraine canceled that legal act. Initiators of imposition of this export duty on ferrous scrap explain their proposal with the state interests and desire to fully satisfy internal needs of metallurgical mills. However, the present system already allows regulating scrap supplies to both domestic and international markets. Metallurgical mills have even started imposing their own quotas for metal scrap suppliers, breaching the payment schedules. Debts of the mills are growing, i.e. everything has gone too far once again.
The present situation proves that advocates of the 30% export duty have no good arguments. It is necessary to just follow the article of the Law on Metal Scrap regarding imposition of quotas. Such a measure can be applied if necessary. So, what is another ban needed for?
At the moment, most Ukrainian metallurgical mills are completely privatized and partially owned by foreigners. They enjoy a full set of rights in the market economy. That is why they should operate in compliance with the market rules, i.e. timely and fully settle all payments due to scrap suppliers or, as it is adopted in export practice, to effect prepayment, so that suppliers can purchase the necessary scrap and get railway freightage cars. In export business, everyone works on prepayment.
Potential toughening of the legislation as regards transactions in ferrous and nonferrous scrap may have its favorable, as well as unfavorable aftereffects.
As a result of dynamic operations of various illegal firms that purchase and sell stolen scrap, especially nonferrous one, the general public has an opinion that deals in metal scrap are an illicit business. Amendments to the Criminal Code can change this state of affairs.
The Parliament of Ukraine is now getting ready to pass some other amendments and additions to the Law on Metal Scrap.
For instance, they propose to oblige scrap reception sites to equip their premises with cash registers on mandatory basis. However, in compliance with the Law on Application of Electronic Cash Registers, these registers must be used where goods are sold, but not purchased. Moreover, the very same Law declares that other legal acts cannot establish rules for application or non-application of cash registers.
Making use of its extensive experience, the Association should unite and constantly safeguard the interests of specialized scrap enterprises.
Vladimir GALUSHKIN, first deputy director-general with Ukrvtormet Association
Vtormet (Secondary metal) companies are the only authentic specialized enterprises that have the necessary recycling and processing technologies in Ukraine today.
Ukrvtormet system took shape with assistance of Ukrainian metallurgical mills back in the Soviet times in order to make the necessary ferrous scrap supplies to metalmakers. In the years of booming business, our companies collected over 10 million tonnes of metal scrap, while last year we were barely able to collect a million tonnes. One of the main reasons for Vtormet’s hardships is the orientation towards Ukrainian metallurgical mills that have discontinued paying for scrap consumed. Those Vtormet companies that have managed to establish strong business contacts with foreign markets stay more or less aloft now. Large-sized Vtormet companies are technologically dependant on integrated mills, thus they are the ones that suffer the most at the moment. We can see that something similar to what happened 5 to 7 years ago is ripening now. If the Association does not take urgent steps, many companies may fall off. The logic of export duty is as simple as it can be; namely, the duty freezes the export business leading to appearance of monopolist consumers. Well, if a company is a monopoly, it can enjoin purchase prices and accumulate as many payables for scrap as possible.
People bring up the issue of metal scrap quality more often nowadays. How justified are these claims? Just a short while ago, metallurgical mills purchased all the scrap supplied to them, including unconditioned scrap, 5A or even 12A scrap. Very often the delivered scrap was bulk and ungraded. Well, there is a very simple solution to this problem. One just has to sign the necessary contracts with Vtormet companies and he will be able to supply conditioned lump scrap that complies with technical parameters or GOST standards.
Concurrently, it is a big issue whether all scrap suppliers are ready to back the adequate scrap quality. It is no classified information that Vtormet companies are the only authentic specialized enterprises equipped with the necessary scrap-treating technologies in Ukraine now. The market economy offers lots of approaches. For instance, scrap owners can make orders to Vtormet companies on various payment terms, and only afterwards sell high-quality conditioned scrap to steelmaking mills. Or metallurgical mills can purchase low-grade scrap and hand it over to Vtormet companies for processing. In fact, only some 15% of Vtormet capacities are utilized at the moment. This is a good way to provide the required quality of scrap sold to metallurgical mills. Coke-making companies successfully take advantage of a similar approach when doing business with metallurgical mills.
Very soon the quantity of scrap collected in Ukraine will go downhill. Save for scrap returns of metallurgical mills, Ukraine mainly collects old scrap now and this source will swiftly become depleted. This means that we will face a challenge of treating hard-to-process ferrous scrap, thus necessarily involving the specialized companies.
