Prior to commencement of the experiment, i.e. in 1998 Ukraine manufactured 96% of the 1997′ output of iron ore, 73% of manganese ore, 86% of pellets, 97% of iron, 95% of steel, 92% of rolled steel, 84% of tubes and pipes, 87% of metal products, and 81% of
THE ECONOMIC EXPERIMENT DOES NOT SUIT EVERYONE
Prior to commencement of the experiment, i.e. in 1998 Ukraine manufactured 96% of the 1997′ output of iron ore, 73% of manganese ore, 86% of pellets, 97% of iron, 95% of steel, 92% of rolled steel, 84% of tubes and pipes, 87% of metal products, and 81% of the 1997′ output of ferroalloys. In the second half of 1998, when the global crisis started unraveling, manufacturing outputs in Ukraine dropped 10 to 15%. The by-month recession was even worse. It was during that period when our metallurgical mills started launching the world market, while the global prices slumped down to the breakeven points. Average rates of return in metallurgy reduced by 3.7% in 1998. Most metallurgical mills and mining companies were suffering losses. Outstanding accounts payable grew faster and amounted to UAH 16 billion, that is 89% of commercial goods in the country. The amount of accounts receivable increased as high as 2.8 times. Debts to the state budget, the Pension Fund, and due wages and salaries enlarged as well.
As the adverse trends threatened financial health of metallurgical mills in connection with the new situation on the domestic and foreign metal markets, legislative and executive authorities began to search for efficient steps to counteract the aftereffects of the financial crisis. On October 6, 1998, the Ukrainian parliament adopted resolution No.166 “On measures to overcome the crisis in mining and metallurgical complex of Ukraine” and later on passed the law “On conduction of economic experiment in mining and metallurgical enterprises of Ukraine” in order to enhance competitiveness of Ukrainian metal products, amplify export potential, stabilize and improve financial health of metalmaking companies and mining enterprises.
First steps of the experiment
Hereafter, this article will quote-reference the letter of the chairman with the State Committee for Industrial Policy of Ukraine addressed to the Ukraine’s Cabinet of Ministers, as well as the analytical report compiled by this Committee to describe outputs and financial performance of mining and metallurgical companies that take part in the experiment.
So far, let’s review the law on the experiment. Though this law was passed in July 1999, the list of enterprises partaking in the economic experiment was approved with the Cabinet’s regulation No.1820 only on October 1, 1999. This means that the law actually started doing what it was supposed to do only in the fourth quarter of 1999. Nevertheless, it was the year 1999 when the majority of mining companies and metallurgical mills managed to overcome unfavorable trends and score the 6-year-record positive performance results.
In the course of 1999 Ukraine manufactured:
21.8 million tonnes of iron, +9% compared to 1998;
27 million tonnes of steel, +12% compared to 1998;
19.2 million tonnes of commercial rolled steel, +8% compared to 1998;
991 thousand tonnes of ferroalloys, +22.1% against 1998.
The situation in tube-making and metalware industry remains complicated. These industries featured a continuing recession in output compared to 1998, with tube output losing 32.7% and metalware production lowering by 16.7%. A slight decline could also be traced in the ore mining complex.
Experts of the State Committee for Industrial Policy believe that the most important achievement was that financial and economic performance of enterprises improved significantly, along with growth in output volumes.
Metalmaking boosted output of commercial products from UAH 11.8 billion current price value to UAH 16.4 billion in 1999, +38.9% compared to 1998; or from UAH 16.5 billion to UAH 18.3 billion in terms of compatible prices, +10.9% respectively. The largest increases in output of commercial products were reported in Makeyevka Iron and Steel Works with +171% and +52% respectively, Alchevsk Iron and Steel Works with +80% and +28%, Krivorozhstal with +35.6% and +0.5%, Dzerzhinsky Iron and Steel Works of Dneprovsk with +40.9% and +5.5%, and Zaporozhstal with +40.8% and +3.4%.
In 1999 the overall rates of return in metalmaking amounted to 6.9% compared to the 2.6% losses back in 1998. Makeyevka Iron and Steel Works managed to lower negative rates of return from -38% to -8%, Yenakievo Iron and Steel Works achieved a +2.6% profitability against -0.6%, Alchevsk Iron and Steel Works +6.6% against -10.6%, Krivorozhstal +14.4% against -2%, Dzerzhinsky Iron and Steel Works of Dneprovsk -2.8% against -4.1%, and Petrovsky Iron and Steel Works +2.4% against –17%.
