In April 2001 Ukraine’s government chose the lesser of two evils in regard to procedure of steel tubes exports to Russia…

STEEL TUBES

STEEL TUBES

In April 2001 Ukraine’s government chose the lesser of
two evils in regard to procedure of steel tubes exports to Russia. At first blush, Russian
investigation as regards Ukrainian tubes came to an end in April. However, to our mind,
this is a premature conclusion.

Let’s leave aside the competence of such investigation in
principle, and recall the end conditions of the Russian side: annual quota in amount of
480 ths. tons or, in case it is not approved, customs duty of 40%. According to the data
with АК&М, the Ministry of Economic Development of the Russian Federation
recommended the government of Russia to limit supplies of Ukrainian tubes to the volume
that ensures the balance of competition conditions on the Russian internal market for
steel tubes for a three-year period. Along with that, antidumping sanctions could be
reconsidered not earlier than in 13 months upon their introduction.

Ukrainian analysts were of the same mind as to introduction
of the 40% duty. They considered this would lead to collapse of steel tubes production in
Ukraine, since it would be impossible to compensate for 60% of Ukrainian export of steel
tubes.

Thus, only one thing remained – to fight for the quota.
It looked like Ukrainian tube producers, having gained a certain experience of resolving
such problems with the EU, would manage to come to an agreement with Russia. However, the
problem appeared to be more complicated than it seemed. Business comes before friendship.
Over the entire period of antidumping inquiry Russian mass media conducted a massive
campaign against Ukraine-made tubes’ presence on the Russian market. So, other
countries, including western ones, can export tubes to Russia, but Ukraine cannot! It is
interesting why Ukrainian tube producers did not advocate their position in Russian mass
media and Internet editions, leave alone Ukrainian ones. Probably they forgot that the
press is the fifth branch of the power and should not be ignored.

As before, an agreement was reached only by the “night”
attack on collision courses. In the night from April 10 to April 11, 2001, the Prime
Minister of Russia Mikhail Kasyanov and the Prime Minister of Ukraine Viktor Yuschenko
agreed on the conditions of supplies of Ukrainian tubes to Russia in the current year.
According to the Business and Commercial Information Herald, annual export quota of
Ukraine totals to 620 ths. tons of steel tubes, including 485 ths. tons of tubes of groups
7304 and 7306 under the Commodity Classification for Foreign Economic Activities (CCFEA)
and 135 ths. tons of group 7305. Taking into consideration annual quotas, the volumes of
supplies for the eight months of 2001 starting from May 1 total: codes 7304 and 7306 –
323.33 ths. tons, and code 7405 – 92.67 ths. tons. Thus, in the 8 months of 2001 total
export of steel tubes from Ukraine to the Russian market should not exceed 416 ths. tons.

Let’s now proceed to analysis of the pattern of Ukrainian
tubes’ export in the current year with consideration of the quotas. Taking into account
average monthly supplies to Russia (76.15 ths. tons), in 2001 calculated volume of export
in January-April totals some 304.6 ths. tons. When adding quota to calculated volume,
annual volume will amount to 720.6 ths. tons, which accounts for approximately 94% of
export in 2000, and is 4% up from the average annual export in the period 1996-2000 (see
table 1). To our opinion, this is not bad taking into consideration the general condition
of Ukrainian-Russian relations in the sphere of trade in metal products.

Table 1. Russian market for steel tubes.

Sources: 1 – Metal-Courier, 2 – Ministry of Industry, Science, and
Technologies of the Russian Federation,

3 – Institute of economy of transitional period

4- Qi = (I x 100)/(Pd + I) with I as import and Pd as domestic production

Analysis of the data in table 1 leads to the following
conclusions:

 – Over the period 1996-2000 the share of steel
tube import in consumption of the Russian Federation fell from 27.9% to 21.0%, and the
share of Ukraine’s import – from 18.6% to 15.2%;

 – There is a certain connection between the
price for oil and domestic consumption (import) of steel tubes in Russia.

We think that resolving the problem of Ukrainian tubes’
export which is repeated every year absolutely does not take care of the most urgent and
important problem of existence of tube production in Ukraine in principle.

According to the analysts, the world tendency in the recent
years shows that only strong integrated companies have an opportunity for further
existence and growth. Only such companies are able to ensure at a high level realization
of all the stages of the production cycle and offering the product to the consumer,
starting from scientific research to continual modernization.