Vtormet companies charge a negotiable amount of some US$15-20 for conditioning and piling of a tonne of ferrous scrap (these rates fluctuate depending on scrap quality), while price for a pile is equated with that charged for 3A scrap.
Anatoly SYTNIK, director-general with joint-stock company Vtormet of Dnepropetrovsk
Metal scrap should not be traded for cash.
Throughout our extensive business experience, we have never obtained that much legal information during one year as we got from the Association. Furthermore, all the laws and by-laws were supplemented with in-depth analysis, conclusions, and improvement proposals. This is wonderful because it proves that the Association has become a true institution acknowledged by the highest authorities. Besides, there is an opportunity to improve its activities further on. Some of us have obtained true help and assistance for the very first time in this business. Now we have someone to ask for help and support, and this is a whole different feeling.
Yet, I personally believe that an attitude towards support of scrap exporters only, which had been accepted from the very beginning, was wrong. For instance, in Dnepropetrovsk region, the Association is treated as some kind of a union of exporting companies. Later on, the Association proved to be a flexible organization giving timely response to the situation with scrap supplies to domestic metallurgical mills. This immediately influenced the performance in the first half of 2000.
As a member of the Supervisory Board and one of the founders of the Association, I have the following proposals as regards further enhancement of its activities. Interaction inside the Association, which is far from being perfect now, is among the most significant aspects. Extensive and thorough efforts are made to protect the Association’s members and keep in contact with the authorities. However, not enough is done to make the Association’s members introduce order to this business. Most criminal offences are made in metal scrap collection at this point of time. Meanwhile, all illegal scrap reception sites that nestle in private garages were not set up by former state-owned Vtormet companies, but by newcomers in this business, who pay in cash. The main root of all this crime in the ferrous and nonferrous scrap businesses shows itself on the initial stage, i.e. at reception sites. That is where people loaded with cash purchase scrap without inquiring where it came from, and without keeping records of the passport identification data of those, who brought the scrap. This is where the crime dwells. If people, who sell scrap, had no easy way to get cash right away, they would never steal scrap from railway freightage cars, cannibalize equipment, or do vandalism in respect to monuments. We are the only ones who can bring order to these reception sites in order to stop discrediting the Association. In fact, we can easily get along without this kind of sites. It is just necessary to make some amendments to the laws on cash turnover and prohibit payment for scrap in cash. If this comes true, the issue of crime would simply disappear.
Here is the second question. Now, when metallurgical mills receive enough ferrous scrap and some of them even have scrap in stock (roughly 0.5 million tonnes, according to the Association’s estimates), these consumers start posing stricter requirements for quality. Vtormet companies are ready to make metal scrap comply with GOST technical standards upon order of scrap consumers. All the scrap-trading companies should be aware of this: the ones, who violate these requirements, would simply lose their clients.
Stanislav SHEFER, director with Delta Impex firm, Zaporozhye
It is time to compile strict schedules of scrap supplies to metallurgical mills so that the latter make payment on time.
Discovery of the optimal levers that balance up domestic and export-bound supplies is a great achievement of the Association.
Balances of ore supplies vividly illustrate that metallurgical mills do not purchase the quantities of raw materials that they claim, thus creating grave problems for mining companies and railways.
Back in the early 1999, the situation with balance of ferrous scrap was about the same. Metallurgical mills claimed excessive quantities of scrap and scrap-exporting companies were the first to suffer from overstated demands. This information also provoked serious attempts to introduce the notorious amendments to the Law on Metal Scrap.
Now, it is time to make strict schedules of scrap supplies to metallurgical mills so that the latter could pay on time. Scrap suppliers should discuss adherence to these schedules directly with metallurgical mills’ representatives right before or right after balance-compilation meetings in Dnepropetrovsk.
The Association should be proactive in disputable cases and should involve lawyers and officials from relevant ministries and state agencies.
It might be good for Association to share more comprehensive information on the current situation on the domestic market, on overdue accounts payable held by metallurgical mills, recommendations on emerging markets and new technologies that relate to scrap processing and quality control.
There is also a need in establishing business contacts with scrap associations of Russia, Georgia, and other CIS member-states in order to prevent market breakdowns, like this year’s collapse. We shall try to generate a common program of actions and balance up the scrap supplies this autumn.
