Metal commerce… What approaches do non-CIS countries and Ukraine’s neighboring states employ in this trade and how do relations between Ukrainian metal producers and consumers look in comparison with those adopted worldwide? How do international and domes
PUZZLING PHENOMENA OF THE DOMESTIC METAL MARKET
Metal commerce… What approaches do non-CIS countries and Ukraine’s neighboring states employ in this trade and how do relations between Ukrainian metal producers and consumers look in comparison with those adopted worldwide? How do international and domestic traditions correlate in this market environment? What new trends are now becoming prominent in metal trade? And do the Ukrainian market participants manage to give timely response to new challenges? This topic is the feature of this issue, which, as we hope, will be further examined in proceeding issues of The Metal.
Necessity of the domestic market’s development is being widely spoken of. It seems that everybody now understands that this task is among the most burning and pressing ones that relate to success of the radical economic adjustments in Ukraine. However, little progress can be traced in this direction so far. If the current development rates are to keep, attainment of the goals will take a very long while. Such slowness is often explained with objective factors peculiar to the transitional period. Of course, this is true to a certain extent. However, there are also many subjective obstacles on the way of development. Quite often, the Ukrainians look like people who fall in the same potholes on a road but cannot agree on the needed repair. Let us consider the following problem as an example.
It is well known that iron ore coming from the Krivoy Rog basin is the main raw material for the Ukrainian metal industry. However, extraction and output of raw materials have significantly curtailed over the recent years. In 1999, extraction of iron ore reduced 5% and output of ore concentrate dropped 7% against the 1998 figures. A resulting effect was shortage of these materials, which forced Ukrainian metallurgical mills to import over 3.5 million tonnes of iron ore. What were the reasons for this situation?
Recession of mining outputs is usually explained with insufficient supplies of diesel fuel and electric power, constant narrowing of the already limited opportunities to renew fixed productive assets, etc. This is indeed so. For example, transport departments of Ukraine’s ore mining and concentrating works report a 75% equipment deterioration. The primary underlying reasons are quite understandable, namely, consequences of the crisis, lack of current assets, and the resulting widespread barter. The State has even introduced tax incentives for many mining enterprises and metallurgical mills for a number of years to come (the so-called economic experiment). It is obvious that such measures were more than necessary.
The author of this article does not intend to proceed with discussion of this issue in detail, but would rather, as a trader, try to find an answer to the following puzzling question. Why do managers of many mining companies and metallurgical mills act inefficiently on the domestic market both in times of the crisis and now, during the upswing? They act illogically, persistently failing to notice and make use of the opportunities to advantageously purchase equipment, materials, fuel, and other items needed for production development. In the author’s opinion, Ukrainian companies do not take the full advantage of sales opportunities either.
Ukrmetall is a State-owned company that has a rather solid experience of supplying various companies with various products for technical and manufacturing purposes. In this business, Ukrmetall relies on long-term business contacts with both manufacturers and consumers. We can contribute weightily into recovery of the country’s metal and mining industry. Unfortunately, most of our capacities remain unutilized. The following examples shall be more illustrative.
Pursuant to the protocol on intentions signed with Belarus’s BelAZ (Belorussian Automotive Works) and proceeding from the results of negotiations with Minsk-based Comerci independent consulting group, Ukrmetall and its affiliate Ferrum will supply seventeen 120-tonne and fourteen 42-tonne dump trucks, as well as the necessary spare parts, to mining companies and metallurgical mills, in compliance with the orders obtained. We have signed an agreement with Mariupol-based Azovobshchemash factory to build two ore loaders for Tsentralny Ore Mining and Concentrating Works (Tsentralny girnychozbagachuvalny kombinat) and Yuzhny Ore Mining and Concentrating Works (Pivdenny girnychozbagachuvalny kombinat). It is important to emphasize that prices for this equipment and spare parts are very moderate and acceptable. It is also significant that a portion of payment can be made in metal and metal products. Moreover, since Ukrmetall is a state-owned self-financed enterprise that does business on contractual basis, its services are charged much lower than those of private intermediary firms are. It seems that the advantages are quite clear from the buyers’ point of view. Alas, for some reason, the buyers prefer to pay more to private companies. There is a lot to think about as regards this situation.
To proceed, Ukrmetall now has the following opportunity. Ukrainian-Russian joint venture Uralmash-Liman has granted us a power of attorney to sell Uralmash products to Ukrainian enterprises. Ukrmetall has been authorized to do marketing research, negotiate prices and terms of supplies, sign and execute contracts. Uralmash products embrace sintering machinery, kilns, blast-furnace equipment, and other machines. It is possible to lease such equipment. Again, payment can partially be made in metal products. However, as of today, we have only received orders from Yuzhny Ore Mining and Concentrating Works and Makeyevka Iron and Steel Works (Makiyivsky metallurgiyny kombinat). I highlight once again that we offer equipment, which has never been and is not manufactured in Ukraine. In other words, this equipment is of high demand and its imports do not damage the Ukrainian machine building.