Mr. Petrovsky of JSC Chermetinformatsiya considers that, if
the Russian metallurgy, and we add Ukrainian as well, does not set a course for
introduction of high technologies, then it would become just a raw material source for
developed countries. It has been stated that Russia and Ukraine are minimum 5 to 10 years
behind in introduction of principally new developments and technologies.

However, fist of all attention should be paid not to just
modernization, introduction of new technologies or creation of integrated company, but to
the product (commodity), which is needed on the market. Moreover, it should be competitive
both on domestic and international markets. In order to achieve this, it is necessary to
carefully study the market and its main segments.

The problem of reliable and stable sales markets, as it can
be seen from an example with Ukrainian tubes on the Russian market, will become more acute
in the 21st century.

Apparently, requirements for the quality and high
performance of the metal products will grow considerably. This will require transfer to
the new systems of quality ensuring and control, which will allow to quickly react for the
market demands and to keep expenditures for the production changeover at a minimum.

The main problem that Ukrainian metallurgists are facing at
present is investments in production. One of the most widely approved methods of resolving
this problem is formation of integrated production systems – holdings. As compared to
limited possibilities of the state in regard to investments and anti-crisis management,
holding, according to the analysts, can invest in production its own funds, as well as
loan proceeds. It is also worth mentioning that holding can attract funds on more
beneficial terms than a selected enterprise.

Russia has already moved from discussions about the
necessity of holdings foundation to practical implementation of the projects. In
particular, the group Russian Aluminum has been founded; formation of EurazHolding, which
will include Nizhny Tagil, West-Siberian, and Kuznetsky Iron and Steel Works of
Novokuznetsk (ISW), is in the process. Besides, the idea of creation of Ural Metallurgic
Holding (Magnitogorsk ISW, Chelyabinsk ISW, Orsk-Halilovsk ISW, Beloretsk ISW,
Magnitogorsk Hardware Metallurgic Plant, and Magnitogorsk Sizing Mill) is thrashed out.
Tube producers do not stay aside also: they have created Tube Metallurgic Company (TMC),
which includes Volzhsky Tube Works, Seversky Tube Works of Polevskoy, Kuznetsky
Ferroalloys Works of Novokuznetsk (KFW), Vtorchermet Plant of Volgograd, Trading House
TMC, Trading House KFZ, procurement agencies Trubpromsnab and Vtormettrade, and service
companies of each enterprise.

Besides to that, Chelyabinsk Tube Rolling Works has taken a
decision on the works’ joining the group of companies United Metallurgic Company (UMC).
This group incorporates Vyksa Metallurgic Works (steel tubes), Chusovo Metallurgic Works
(ferroalloys), Schelkovo Metallurgic Works, Vtormetinvest, and Metalloinvestbank.
According to the experts’ estimates, UMC group will account for almost 30% of the
Russian steel tube production.

According to Mr. Petrovsky (JSC Chermetinformatsiya), the
main objective of the owners of the aforementioned enterprises is to utilize financial and
intellectual capitals in the most efficient way in order to enlarge production of
commodities with high competitive ability to an extent provided by the market and
available funds.

Great attention paid by Russian tube producers to
modernization of production processes can be proved by the data presented in table 2. In
this regard it should be mentioned that table 2 does not contain the data on new types of
tubes, which Russian tube makers start to produce.

Table 2. Data on modernization of production process
at Russian and Ukrainian Tube Works in 1999-2000

According to the Bulletin of Foreign Commercial
Information, in the recent years all Russian tube works did a lot for certification of
their products and obtained the right to produce tubes for oil transportation in full
compliance with API requirements.

Russian experts consider that, as a result of their
modernization, Russian tube works will compensate for imports of foreign tubes in many
segments of the market.

The problem of compensation for imports arose in the CIS
countries immediately after the collapse of the Soviet Union. Probably, many people
remember the lists of commodities, production of which it was necessary to launch in
Ukraine published in Ukrainian newspaper Uryadovy Kurier.

Analysis of mass media and Internet editions shows that the
problem of compensation for imports at present is acute for all CIS countries. Russia,
Belarus, and Kazakhstan have launched the state programs of compensation for imports.
According to the aforementioned sources, these programs cover many sectors of economy –
from food to metal production.

The Economic Program of the Government of the Russian
Federation states that at the first stage, which is 2000-2002, the main objective is
recovery of engineering capabilities of industries, the products of which are in steady
demand on the market. According to the authors of the above program, market niches may be
expanded on account of active compensation for imports. And we would like to emphasize the
term “active compensation for imports” used in that case.