We should not ease our contacts with Ukrzaliznytsya (Ukrainian Railway) representatives. For instance, Pridneprovye Railway has lately issued an order prohibiting scrap handling in freightage cars placed on sidetracks. Theft of metal scrap right from freightage cars is the greatest problem for everyone in this business. We must try to tackle this problem jointly with Ukrzaliznytsya people and pass it down to the legislators.
Andrei BOBRUS, director of public joint-stock company BiC, Donetsk
One has to remember the great revenues that the country’s budget gets from scrap exports and all the taxes paid in cash, not in some barter.
When establishment of the Association was just in progress, quite a few of us doubted whether it would be just another soap bubble or some kind of a distribution valve that works only one way and not the other. Luckily enough, all our fears and doubts have proved wrong. We have finally got a marvelous mechanism for regulation, planning, and analysis, which relieves scrap collecting companies of some of their terrible problems.
The main tasks of the Association have been accomplished: Ukrainian metallurgical mills are replete and winter stocks are made. The balanced policy has brought about a state of equilibrium between domestic consumption and exports.
However, receiving enough ferrous scrap, metallurgical mills make efforts to narrow the domestic market, disagree with scrap quality and quantity suitable for suppliers, and start delaying the due payments. As it turns out, scrap suppliers do nothing, but issue commodity credits to the metal industry.
Numerous mismanaging and even foolish executives of various companies have reduced their employees to poverty and worn productive assets into bare scrap. Trying to vindicate their actions and deliberately misinterpreting causes and effects, these people keep on blaming scrap-collecting companies for alleged devastation of the country’s industry and economy. Meanwhile, one simply has to keep in mind the great revenues that the country’s budget gets from scrap exports and all the taxes paid in cash, not in some barter.
It only together with the Association that we can settle these acute problems and be of real use.
Vadim BUBLEI, director-general with private joint-stock company Ceramet, Donetsk
Search for a compromise is the only thing that can justify itself.
I would like to draw attention to our joint achievements within the Ukrainian Association of Metal Scrap and to opposition encountered by the Association’s regional representative offices from local authorities. When these rep offices were set up, we mainly selected the companies, which were located in regions and had significant scrap collection performance. Believe me, if regional offices of the Association just try to look for opportunities to oppose local authorities, we will reach nothing.
Our regional center has chosen its own way. First of all, we determined the scope of scrap consumers in Donetsk region, where 5 iron and steel works are placed. Besides, the Regional Metal Scrap Commission practiced strict administrative regulation in Donetsk region. Search for a compromise is the only thing that can justify itself in this case. We have come to this compromise and established Donetsk Association of Metal Scrap, which currently unites not only scrap-dealing companies, but also metallurgical mills. These are the entities that own or control large companies in the region now. We made this step to discuss all the issues at one round table on equal status, though we have to remember that metallurgical mills are our clients and they are the ones to pay for metal scrap. Hence, we have proven that we can reach a compromise.
Accession of the Ukrainian Assn. of Metal Scrap’s representatives to Donetsk Regional Metal Scrap Commission was a next step. Taking part in work of this commission and participating in its meetings, we make keen efforts to influence the situation with license revocation and regulation of the scrap-collecting business. The top objective is to supply regional steelmaking mills with ferrous scrap. A scrap-collecting company cannot export scrap beyond the region until it discharges its obligations as regards scrap supplies to regional steel mills.
Donetsk Regional State Administration supports the Association’s regional office and companies that pay off their debts for scrap.
Following the Association’s example, we are getting ready to sign an agreement on balance supplies of ferrous scrap with the Regional State Administration.
Right now, we are trying to emphasize on local relations among metallurgical mills and companies that collect and process ferrous scrap. Every new specialized company that wants to collect scrap has to get approval of local authorities today. Local executive authority takes refuge in the fact that licenses are issued in Kiev, thus acknowledging its own weakness and creating nice conditions for thriving larceny.
At the moment we work on design and introduction of a system that would bring relations with scrap collecting companies down to the local level. There is a proposal to set up the so-called risk funds on sites, which would compensate for losses of the collecting businesses. All scrap-collecting companies that want to run a normal business would contribute their parts to these funds. These contributions would be spent to fix serviceable equipment, which is sold to us as metal scrap. Our people cannot be punished but with docking their pay. Prohibition of settlements in cash would have a limited effect and little or no efficiency. Meanwhile, establishment of a risk fund would highlight new key points and the whole criminal upturn would come to a naught.
The Association has to deal with political and macroeconomic issues on the levels ranging from State Committees to the Ukrainian Parliament and corresponding international institutions and organizations.