Voikov Iron and Steel Works and Donetsk Metallurgical Works showed a bit worse performance owing to reorganization of companies’ architecture and inappropriate financial statements submitted for the previous financial year.
The scope of barter transactions, which was mentioned among the main figures signaling improvement of enterprises’ performance, diminished from 35.9% of the total sales in 1998 to 29.67% in 1999. The best achievements were registered in Ilyich Iron and Steel Works of Mariupol, which lowered barter transactions from 30.2% of the total sales in 1998 to 18%, Krivorozhstal from 46.9% to 24.4%, and Zaporozhstal from 87.7% to 78%. Yenakievo Iron and Steel Works still had barter transactions accounting for 85% of the total sales, while Dzerzhinsky Iron and Steel Works of Dneprovsk, Petrovsky Iron and Steel Works, and Dneprospetsstal even did more barter.
Direct exports of metallurgical mills grew from 38.1% up to 44%. The best results were achieved by Krivorozhstal (from 33.7% to 47.4%), Dneprovsk Iron and Steel Works (from 14.4% to 28.3%), and Zaporozhstal (from 54.3% to 67.7%).
As of January 1, 1998, mining and metallurgical companies of Ukraine owed UAH 164.5 million for electric power. During the financial crisis in 1998, outstanding payables for electric power increased to UAH 346.8 million. In the second half of 1999 all enterprises fully settled for current consumption of electric power and paid off UAH 64 million of the outstanding debts. Krivorozhstal greatly improved settlements for electric power in the fourth quarter of 1999 and lowered outstanding payables from UAH 33 million to UAH 14.9 million. Negative trends can still be traced in Makeyevka and Alchevsk Iron and Steel Works.
As regards payments for natural gas, prior to adoption of the law on the economic experiment metallurgical mills kept on building up the debts coming to UAH 473.5 million. In the second half of 1999 all due current payments were completely settled and UAH 54 million worth of overdue debts were discharged.
Thus, there are all the essential grounds to give a positive assessment to business performance of Ukrainian mining and metallurgical companies in 1999. It should be mentioned that the most dynamic improvements took place in the third and the fourth quarters of the year, i.e. when the law on the economic experiment became effective.
Analysis witnesses that in the third quarter of 1999 commercial products’ output gained 50.2% compared to the third quarter of 1998. In different industries, the growth in output amounted to:
+58.4% in metallurgy;
+50.4% in mining;
+22.4% in coke making;
+2.3% in tube making;
+51.1% in nonferrous metallurgy;
+21.1% in output of metalware products;
+38.5% in refractory production.
The fourth quarter of 1999 saw the overall output of commercial products increasing 38.6% against the fourth quarter of 1998, with specific industries featuring the following upturns:
+44% in metallurgy;
+21.6% in mining;
+34.4% in coke making;
+23.7% in tube making;
+51.2% in nonferrous metallurgy;
+23.6% in metalware products;
+46.6% in refractory industry.
Enterprises participating in the experiment significantly boosted payments to the state and local budgets. In the third quarter of 1999 the total amount paid to the budget amounted to UAH 161.2 million, while in the forth quarter of 1999 this figure increased to UAH 374.2 million, thus gaining 2.3 times. Payments to the budget increased 21.1% in the fourth quarter of 1999 against the fourth quarter of 1998.
The most favorable trend is the shrinking gap between accruals payable and actual payments to the state budget. For example, in the fourth quarter of 1999 enterprises accrued UAH 247.01 million due to be paid to the state budget and actually transferred UAH 374.42 million or 51.5% more, thus discharging the old debts. Back in the fourth quarter of 1998 the situation was quite the contrary because UAH 442.76 million were accrued and UAH 309.12 million were actually paid, thus covering only 70% of the amount due to the state budget.
It is worth pointing out that the upward trend in settlements with the state budget started showing as early as in the third quarter of 1999, i.e. from the very beginning of the experiment. In the third quarter UAH 325.99 million were accrued as payable to the budget and UAH 257.69 million were discharged, which showed an increase in the portion of settled payables from 70% in the base period to 79% in the third quarter of 1999.
