Starting from the mid-August 2000, there keep on raging the debates of Ukrainian operators of the metal scrap market in regard to certain assignments of the first vice prime minister of Ukraine Y. Yekhanurov. These touch upon the issue of approving furthe

“FOLLOWING THE ISSUE OF SCRAP AND TOLLING CONTRACTS…” WE NEED THE FINAL ANSWER

Nikolay GIZENKO, director general, Ukrtsvetmet Concern; Vladimir PIKOVSKY, deputy director, DerzhZovnishInform

Starting from the mid-August 2000, there keep on raging the debates of Ukrainian operators of the metal scrap market in regard to certain assignments of the first vice prime minister of Ukraine Y. Yekhanurov. These touch upon the issue of approving further measures to regulate relations in the field of transactions in scrap.

The midpoint of the August 10, 2000 assignment, which initiated the hottest debates, is the clause on temporary suspension of adjustment, registration, and customs clearing of the effective contracts for tolling export of nonferrous scrap and waste from Ukraine. This ban will be in force until the Ukrainian Parliament approves the submitted bills on scrap transactions or until the Cabinet of Ministers of Ukraine gives a special permission.

Dealing under the tolling contracts with overseas partners has been lasting in Ukraine for a few years running. Since Ukraine had no capacities to manufacture copper and aluminum rolled metals required to produce cable and other electric technical products, supplies of nonferrous scrap (mainly, copper and aluminum scrap) as a give-and-take raw for further production of the aforementioned products were the quite traditional working points in the activities of Ukraine-based manufacturers.

In June 1999, the Law of Ukraine on Metal Scrap came into force. The latter introduced a ban for export of nonferrous scrap. The only exception was made for tolling contracts, since under this scheme, in exchange for the exported scrap, Ukraine would get products that are not manufactured in Ukraine and are applied in the electric technical industry. The list of such products was approved by the regulation of the Cabinet of Ministers comprising such commodities as cathodes and sections for cathodes made of refined copper; wire bars of refined copper; copper wire; aluminum wire; aluminum sheets, plates, strips and bands, over 0.2 mm thick; aluminum foil, up to 0.2 mm in thick (excluding the base); and aluminum tubes and pipes.

Starting from that moment, the amount of tolling contracts soared, while the number of cable manufacturers remained practically the same. The reason for such an occasion origins from the fact that the list of cable-conductor suppliers to Ukraine was enriched with new entities, most of which were neither manufacturers nor consumers of these products. At the same time, they took rather active position in the field of export supplies of nonferrous scrap under tolling contracts.

However, the end products, which should have been returned under these contracts to Ukraine, were not always returned, and were either manufactured and immediately sold abroad or manufactured just nominally. Thus, the main goal set when the tolling scheme was permitted, namely, supply of metal products for the Ukrainian electric technical industry, was not fulfilled completely. Moreover, many tolling contracts turned into the export ones.

Thus, the Law on Metal Scrap was not adhered to completely. Hence, to understand what was the reason for stoppage of nonferrous scrap and waste exports under the tolling scheme, let us consider in detail the issue of scrap formation, collection, and recycling of nonferrous scrap and waste.

Since the collapse of the USSR, application of nonferrous metals in Ukraine’s industrial manufacturing, construction, machinery, and for household needs has been narrowing continuously. This tendency became the objective result of structural transformations of the Ukrainian economy, imbalance of economic relations among the CIS countries, and altered development priorities of the Ukrainian economy. Comparing use of base nonferrous metals in Ukraine in the period from the mid-1980s up to the present moment, one may note that Ukraine annually consumed some 300,000 tonnes of aluminum and aluminum alloys and 160,000 tonnes of copper and copper alloys. Starting from the mid-80s, this figure continuously decreased and hit its low in 1994-1995 with physical application of aluminum and aluminum alloys at nearly 76,000 tonnes, and that of copper and copper alloys at 56,000 tonnes.

