Ukrainian delegation directed by deputy chairman of the State Committee for Industrial Policy Sergey Grischenko and by President of the Ukrainian Association of Ferrous Metallurgical Enterprises (UkrAPchermet) Anatoly Golubchenko took part in the third In

TO LIVE, TO STAND, TO GAIN

Markets like parachutes are only helpful when opened

Ukrainian delegation directed by deputy chairman of the State Committee for Industrial Policy Sergey Grischenko and by President of the Ukrainian Association of Ferrous Metallurgical Enterprises (UkrAPchermet) Anatoly Golubchenko took part in the third International Metallurgical Forum “Production, transportation, and sale by CIS countries on the world markets” METEX-2001.

Mr. Anatoly Golubchenko, who is president of UkrAPchermet, aquainted the public with situation and outlooks for development of metallurgical industry in Ukraine.

The editor of the Metal monthly presents Anatoly Golubchenko’s speech at the annual international metallurgical forum.

Ukrainian experts say the year 2000 saw global output of crude steel outrunning 840 mln. tons, official consumption growing by 5.8% against 1999, thus, coming 752 mln. tons. Forecasts on global steel market development for the second half of 2001 as well as for the upcoming 4-5 years are quite conflicting. Encouraging forecast by the World Steel Dynamics, which announces a 2% annual growth of the world consumption of steel within the next five years, call doubts. With steel production in the world approaching saturation rate and development of the world economy seeing dim outlooks, there are no expectations for further weighty increase of production. It already becomes obvious that ferrous metal making in the 21st century will be guided by production of high-tech materials with high value added, which will decrease metal content and raise product reliability for end consumers of rolled steel. Downward trend in absolute steel consumption in machine building and construction will turn stronger because of ever-growing use of light metals and composite materials. This is also proved by new tendencies, which have been registered on the world steel market for the last few years. Hence, along with slowdown and even suspension of steel output growth, the next decade is likely to eye reduction of steel prices as well as aggravated competition on the world market.

The prospects of the Ukrainian metallurgy are even more intricate because slow transition of the national economy to market relations was the reason behind steep fall of industrial production, which was also reported in other ex-USSR republics. The lowest in Ukraine’s production was reported in 1999, when output accounted for 64.5% only as compared to 1990’ figure. Decline in the Ukrainian economy was also inevitable because among all Ukrainian enterprises that formed industrial sector of the Soviet Union not integrated into the world economy, there were only 20% with complete production circuit within the republic and capable of providing 15% of production upon own raw stocks. To compare with – Russia’s economy had a capacity for a 70% output from the enterprises’ raw materials.

It is of no surprise then that Ukrainian metallurgical complex, which used to attend up to 25% to the USSR industry and had the largest portion of end products ready for sale, became the crucial factor for development of the entire economy of Ukraine.

Among CIS countries as well as all the rest of the world, Ukraine presently has the record-high share of metallurgy within the country’s GDP (30% in 2000).

Ukrainian export in 2000 comprised some 28.6 mln. tons of metal products including 21.3 mln. tons of rolled products, 1.5 mln. tons of cast iron, 820 ths. tons of ferroalloys, and 5 mln. tons of ferrous metal scrap. Supplies added 8%. In terms of 2000’ performance, Ukrainian metallurgy ranked the seventh among 63 countries that produce steel.

In 2000, Ukrainian metal traders revealed more professional skills (the very producers of metal account for 80% of them). Under constantly changing conjuncture, they demonstrated high-quality management in market orientation. Therefore, in 2000, due to lower shipments to the cheapest market of China (-34% from 4 mln. tons in 1999 to 3 mln. tons in 2000), export to high-priced markets went up as follows: to the USA – 1.85 times, to the RF – fivefold, countries of Latin America –1.9 times, the Middle East – 1.4 times, and to the EU – 1.1 times. Overall export of rolled metal augmented by 10% as compared to 1999.

Cornernerstones of the Ukrainian metal product export are commodities, which face constant tight competition on the world market under fundamental fluctuations of demand. Commodity range of rolled product shipments in 2000 is a complete reflection of technical and technological capacities of the Ukrainian metallurgy to fill in the segments of the world rolled metal market.

At present, the main task of Ukraine’s ferrous metallurgy is to refuse boosting production of steel and rolled products with low value added as well as transfer to conception of raising profit through exporting of high-grade steel by metallurgical enterprises. Considering situation with fixed assets, the next 3-4 years will not see increasing share of flat rolled products and rolled alloy steel in the export along with possible growth of shipments of rebars, wire-rod and reducing portion of bars.

