MINING AND METALLURGY IN UKRAINE: CURRENT SITUATION, PROBLEMS, AND PROSPECTS

Sergei GRISHCHENKO, deputy minister of economy

The mining and metallurgical complex is a basic Ukrainian industry that brings together 300 enterprises, including:

- 14 iron and steel works and mills;

- 7 tube works;

- 10 metal goods manufacturers;

- 16 coking plants;

- 17 units manufacturing refractories;

- 26 ore mining and processing plants;

- 3 ferroalloy plants;

- 20 nonferrous smelters, and;

- 35 companies producing secondary products from ferrous and nonferrous metals.

As of January 1, 2000 there were more than 500,000 people employed in this sector.

In 1999 ferrous and nonferrous metallurgical mills manufactured around UAH 28 billion of commercial products, which was equivalent to 26% of the total industrial output in Ukraine. About 40% of the country’s export revenues were raised via exports of mined products and metals.

The mining and metallurgy have not always played such a leading role in the Ukrainian economy. Back in the 1990s, at the dawn of transition to market economy, commercial outputs of industrial manufacturing and other sectors were more than 2.5 time as high as the mining and metallurgical outputs. In this case, the adjustments among different economic sectors did not spring from greater metallurgical outputs, but simply reflected the unequal recession in production in different sectors of the economy. Put simply, the mining and metalmaking output shrank less dramatically than in the other sectors.

From 1990 till 1998 the decline in output of the main metal-consuming sectors, such as industrial manufacturing, defense, transport, construction, and others, narrowed the domestic market for metal products from 13 million tonnes down to 5.2 million tonnes per year. At the same, the 1999 statistics report the encouraging trends in these sectors as well. For example, for the first time there was no decline in industrial manufacturing. Certain industrial sectors even managed to increase outputs, notably it relates to manufacturers of equipment for the metallurgical industry, machine tools, aircraft construction, shipbuilding, tractor-making, and farm equipment building.

Changes in mining and metallurgical production tempos throughout the entire period from 1992 till 1999 show that outputs stabilized in 1996 after a protracted recession. In 1997 there was a clear upward tendency in mining and metalmaking production figures, but 1998 witnessed a new phase in metallurgical recession after the crises in Southeast Asia and Russia, the major markets for Ukrainian metal products.

Despite this downswing, Ukraine remains one of the world’s top ten metal producers, sharing the seventh to the ninth places with Italy and Brazil in terms of liquid steel output.

In 1999, the Ukrainian mining and metallurgical complex achieved its best production performance for the last six years, particularly making:

- 47.5 million tonnes of iron ore, 93.6% against the 1998 figure;

- 35.85 million t of concentrate, 92.5%;

- 32.62 million t of sinter, 117%;

- 9.59 million t of pellets, 74.7%;

- 17.25 million t of coke, 105.4%;

- 26.99 million t of steel, 112%;

- 19.25 million t of finished rolled steel, 108%;

- 1.14 million t of tubes and pipes, 77.3%;

- 0.26 million t of manufactured metal goods, 83.2%;

- 0.991 million t of ferroalloys, 122%;

- 1.22 million t of alumina, 94.5%;

- 0.112 million t of primary aluminum, 105.5%;

- 0.12 million t of electrode products, 126.5%.

In 1999, overall output of commercial products amounted to 106.2% of the 1998’ figure for iron and steel and 108.9% for nonferrous metals, while the average Ukraine’s industrial output was 104.3%. This trend is bound to continue, according to the figures available for January and February 2000.

The poor results achieved in 1998 did not go unnoticed by the President, Government, and Parliament of Ukraine. In October 1998, the Ukrainian Parliament approved resolution "On measures to overcome the crisis in mining and metallurgical complex of Ukraine", and in June 1999 the law "On the economic experiment at mining and metallurgical enterprises" was passed.

By taking legal steps to improve financial and economic health of the enterprises involved, it has become possible for the first time in recent years to hold back any further increase in the amount of companies’ payables and to actually reduce overdue accounts payable to the state budget and the national pension fund. Though back in 1998 profitability of mining and metalmaking companies reduced by the total of 3.7%, the results for 1999 showed that profitability stood at +6.9%, as opposed to -2.6% in 1998.

A number of measures have also been introduced recently within the framework of the economic reform program to strengthen the financial discipline, amplify settlements in real money rather than surrogates in transactions between enterprises, and write off reciprocal debts. Taken together with recovering activity on the domestic and international metal markets, these measures have brought about positive developments at Ukrainian mining and metallurgical companies.

However, despite these positive trends, some of the most complicated problems, namely structural, organizational, and financial ones, remain to be solved.

Over capacity is the key headache of the sector. In 1990 total productive capacities were enough to make 35.0 million tonnes of coke, 119.2 million tonnes of commercial iron ore, 48.6 million tonnes of iron, 52.6 million tonnes of steel, 42.0 million tonnes of finished rolled steel, and 7.2 million tonnes of steel tubes.