Here is the main objective for the Association – to lobby optimal laws and protect us from the laws that bend businessmen to their knees.
the Metal
About activities of the Ukrainian Association of Metal Scrap from April 1999 till July 2000, and on main tasks for the coming year
Approved by the 3rd Assembly of the Ukrainian Association of Metal Scrap
21 July 2000, Kiev
The Assembly acknowledges that during a year of existence the Association has made many efforts to become acknowledged as a public organization and to arrange the necessary contacts with the State Committee for Industrial Policy, Ministry of Economy, Customs Service, Tax Administration, Antimonopoly Committee, State Committee for Regulatory Policy and Entrepreneurship, Ministry of Justice, and other ministries and agencies. There have been arranged contacts with departments of the Cabinet of Ministers and the relevant standing committee of the Ukrainian Parliament.
Today, the Association always participates in drafting of Cabinet’s regulations and bills that relate to the scrap business. This allows timely and gradually safeguarding the Association’s interests, working out a coordinated legislation, and creating the necessary manufacturing conditions in favor of both the State and the business.
One of such activities was the Association’s direct participation in implementation of governmental decisions in the sphere of ferrous scrap supplies to domestic producers in 2000. The Cabinet of Ministers supported and approved the Association’s proposal to introduce a balance method of scrap supplies to domestic steelmaking and foreign clients. Owing to joint efforts of the State Committee for Industrial Policy and the Association, in the first half of 2000, the issue of sufficient ferrous scrap supplies to Ukraine’s metallurgical mills without sacrificing export was successfully resolved for the first time in 10 years. This complies with Ukraine’s commitments to the European Union.
It has become especially evident recently that the Association gives timely response to manufacturing and business problems of its members.
The Association’s members now receive all the necessary information on the latest amendments to laws and by-laws, on situations at domestic and international markets for metal scrap, and the like.
The Association works in close contact with the leading mass media.
At the same time, the Association’s efforts in certain fundamental directions call for improvement.
Above all, this relates to more dynamic activities in Ukrainian regions, mostly as regards cooperation with regional state administrations, closer contacts with local executive and legislative authorities, enhancement of authority of the Association’s members and plenipotentiary representatives in the regions in order to exert influence on local scrap-related executive decisions.
There is a need in greater efficiency concerning settlement of specific local business problems of the Association’s members and in more active protection of the members’ interests.
Upper executives of the Association have not been practicing enough settlement of specific regional issues directly on the local level.
The Assembly decrees:
1. To recognize activities of the Association’s executives in April 1999 – July 2000 as satisfactory.
2. To treat the following points as the main tasks in the short run:
to further secure achievements in the Association’s role and influence on solution of the national tasks, more persistent and consistent settlement of common problems that impede the scrap business via the Association’s participation in drafting of bills and by-laws. Paramount importance should be paid to participation in preparation of the bill on Amendments to the Law on Metal Scrap and Several Other Laws of Ukraine, which will be considered in the Ukrainian Parliament in September-November 2000;
to enliven cooperation with the Council of Minister of the Autonomous Republic of Crimea, Regional, Kiev and Sevastopol Municipal State Administrations in order to enhance the Association’s influence, including via its representative offices, in fostering suitable environment for scrap business in regions;
to give more effective response to specific manufacturing and business problems of the Association’s members in order to render all the necessary assistance and create the necessary conditions for every Association’s member to feel safe from offence and illegal actions.
3. The Assembly sees active participation in bringing order to scrap collection and in elimination of criminal deficiencies in the scrap business as an important and crucial task for upper executives and members of the Association in the coming future.
The Assembly appeals to all businessmen to subscribe to this address and make joint efforts to stabilize the situation for the sake of society and scrap businesses.
4. It is necessary to continue efforts as regards ferrous scrap supplies to metallurgical mills on the basis of balance of scrap formation in the country.
5. To entrust the Association’s president and executive board to prepare a schedule of activities and special events for the next year, considering decisions and proposals of the Assembly. Execution of the scheduled events should be disclosed further on.
6. The Association’s members should timely pay their membership dues, which are required to back everyday performance of such a non-profit-making organization as the Association, as well as provide financial aid to give broader coverage of the Association’s and its members’ activities in mass media.
7. Considering proposals of the Assembly’s participants, executives of the Association should prepare and send the Assembly’s address to the Ukrainian Parliament and the Cabinet of Ministers of Ukraine.