We think that methods of conducting special investigation
of export of Ukrainian steel tubes demonstrate implementation of the first stage of the
program.

The leading Russian economists also support such position
of the government of the Russian Federation. In particular Mr. Alekseyev, Ph.D. (Economic
Sciences), Corresponding Member of the Russian Academy of Sciences, points out that the
program of compensation for imports becomes the key element in the state industrial and
scientific & technical policy.

It is worth mentioning that large-diameter welded tubes for
oil and gas transportation pipelines ranked the first in the list of commodities in the
program of compensation for imports. This can have a great effect on Khartsyzsk Tube
Works. Most probably, the existing quota on exports to Russia for large-diameter welded
tubes wouldn’t increase, but reduce, if the situation with Khartsyzsk Tube Works does
not change.

The only way out is seen in formation of holding including
the following enterprises: Paton Electric Welding Institute, Ilyich Iron and Steel Works
of Mariupol (strips), Khartsyzsk Tube Works (tubes), Itera-Ukraine, and Gazprom. Such
structure would allow producing strips not only of X70 steel, but also of a higher quality
steel, which is competitive on the world market.

At the second stage (2003-2007), the program of the Russian
Federation’s government provides for launching new production processes, which will
utilize the most modern technological experience, and entering the domestic and
international markets with knowledge-intensive world-level products. Completion of this
stage will allow Russia taking competitive positions in the promising sectors of the
market, where there were no Russian commodities before. In some cases, Russian producers
will be able to form new spheres of demand.

In Belarus, the state program of compensation for imports
is in force since 1997. The program provides for legislative support on the one hand, and
development of innovative policy on the other.

In the course of implementation of the program, fireclay
productive capacities were launched in CJSC Krovlya of Osinovichi.

Kazakhstan started to discuss new industrial policy based
on long-term multi-stage program of compensation for imports in 2000.

Big companies such as Ispat-Carmet and Kazakhmys annually
import products worth some USD 150 mln. In the following two years, in the course of
implementation of the first stages of the program the whales of Kazakhstan industry will
be able to completely switch to purchasing domestic products.

Kazakh government regards the program as one of the
effective mechanism of recovery and development of the republic’s industry. In order for
the program to be introduced, fiscal, tariff and monetary policies are being corrected.

For instance, new tax code is carried into effect. This
code, among the rest, provides for reduction of VAT first to 16%, and then to 12%.

Not only the government is directly engaged in the program
of compensation for imports, but also the regions.

For instance, web site of Aktyubinsk region displays full
information on imports and plans for compensation for imports. By the way, in 1996-1999,
the region imported ferrous, non-ferrous metals and metal products from the Russian
Federation, USA, the Czech Republic, Mexico, Germany, and Belarus.

The aforementioned proves that situation becomes less
favorable not only on the distant world markets, but also on the markets of the CIS
countries.

It is also worth mentioning that many CIS countries
implement a policy of support of the domestic producer much more actively than Ukraine
does.

According to the data with MetallurgProm association, the
main Ukrainian steel tube producers in the first quarter of 2001 manufactured 436.2 ths.
tons of the products (see table 3). This accounts for about 83% of the volume of
production in the fourth quarter of 2000, although it is 67% up as compared to the
production figure in January-March 2000.

As regards the level of average monthly production, in the
current year only Lugansk (187.5%), Khartsyzsk (150.6%), and Nikopol (109.9%) Tube Works
overdid the 2000 output figures. Nizhnedneprovsk Tube Rolling Works was close to the last
year’s production volume – 94.1%. Over the three-month period, Novomoskovsk Tube Works
(77.8%) and Ilyich ISW of Mariupol showed the lowest performance among the other plants.
Along with that, although Nizhnedneprovsk Tube Rolling Works produced some 94.1% of the
last year’s output, its share was the biggest in total production and accounted for some
33.1%. It is worth mentioning that, in January-March 2001, Nizhnedneprovsk Tube Rolling
Works, Khartsyzsk Tube Works, and Nikopol Yuzhotrubny Works produced some 73% of the total
steel tube output.