At the same time, because currency inflows to the budget of Ukraine are greatly dependent (40% of currency earnings!) on export of metal products, producers are forced to develop export of those kinds of low-tech products, which are not yet subject to quotas and sanctions. For this reason, even with unfavorable conjuncture of world metal market, export of Ukrainian semis in the short-run may add 2-3%, and shipments of cast iron may grow by 4-5%. It is of no surprise then that the world community of steel producers is alarmed with influence that Ukrainian metal product export has on the situation on the world market.

To reduce deforming effect of Ukraine’s metal export on the world metal market is possible through solving of the two key problems, which arose especially urgent in late 2000; namely, recovery of interior metal market and upgrade of steel casting industry.

Interior market of Ukraine consumes 17-21% only of rolled product output, whereas developed and dynamic developing countries report the figure of 70-90% (see table).

Due to low solvency of the interior market, metal-making sector has to be oriented at export, which is largely defined by situation on the world metal market. Over-saturation of a number of countries and price fall in the fourth quarter of 2000 and the first quarter of 2001 for certain commodities, and for HR flat steel foremost, will inevitably lead to dropping export supplies of Ukrainian products in 2001, will create additional problems in the sector, and likely to drive profitability rate even lower.

Low marketability of most commodity export from Ukraine results from outdated technical and technological basis. More than 60% of metal products in the country are manufactured upon old technologies, and 62% only of Ukrainian metal product export may be certified in compliance with international standards. In 1999, Ukraine produced 43% of steel output via open-hearth method (the world indicator is 4%), and only 19.5% of steel was made as continuous casting (83% in the world). In Ukraine, electric furnace steel accounts for 4.4% only in the national steel output as compared to 33.4% as average world production. This suggests that in 2000, Ukraine produced only 526 ths. tons of rolled products out of alloy steel (1.8% of total volume). The share of rolled alloy steel in developed countries traditionally makes 10-15%. Metal wastes per production of one ton of steel in Ukraine are six-fold up from the respective figure in Japan.

As of the beginning of 2000, depreciation of fixed assets in mining and metallurgical sector of Ukraine made 63%. Annual depreciation comes to UAH 3-3.5 bln., while renewal in 2000 consumed UAH 1.61 bln. only, and that was because of economic experiment in the sector. Main investment source is still enterprises’ assets (87%), loans of commercial banks make 4%, and foreign investment add 9%. Also, the sector fails to undergo upgrade because of low depreciation charges (6.2% versus 10-12% in the EU countries and 14.5% in Japan). However, the chief reason of low technical and technological condition of mining and metallurgical enterprises is lack of task-oriented state policy to drive investment from the very beginning of denationalization and privatization processes.

High portion of low-tech enterprises and energy- and material-consuming technologies in metal making virtually depletes Ukraine, when it creates problems with ensuring effective energy and fuel balance in the country. Continuous growth of prices for energy carriers has negative effect on competitiveness of metal products – this can not be helped even with preferential taxation.

Growth of antidumping investigations concerning Ukrainian products in 1996-2000 period reached 58 (third ranking in the world), 46 of these resulting in antidumping sanctions. Direct losses from these sanctions are way above USD 1.5 bln.

The time has come to look at Ukraine’s metallurgical problems leaving aside the perspective of immediate national interests. At present, the "National Program for development of mining and metallurgical sector of Ukraine till 2010" undergoes adjustments. It is already the third attempt to formalize crucial structural changes in ferrous metallurgy at the final stage of transition to market relations. The Program takes into account new financial condition of enterprises of various ownership forms, experience on foreign markets, trends of the interior market revival, and also provides clear idea of rational use of production facilities.

Intentions and actions of Ukraine aimed at curtailment of excessive steel casting facilities, as well as attempts to reduce percentage of steel products in the country’s total export and the share of export in steel output are given poor heed in global metallurgical community. As compared to 1990, production facilities decommissioned by the beginning of 2000 looked as follows: for cast iron – 18%, steel – 24.5%, rolled products – 8%, tubes – 20%, and coke – 37%. At present, utilization of production facilities is at some 70%.

According to forecasts, in 2001, metal makers of Ukraine will produce 26.5 mln. tons of cast iron, 33 mln. tons of steel, and 29 mln. tons of general-purpose rolled products. Taking into account decommissioning of depreciated facilities, installation of new technologies, reconstruction and upgrade of principle equipment, production facility utilization in 2010 is planned to reach 80%. Metallurgists themselves estimate that in 2010 output will embrace 28 mln. tons of cast iron, 33-34 mln. tons of steel, 29 mln. tons of general-purpose rolled products, that is no increase of total production is expected. By this time, the following ratio by cast steel types is envisaged: open-hearth steel – 36%, oxygen-converter one – 46%, and electric furnace steel – 18% (3% in 2000). Continuous casting machinery will produce up to 48% of output (18% in 2000).