Utilization of this productive capacity is currently at 30% to 70%. At the moment, only 33 blast furnaces of the 50 available furnaces are in use, 13 out of the 19 available basic oxygen furnaces, 31 out of the 56 open-hearth furnaces, and 52 out of 66 rolling mills. Fixed productive assets are 50% depreciated. Given these conditions, steps to make productive capacity reflect the realities of the domestic and international markets are the number one priority for development of this sector.

In recent years mining companies and metallurgical mills have already phased out excess capacity for 12 million tonnes of iron, 15 million tonnes of steel, and 8 million tonnes of finished rolled products.

One should keep in mind that any removal of excess capacity requires substantial amounts taken from net profits generated by the enterprise itself, because the state budget has allocated only limited resources to restructure underground iron ore mining facilities in the Krivbass region.

The second priority for the mining and metalmaking is to enhance competitiveness of the sector’s products by reducing the amount of power and materials used in manufacturing operations, by cutting labor costs, improving infrastructure, and making use of modern science.

These measures have been outlined in the "National Development Program for the Ukrainian Mining and Metallurgical Complex for the period up to 2010" that was drafted on the instruction of the Ukrainian parliament and is currently being debated by the Cabinet.

Within the Program, the balance sheet for the metal industry plans to make some 20 million tonnes of finished rolled steel in 2010, a figure which corresponds to what has been achieved in recent years and is based on the anticipated demand on the domestic and export metal markets.

The Program proposes to ease the export turnovers depending the global market conditions and the expected growth of domestic demand rather than to increase exports of Ukrainian metal products in the future.

However, exports are still an important element in the sales profile of Ukrainian ferrous and nonferrous metals.

In 1999, Ukraine exported about 26.3 million tonnes of metal products valued at USD 3.6 billion. In terms of quantity, this was 24.4% higher than in the previous year, however, in terms export revenues, it represents a 11.5% reduction.

The main export items last year were semi-finished steel with 7.9 million tonnes exported or 30.1% of the total metal exports from Ukraine; ferrous scrap, 4.7 million tonnes and 17.8%; hot-rolled flat steel, 4.4 million tonnes and 16.9%; reinforcing bars, 2.7 million t and 10.4%; iron, 1.9 million tonnes and 7.1%; wire rod, 1.4 million tonnes and 5.3%; cold-rolled flat steel, 1.2 million tonnes and 4.5%.

There were no significant changes in the geographic distribution of Ukrainian metal exports in 1999.

As before, the main markets for Ukrainian exporters in 1999 were Southeast Asian economies that imported 8.9 million tonnes of Ukrainian metal or 34.1% of the total metal exports from Ukraine, and Middle Eastern countries, 6.9 million tonnes and 26.3%. Exports to these two regions increased by 54.8% and 10.8% respectively against the 1998’ figure.

Reverting once again to the Program mentioned, it is worth paying particular attention to the following consolidated priorities for various sectors of the industry.

The mining and extraction sector is supposed to:

- use more rapid extraction and processing schedules;

- introduce continuous production line technologies;

- improve drilling and explosive work;

- switch to low power-consuming methods of processing magnetite ores.

One has to bear in mind that the main ore mining and processing facilities have been in operation for 50-60 years and are in need of thorough reconstruction.

By introducing these new methods, it is expected to increase iron content in concentrate by 2-2.2%, in pelletized ore by 1-2.5%, and in sinter by 0.8-1.5%.

The following developments have been proposed for blast furnace operations:

- improvement of the quality of iron ore and coke fed;

- phasing out of outdated units, along with upgrade of the functioning blast furnaces;

- improvement of the blast furnace technologies in order to save energy, including application the of pulverized fuel;

- reduction in coke consumption by 1.5 million tonnes per year and in natural gas consumption by 650 million cubic meters.

Fundamental changes are planned for steelmaking.

Nice results have already been achieved in 1990-1999. For example, the quantity of continuous-cast steel has increased by 1 million tonnes and now accounts for 17.5% of the total steel production. There are forecasts that in 2010 steelmaking pattern will be as follows:

- 71% of the total steel will be made in basic oxygen furnaces;

- 12% in electric arc furnaces;

- 17% in open-hearth furnaces;

- 82% of steel will be continuous-cast.