Table 3. Output of steel tubes in Ukraine, ths. tons

*Source: Association MetallurgProm

According to preliminary data, in the first quarter of 2001
export of steel tubes from Ukraine totaled some 343.3 ths. tons worth about USD 184.1 mln.
This is approximately 1.8 times up from the respective figure in January-March 2000, but
accounts for just 80% of export in the fourth quarter of 2000. At the same time, it is
worth mentioning that total export of steel tubes in March was some 14% up from the
February figure (see diagram 1). Nonetheless, export in March 2001 accounted for only 79%
of export in the most successful month of 2000 – October, when 171 ths. of steel tubes
were exported from Ukraine.

Diagram 1. Export of steel tubes from Ukraine in
2000-2001

The pattern of Ukrainian steel tubes export in 2001 was the
following: seamless tubes – 55.8% against 61.8% in the respective period of 2000,
large-diameter welded tubes – 28.3% against 20.8% in 2000, and other welded tubes –
15.9% against 17.4% in 2000.

In the first quarter of 2001 81% of steel tubes supplies
from Ukraine were bounded to the CIS states. Export of seamless tubes accounted for 47.7%,
large-diameter welded tubes – for 39.6% and other welded tubes – for 12.7%.

EU member-states rank the second among the buyers of
Ukraine-made tubes and account for 6.9% of Ukrainian export. Supplies of seamless tubes to
this region totaled 76.6%, other welded tubes – 23.4%, and large-diameter welded tubes
– less than 0.1%.

East European countries with 3.9% of the total export
volume took the third place in the regional pattern of Ukraine’s steel tube export. In
the first three months of 2001, East European countries imported Ukrainian seamless tubes
(65.1%), other welded tubes (32.3%), and large-diameter welded tubes (2.6%).

Seamless tubes

In January-March 2001 Ukraine exported its seamless tubes
to 44 countries, as compared to 57 countries in the last year. The main consumers of the
seamless tubes were Russia with some 108.9 ths. tons or 56.9% of the total export,
Kazakhstan (13.7 ths. tons), Germany (11.6 ths. tons), USA (6 ths. tons) and Italy (5.8
ths. tons). These countries imported some 76% of the total export volume of Ukrainian
seamless tubes.

As regards the regions of the world, the first three
biggest consumers of Ukrainian commodities were the CIS (72.7% of seamless tubes exports),
EU (9,7%), and Asian countries (5.8%).

Large-diameter welded tubes

These tubes in January-March 2001 were exported to nine
countries. Russia was the primary consumer of Ukrainian large-diameter welded tubes and
imported 93.2% of the total exportable volume.

Other welded tubes

In January-March 2001 Ukraine exported other welded tubes
mainly to the CIS states (78.5%), including 52.9% to Russia. Among other consumers of
Ukrainian welded tubes the following should be mentioned: EU – 10.2% and East European
countries – 7.9%. All in all, 23 countries imported other welded tubes from Ukraine in
2001. The first five countries accounted for 81% of the total export, namely Russia,
Germany (5.3 ths. tons), Uzbekistan (4.1 ths. tons), Turkmenistan (3.5 ths. tons), and
Belarus (2.6 ths. tons).

In the first quarter of 2001 Ukraine imported approximately
8.5 ths. tons of steel tubes worth some USD 6.9 mln. Hot-rolled seamless tubes made up
80.9% of the total import, other welded tubes – 19.0%, and large-diameter welded tubes
– 0.1%. The main suppliers of seamless tubes were Russia (3.8 ths. tons), Austria (2.1
ths. tons), and Poland (0.4 ths. tons). Aggregate share of these countries amounted to
91.3% of the total import of the commodity. Other welded tubes came from Germany (0.9 ths.
tons) and Russia (0.3 ths. tons), which accounts for 76.3% of the total supplies.
Large-diameter welded tubes were imported from Italy, the Netherlands, and the Czech
Republic. Geographical pattern of Ukraine’s import in January-march 2001 was as follows:
24 countries supplied other welded tubes, 22 countries – seamless tubes and 3 countries
– large-diameter welded tubes.

Summarizing the data on output, export and import of steel
tubes in January-March 2001 and comparing these figures to the 2000’ performance
results, one can notice that the situation on Ukrainian market for steel tubes has changed
for the worse.

Analysis of the summarized data with consideration of the
average monthly performance figures shows that in 2001 output of steel tubes increased by
some 4.8% and export – by about 8.5% as compared to 2000 (see table 4).

At the same time, supplies of steel tubes to the domestic
market reduced down to 92.5% as compared to the last year’s respective figure, whereas
import of steel tubes grew by some 12% as compared to the year 2000.

Vitaly GNATUSH, expert with DerzhZovnishInform