If this were the only example, it would be reasonable to suppose that Ukrainian buyers do not always have a clear idea of the domestic market, thus choosing less profitable alternatives. However, this explanation does not stand criticism. For instance, Ukrmetall is ready to supply petroleum products from Kazakhstan on contractual terms. Monthly supplies can total 20,000 tonnes of L-02-40 diesel fuel and 7,000 tonnes of M-100 fuel oil on the terms of DAF the Ukrainian frontier. The buyer should provide an irrevocable bank guarantee for the term of up to the end of 2000. Besides, Ukrmetall has entered into another agreement on petroleum supplies from Turkmenistan.
So, what were the outcomes? Our appeals to managers of Ukrainian mining and metallurgical companies and offers of diesel fuel at lower prices than they currently pay have been simply disregarded. They continue buying diesel fuel from private intermediary companies at higher prices. It looks like somebody gets good personal income from these transactions. Under these circumstances, Ukrmetall had to redirect its business and sign agreements with a number of regional state administrations in Western Ukraine. Diesel fuel was forwarded to agricultural companies.
By the way, it is during our business meetings with regional state administrations when yet another unresolved problem came to light, namely, insufficient supply of metal commodities to farm-machinery-building factories. For example, Ternopol Combine Harvester Factory (Ternopilsky kombaynovy zavod) needs various types of rolled steel and small batches of tubes and pipes. However, even on prepayment, metallurgical mills do not accept orders for metal products, if the ordered quantity is less than a single melt’s weight or less than a railway freightage limit. There is only one way out: orders coming from regional machinery-building factories should be put together and consolidated orders should be forwarded to metal makers.
Since Ukrmetall is used to doing this kind of work, our company is ready to assume this responsibility now. Making use of the system of metal warehouses once owned by the former Soviet State Provision Committee (Gossnab), Ukrmetall can become a connecting link in supplies of small batches of rolled steel, tubes, and metal products, i.e. to supply what’s required by farm-machinery-building factories.
At this point, it is reasonable to discuss the issue that was raised during our meetings with regional state administrations, namely, not to pay for metal right away, but rather supply it on consignment, when a manufacturer remains the owner of metal up to realization. Should they arise, other problems can be resolved successfully too. It is obvious that implementation of this project will provide farm-machinery-building enterprises with sufficient quantities of raw materials and will bring recovery to the whole Ukrainian market, because the problem of metal supply is a great headache for other industrial sectors in Ukraine.
This statement can be illustrated by the example of Kryukovo Railway Car Factory (Kryukivsky vagonozavod). In December 1999, enterprises of the then-Ministry for Industrial Policy and the Ministry of Transport of Ukraine signed an agreement on manufacturing cooperation and reciprocal settlement of accounts. For the sake of mutually beneficial cooperation, reciprocal obligations were assumed as regards cargo transportation and metal supplies. However, as it often happens in Ukraine, the agreement brought no results.
Kryukovo Factory was supposed to receive railway-car stanchions, beams, steel angles, channels, special rolled shapes, and other products from Kramatorsk Metallurgical Works (Kramatorsky metallurgiyny zavod), Petrovsky Metallurgical Works (Metallurgiyny zavod imeni Petrovskogo), Azovstal, Iron and Steel Works named after Dzerzhinsky (Metallurgiyny kombinat imeni Dzerzhynskogo), and other mills. However, all the numerous attempts of Kryukovo FUkrainian Railway) will have to dispose of approximately 16,000 worn-out railway cars this year. We can only guess how this will affect Ukraine’s economy.
Of course, metal suppliers purposefully avoided execution of this order. This notorious agreement did not contain such a "negligible trifle" as the parties’ responsibility for non-adherence to the contract provions. On the other hand, the metallurgical mills’ point is also understandable. As a rule, consumers require individual, specific types of rolled steel in small or unusual batches. In order to perform such orders, metallurgical mills have to incur losses, because the cost of forming rolls is significantly higher than revenues coming from sale of end metal products.
This means that the only way out is to arrange provision of Ukrzaliznytsya and transportation-machine-building enterprises with non-standard batches of specific types of rolled steel and tubes through consolidation of orders. This approach would enable metal manufacturers to plan ahead, schedule their rolling production, manufacture the ordered shapes in suitable quantities, avoid significant losses, and timely meet demands of the Ministry of Transport. Ukrmetall proposed all these things to Ukrzaliznytsya management. We are positive that Ukrmetall’s participation in settlement of this problem on agreed-upon terms can change the current situation for the better.
In addition to Ukrmetall proposals, there are many other business opportunities in Ukraine. We are far from exhausting the internal resources of the domestic market. These resources are fully accessible, but, owing to various reasons and motives, are now ignored and remain unused.
the Metal