The total amount of tax incentives granted to mining and metalmaking enterprises of Ukraine amounted to UAH 179.7 million in the third quarter of 1999 and UAH 208.8 million in the fourth quarter of 1999, i.e. 16.2% more than in the third quarter. This fact demonstrates the respective enlargement of the tax assessment basis, as well as enhancement of the overall efficiency in the industry in the fourth quarter of 1999.
Owing to tax incentives, in the fourth quarter of 1999 participants of the experiment accumulated the following resources:
UAH 82.37 million coming from incentives on corporate income tax;
UAH 38.27 million coming from incentives on charges to the Innovation Fund;
UAH 82.03 million from cancellation of road maintenance charges;
UAH 7.98 million from incentives on pollution-control charges.
These resources were allocated for:
UAH 39.56 million for technical re-equipment of manufacturing facilities;
UAH 148.26 million for replenishment of current assets;
UAH 12.69 million for pollution control and environmental measures;
UAH 23.35 million for other activities.
The first results of the experiment reveal that significant favorable changes occurred in mining companies, namely in the ones belonging to state-owned joint-stock company Ukrrudprom. Output of commercial products increased to UAH 713.11 million in the third quarter of 1999, gaining UAH 183.68 million or 35.2% compared to the third quarter of 1998, while in the fourth quarter the output figure reached UAH 727.6 million, UAH 97.41 million or 15.5% more than in the respective period of 1998 and UAH 14.53 million or 2% more than in the third quarter of 1999.
Costs per 1 hryvnya of commercial products decreased down to 89 kopecks in the third quarter and to 83 kopecks in the fourth quarter of 1999, which is 12 and 15 kopecks less than in the respective periods of 1998. Rates of return on sales increased from 4.63% in the third quarter of 1998 up to 21.14% in the third quarter of 1999 and 27.98% in the fourth quarter of 1999. Mining companies managed to lower accounts payable and receivable and considerably boost the portion of cash settlements in the total sales. Due to improvement of financial health at mining enterprises, transfers to the budget gained volume and the situation with settlements for the consumed power and fuel improved.
In November and December 1999 mining companies discharged 100% of current payments due to the state budget, while this percentage equaled only 22.82% in July 1999. As of January 1, 2000, companies within state-owned JSC Ukrrudprom had no arrears on payments to the state and local budgets, while outstanding payables to the Pension Fund and debts on wages and salaries were reduced.
The situation with payments for consumed fuel and power has improved considerably. Current invoices are paid off in full, while there are taken steps to lower the amount of overdue payables. For example, 174.5% of amounts due for consumed electric power and 62.7% of charges for natural gas were paid off in the third quarter of 1999; while in the fourth quarter of 1999 these settlement ratios amounted to 183.2% and 284.5% respectively.
During the period of the experiment, enterprises within Ukrrudprom additionally raised UAH 62,469,000 owing to the obtained tax incentives and made use of UAH 45,366,000 of this amount, including:
UAH 35,098,600 for replenishment of current assets;
UAH 1,759,500 for technical re-equipment of manufacturing equipment;
UAH 6,557,600 for pollution control.
Analysis of refractory-making performance within the framework of the experiment shows that, notwithstanding the harsh situation with the crisis of power, manufacturing and especially financial performance of these companies changed for the better. For instance, output of the main refractory products amounted to 256,240 tonnes in the fourth quarter of 1999, +42.3% compared to the fourth quarter of 1998.
In the fourth quarter of 1999 UAH 10.92 million were paid by the enterprises to the state and local budgets, 4.1% more than in the fourth quarter of 1998. Overall costs per 1 hryvnya of commercial products lowered by 0.24 kopecks and equaled less than UAH 1.00, except for private joint-stock company Mineral with UAH 1.18 owing to breakdown of dragline excavator.
The industry used the additionally raised money for as follows:
UAH 4,089,000 for replenishment of current assets;
UAH 620,000, or 4% of all the raised resources, for technical re-equipment;
UAH 297,000, including UAH 37,000 on account of tax incentives, for environmental measures and pollution control.
In the fourth quarter of 1999 UAH 5,175,000 were allocated for technical re-equipment including UAH 619,000 raised owing to tax incentives, while in the third quarter of 1999 only UAH 2,639,000 were assigned for this purpose.