With realistic estimates, restructuring, upgrading, and re-equipping of Ukraine’s metallurgical sector will require some USD 13 bln. Because of hard financial situation, Ukraine was unable to ensure the same modes of state regulation of metallurgical sector performance as did developed countries with market economy, and so it was forced to look for its own way. Its ultimate goal is establishment and maintenance of systematic events, which will re-orient the sector at interior consumption of metal products along with consequent laying out of firm position for Ukrainian metal on the world market.

By 2001, most of mining and metallurgical enterprises of Ukraine were already privatized. There are only three metallurgical enterprises out of 16 with the control interest owned by the state, namely, Petrovsky Metallurgical Works of Dnepropetrovsk – 50%, Dneprovsky Iron and Steel Works named after Dzerzhinsky – 50%, and State-Owned Mining and Metallurgical Works Krivorozhstal – 100%. This implies that the state has a few tools for centralized management of the sector, since decentralization went the natural way. Similar to countries with pure market economy, coordinating role of ministries of Ukraine has significantly transformed from directive into regulating function – maintaining of political, legislative, economic, and social conditions for the industry’s functioning.

Experience of the last 50 years of ferrous metallurgy development in industrialized countries during critical moments of the sector’s history reveals in direct state regulation. Starting from the beginning of 1970s and especially in 1980s, almost all developed countries conducted upgrade of metallurgical sector – capital investment over the decade equaled to USD 18 bln. in the USA, USD 33 bln. in Japan, and USD 34 bln. in the EU. Directly or indirectly, the state was behind these processes – favorable tax and depreciation policy, multi-optional bankruptcy legislation, handling of environmental standards, protectionism trade rules – this is far from the complete list of the state tooling applied.

For the present stage of Ukraine’s metallurgy development, it is of crucial importance to refer to experience of the sector’s state regulation in Western European countries and in the USA from the perspective of successful performance of the sector and the entire economy of the country.

Performance in the last 1.5 years reveals that a successful tool of the state regulation of Ukrainian metallurgical enterprises was economic experiment on mining and metallurgical enterprises, which spelled tax privileges and was targeted at reduction of commodity exchange transactions, restoration of current assets, increase of production and sales, 100% budget payments, gradual settlement of arrears on wages and energy carriers, as well as stabilization of financial and economic condition of enterprises.

Tax benefits are the only mean, which could have been found under given economic conditions. The budget of Ukraine was short of funds for upgrade, neither did enterprises have them. Closing of unprofitable production was impossible because of enormous load of social problems related to the sector. As a result, ferrous metallurgy came out of "shadow" business, number of commodity exchange transactions plummeted, and expansion was registered in current assets of enterprises. Means for production upgrade and decommissioning of unnecessary facilities were found by enterprises because of the very experiment. One can not agree with statements of the U.S. experts in their report to the President, which claimed that four metallurgical giants only made use of all favors of the experiment to full degree. Privatization in Ukraine is carried out under the banner of equality for all enterprises, and economic experiment in metallurgy was directed at revival of enterprises despite form of ownership.

Ferrous metallurgy of Ukraine and especially its "excessive" facilities are under continuous observance of the Steel Committee. Nonetheless, Ukraine fails to raise its status on seminars and conferences of the Committee in order to find acceptable solutions to the problems. It is a wonder that the country, which is among the world leaders in metal production and trade, has not still entered any organization, which forms and runs policy for global and regional steel markets. There is a necessity to activate Ukraine’s participation in contacts with the Steel Committee under the Organization for Economic Cooperation and Development as regards joint elaboration of measures for Ukrainian metallurgy integration into the world system of steel production and trade. The country should also expand the circle of representative offices of Ukraine’s metallurgical enterprises in international organizations of steel producers.

The key reason in the way is engrained negative image of Ukrainian metallurgy, which is based on lack of information, conservatism, and sometimes just unfair means to resolve competition disputes. The Association of Ferrous Metallurgy of Ukraine initiates creation of the unified entity, which would set the policy for national metal producers and metal traders on the interior and foreign markets titled the Ukrainian Iron and Steel Institute. It is only organization of such scale that would be able to promote the policy of provident decisions, which would suggest denial of immediate benefits for the sake of maintaining long-term positions on the world market. It should the organization that would bring forth the issue of unification of actions and creation of atmosphere of trust between the officials, metal producers, and metal traders.

Table. Dynamics of production, export, import, and consumption of rolled products in Ukraine (mln. tons)