To enhance competitiveness and reduce consumption of metal and power, the Program plans the following steps involving the rolling manufacture:

- production of more than 80% of bars and sheet steel using continuous cast billets;

- setting up production of rolled products in line with international standards;

- introduction of nondestructive testing at plate-rolling mills, automatic marking, various packaging equipment to provide for high-quality storage of finished rolled products and protective coating;

- improvement of the technology of hot and cold precise cutting of rolled steel to length;

- expansion of the use of specialized rolling mills capable of producing a wide range of items upon petty orders, rolled steel for finish-cutting, merchant bars with various coatings, metal for household appliances and other consumer goods, and a wider range of roll-formed products;

- reconstruction of processing and furnace sections at rolling mills;

- increase in output of lower-temperature rolled steel to reduce power consumption and improve physical and mechanical properties of the end metal;

- making wider use of strengthening technologies for rolled products applying the hot-rolling heat.

Upgraded bar-making and sheet steel producing facilities will be left in operation until 2010, and these, together with new mills, will be sufficient to meet demand of the Ukrainian economy in terms of both quantity and product range. These facilities make competitive exportable products, notably bars, rails, wire rod, rebars, sheet steel, etc.

The main mining and metalmaking sub-sectors have already taken very important steps to re-equip, reconstruct, and upgrade their production facilities. For example, several metallurgical mills have carried out fundamental reconstruction of their rolling mills. Out-of-furnace steel-treatment units have been installed at DneproSpetsStal and Nizhnedneprovsk Tube Works. Two continuous casters with aggregate capacity for more than 1.5 million tonnes per year have been installed at Donetsk Metallurgical Works and Dzerzhinsky Iron and Steel Works of Dneprovsk. Preparations are underway to reconstruct the basic oxygen furnace shop of Krivorozhstal Works and build a new continuous casting section.

In the nonferrous sector, the last few years have seen introduction of a 15,000-tpy aluminium wire rod production at Zaporozhye Aluminum Smelter. This smelter is also getting ready to phase in the first element of a foil-rolling mill, i.e. a strip coil producing line. New capacity for copper wire rod has been introduced in Artemovsk Nonferrous Metal Processing Factory and in Forum company. There has been recommenced production of titanium sponge at the reconstructed facilities of Zaporozhye Titanium-Manganese Works. Finally, Ukraine now has an entirely new sector of gold mining and processing of gold-bearing ores. Muzhievsk Polymetal Works located in the Transcarpathia has put into operation a gold mine and a gold-extraction plant.

The Program gives special heed to power-saving issues. Currently, power accounts for more than 40% of metalmaking production costs. Hence, power saving is one of the best ways to cost efficiency of metal production.

By taking steps to save power, the Ukrainian mining and metallurgy can save up to 5-5.5 million tonnes of equivalent fuel per year.

Significant amounts of investment are needed to execute the Program. The whole mining and metallurgical complex requires the total of USD 9.8 billion worth of investments, including USD 5.3 billion for metallurgical mills, USD 2.9 billion for ore mining companies, and USD 0.9 billion for coking plants.

Sources of funding within the mining and metalmaking complex itself could provide for about USD 250 to USD 350 million per year to back the essential investment projects, whereas the total annual investment required for the period ended 2010 is USD 650-850 million. In other words, the sector has to raise additional capital of outsider investors, including foreign ones, to re-equip mining companies and metallurgical mills.

The privatization creates the major opportunities for foreign firms and companies to invest in Ukrainian metallurgical enterprises. Currently, 141 mining and metalmaking companies are being or have already been privatized. 64 of these enterprises have been put on a list of enterprises that have strategic importance for the economy and security of Ukraine. The State holds 25% + one share interests in 6 mining and metallurgical companies and 50% + one share stakes in 14 more related companies.

The state privatization program for 2000 schedules sale of interests in 23 mining companies and metallurgical mills, including 45.6% of shares in public joint-stock company Azovstal Iron and Steel Works, 50% in open JSC Alchevsk Iron and Steel Works, 42% in public JSC Zaporozhstal Iron and Steel Works of Zaporozhye, and stakes in a whole range of tube-making companies, coking plants, ferroalloy manufacturers, and mining companies. There has been launched execution of the incorporation plan and pre-privatization preparation involving Krivorozhstal, the largest mining and metallurgical works. It is also scheduled to put on sale the interests in such major nonferrous manufacturers as

public JSC Nikolaev Alumina Works, Zaporozhye Aluminum Smelter, etc.

One of the pivotal objectives of the mining and metalmaking privatization program is rapid transition to efficient sectoral structure, formation of a new class of owners and strategic investors. The main approach here is to move towards financial-industrial integration, with the establishment of financial-industrial groups and multinational corporations that are able to raise their own and borrowed finance for development.

When these structural adjustments are completed, the technical, re-equipment and upgrade programs implemented, and the attendant social issues settled, then the mining and metallurgical complex of Ukraine will be in a position to integrate successfully into the international economy and occupy a worthy place in the global metallurgical community.

РЕЙТИНГ ПРЕДПРИЯТИЙ ПО ОБЪЕМАМ ВАЛОВОГО ДОХОДА В 1999 ГОДУ/ COMPANIES RANKED BY REVENUES-99