Owing to additional money incomes, public joint-stock company Chasov-Yarsk Refractory Works is about to put into operation block #6 for refractory clay mining, while public joint-stock company Zaporozhogneupor is wrapping up phasing in of a new powerful hydraulic press to make high-quality refractory materials.
The experiment had a favorable influence on the coke industry as well. In the fourth quarter of 1999 output of the main coke products increased to 23,012,490 tonnes, which was 2,507,770 tonnes more than in the third quarter of 1999 and 4,701,000 tonnes more than in the fourth quarter of 1998.
Output of the main products was enhanced at the State Phenol Plant, Avdeyevka Coke Chemical Recovery Plant, Yasinovatoye Coke Chemical Recovery Plant, and Markokhim. A slight recession in production was reported by Donetskkoks, Alchevskkoks, Dneprodzerzhinsk Coke Chemical Recovery Plant, and Dnepropetrovsk Coke Chemical Recovery Plant due to unstable supplies of coking coals in the third and the fourth quarters of 1999.
Payments to the state and local budgets are among the main criteria for assessment of companies’ financial performance. In the fourth quarter of 1998 coke manufacturers failed to pay UAH 13.05 million worth of due payments to the budget, while at the end of 1999 the situation changed radically and Yasinovatoye Coke Chemical Recovery Plant, Donetskkoks, and Dnepropetrovsk Coke Chemical Recovery Plant were the only ones with insignificant debts to the budgets, which were settled in January 2000.
In the fourth quarter of 1999 coke manufacturers allocated UAH 4,862,000 for technical re-equipment of manufacturing facilities, including UAH 1,063,000 or 21.8% of the total raised owing to preferential taxes. Some UAH 1,514,000, including UAH 826,000 or 54.7% of the total raised via tax incentives, were spent on pollution control and environmental protection.
Taking advantage of this money, Avdeyevka Coke Chemical Recovery Plant is putting into operation a new 45-MW turbo generator to make sufficient power supplies both to the company and to Avdeyevka town. Alchevsk Coke Chemical Recovery Plant is getting ready to phase in gasifiers on the 1st, the 2nd, and the 3rd boilers.
Yasinovatoye Coke Chemical Recovery Plant has managed to phase in coke-oven battery No.6 with capacity for 720,000 tonnes of coke per year.
When assessing the present situation in mining and metalmaking of Ukraine, one should keep in mind that decline in output at selected enterprises was mainly brought about by the critical situation with electric power supplies. This is why metallurgical mills faced shortage of 1.565 million tonnes of iron ore and failed to make 500,000 tonnes of rolled steel in 1999. Lack of iron ore owing to limited electric power supplies brought about failure to produce over 800,000 tonnes of iron. The biggest losses on rolling production were incurred in Krivorozhstal with over 150,000 tonnes and Yenakievo Iron and Steel Works with 130,000 tonnes. As regards iron output, Petrovsky Iron and Steel Works and Azovstal suffered the largest losses of 270,000 tonnes and 135,000 tonnes respectively.
Limited electric power supplies in 1999 caused losses of significant quantities of ferroalloys and aluminum, while Zaporozhye Aluminum Smelter and other enterprises periodically ran into emergencies.
During the 24 days of January 2000, power cuts caused losses of 28,000 tonnes of deep-mined iron ore; 316,000 tonnes of ore concentrate; 120,000 tonnes of pellets; 41,500 tonnes of ferroalloys; and 203,000 tonnes of finished rolled steel. In February mining and concentrating works virtually discontinued supplies of iron ore. There remains a tangled problem with ferroalloy supplies to metallurgical mills. The largest shortage is experienced by Dzerzhinsky Iron and Steel Works of Dneprovsk, which had to suspend manufacture of skelp and semi-finished axles in February 2000.
The aforementioned circumstances have already worsened the situation with skelp supplies to Ukrainian tube works, and supplies of the necessary metal products to Ukrzaliznytsya (Ukrainian Railway) to ensure safe operations of rolling stock.
Taking into consideration the difficult conditions of mining and metallurgical business in Ukraine and the essential positive results achieved within the short run, the State Committee for Industrial Policy considers it advisable to continue the economic experiment to finish off the crisis, boost outputs, and provide for timely and complete settlements of payables to the state budget, special state funds, and suppliers of electric power.
the Metal