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ADDRESS TO THE UKRAINIAN PARLIAMENT AND THE CABINET OF MINISTERS OF UKRAINE
Dear officials,
It has been a little over a year since passage of the Law on Metal Scrap in the Parliament and foundation of the Ukrainian Assn. of Metal Scrap.
These two events have brought about significant changes to the Ukrainian ferrous scrap market.
Being a voluntary, non-profit-making organization of Ukraine’s scrap businesses, the Association today represents companies that hold almost 80% of the Ukrainian market for ferrous scrap.
The pertinent standing committee of the Ukrainian Parliament has appreciated the Association’s participation in enforcement of the Law on Metal Scrap. Owing to the Association’s partaking, ferrous scrap supplies to domestic metallurgical mills grew almost 1.8 times in the first half of 2000 against the first half of 1999, while steelmaking mills’ demand for ferrous scrap has been completely covered for the first time in 10 years.
Simultaneously, the 6-month scrap export remained at the last year’s level. This means that Ukraine measures up to its international commitments and obligations to the European Union.
Meanwhile, constant attempts of excessive administrative intrusion in the scrap business cause strong concerns. Undoubtedly, this is called forth by perilous crime in collection of metal scrap, mostly nonferrous scrap. Yet, it is impossible to settle the problems of nonferrous scrap and ferrous scrap businesses with the very same measures. The nonferrous scrap market features high crime rates and no necessary scrap sources inside the country, while the main problem of the ferrous scrap market is a need to supply domestic steelmaking mills with this raw material. The ban on nonferrous scrap export, which failed to meet its objective, is a good example of thoughtless regulation. At the same time, the old problem of ferrous scrap supplies to domestic manufacturers has been resolved without any restrictions and limitations, but rather on a compromise of economic interests of the State and the business.
Altogether, practical experience reveals that sporadic prohibitions involving the scrap business cause nothing, but greater red tape and market destabilization. Scrap market operators now incur great losses because of exorbitant railroad freightage rates and a chargeable procedure of double-stage radiation safety control. Besides, selected road police elements request numerous papers to accompany trucks that transport metal scrap, although some of these requests contradict the Ukrainian law. Simultaneously, Ukrzaliznytsya (Ukrainian railway) bears completely no responsibility for endless cases of scrap theft from railroad freightage cars, though sometimes up to 15% of cargo transported is stolen.
We are alarmed by the attitude selected regional authorities towards the ferrous scrap business, notably, when force is applied to limit or suspend transactions in metal scrap. Under the slogan of legal order, these actions in fact infringe the effective laws.
We are also concerned with new attempts to legally pursue a restrictive policy in respect to ferrous scrap, which deviates from the proclaimed market economic reforms and can lead to recession in the scrap-processing business and lower scrap supplies to clients. It is not the new prohibitions (there are already plenty of these), but a true pricing policy and nourishment of favorable conditions for stable scrap supplies to the domestic market that ensure full satisfaction of domestic demands for raw materials.
Nonetheless, the bill on Amendments to the Law on Metal Scrap and Several Other Laws of Ukraine once again proposes imposition of a 30% export duty on ferrous scrap. This move has no sense because the Law on Metal Scrap already gives the State an opportunity to apply quotas (all the way to complete embargo) on ferrous scrap export. Therefore, two restrictive actions are proposed to be in force at once. The third thing proposed is cancel the practice of reimbursing value-added tax paid on scrap export. Isn’t it a little too much for one type of business?
At the same time, the Law on Metal Scrap and the proposed amendments to this act have no reference to wholesale trade in metal scrap, thus violating business laws. We believe that elimination of a regular intermediary business in scrap trade, which serves as the necessary link between producers and customers, damages the Ukrainian scrap market and makes shadow economy flourish.
Normal scrap business and lower crime rates in this sphere depend on stricter adherence to the effective legislation on all the levels of power and on basic control over activities of specialized companies’ local branch offices. The Association and its regional representative offices will to their best to fight the negative things in metal scrap collection. The Association also undertakes to supply domestic manufacturers with ferrous scrap, if these local companies follow the agreed-upon payment terms.
The economic reforms implemented in Ukraine and international experience of various business associations make it possible for us to raise the issue of possible introduction of a special law that would legally define the relations between business associations and executive and legislative authorities. This shall encourage business development and successful progress of economic reforms in Ukraine.
Unanimously approved by participants of the 3rd Assembly of the Ukrainian Association of Metal Scrap, Kiev, 21 July 2000
the Metal