Basing on the results of surveys conducted by international organizations dealing with the issues of use of copper and aluminum products, average age of copper and copper-alloy products in use comes to some 12-14 years, and that of aluminum and aluminum alloys to 7-10 years. Thus, it is possible to give a rather accurate forecast for natural formation of nonferrous scrap and waste in Ukraine. However, the actual situation with balance of nonferrous metals (aluminum and copper) in 1995-1999 was as follows. Table 1 presents the data on actual collection and recycling of aluminum and aluminum alloy scrap and waste, domestic consumption of aluminum products, as well as relevant export figures.

Calculation of the natural volume of aluminum scrap formation in 1998 and 1999 is based on the use of aluminum and aluminum alloys in 1990-1991 (175,500 tonnes and 150,700 tonnes respectively). Inconvertible expenditures of aluminum as deoxidizer in metalmaking accounted for respectively 25,000 tonnes and 21,000 tonnes. Taking into account the average ratio of transition of metal from the end products into metal scrap for 85% aluminum, it is possible to calculate the planned physical scrap formation in the country in 1998-1999, which amounted to 128,000 tonnes in 1998 and 110,200 tonnes in 1999.

Comparison of these figures with the data presented in table 1 enables calculating the volumes of excessive collection of aluminum scrap and waste in these years, i.e., 85,300 tonnes and 182,500 tonnes respectively.

At the same time, the natural volume of copper scrap formation, which is calculated on the basis of average ratio of copper transformation into metal scrap (88.0%) and irrecoverable losses at various industrial production stages (15,000 tonnes), accounted for 102,300 tonnes in 1998 and 101,400 tonnes in 1999.

Thus, excessive collection of copper and copper alloy scrap in 1998 and 1999 respectively amounted to 15,800 tonnes and 50,800 tonnes.

Introduction of a ban on export of nonferrous scrap and waste should foremost have become a mean for protection from destruction of functioning machinery, and, secondly, eliminate criminal offence on the scrap market from the side of both legal entities and individuals.

The problem of regulating export of excessive scrap is a rather hot one from the viewpoint of protecting domestic producers. The available recycling capacities come to 140,000-150,000 tonnes of aluminum per year, 170,000-180,000 tpy of copper, 80,000-90,000 tonnes of lead (incl. capacities under construction), and 30,000-40,000 tonnes of nickel.

Taking into account immature taxation system of Ukraine, and the sufficient number of non-privatized or partially privatized enterprises, with no efficient owners, there exist temptations and potential overindulgence out here.

There were some occasions, when domestic pricing, while defining the cost of nonferrous scrap and waste, was based on the previous cost of these materials in the functioning equipment and machinery. Thus, the cost of old scrap for enterprises, where it was formed, was at US$/tonne 200-350 for aluminum and aluminum alloys, and US$/tonne 400-650 for copper and its alloys.

At the same time, the effective prices for copper on the world market, depending on the quotations of aluminum and copper, amounted US$/tonne 800-1,250 and US$/tonne 900-2,000.

Some more attention should be paid to the situation with tolling recycling of nonferrous scrap outside Ukraine.

If collating the data on export of copper and aluminum scrap and import of metal products to the electric technical industry of Ukraine, one can trace some curious trends.

According to table 4, aluminum scrap exports in 1999 reached 36,230 tonnes. At the same time, import turnover of aluminum wire rod (incl. tolling and import contracts) accounted for 1,715 tonnes. Even with high-allowance calculations of technological losses and assuming that all the aluminum wire rod was supplied under tolling contracts, it is hardly possible to even speculatively imagine over a 90% mismatch between the quantities of scrap exported and end products. It is possible to assume that the half of aluminum scrap could be supplied under export contracts, since it was exclusively permitted to wrap up the previous export contracts. However, the result is disappointing anyway, with over 90% mismatch.

A similar picture showed itself in first half of 2000. In January-June 2000, export of aluminum was virtually the same (33,449 tonnes) as in the whole 1999 (36,230 tonnes). Moreover, supplies of scrap were permitted only within the frameworks of tolling contracts. Thus, speaking on the “purity of experiments”, the scrap to end products ratio reaches 96.12% in favor of scrap. The picture is more than eloquent.

The situation with exports of copper and copper alloy scrap under tolling contracts is also worth of attention. Though this situation reminds the aluminum scenario, it is safer.

In the six months of 2000, Ukraine exported 36,837 tonnes of copper and copper alloy scrap. In turn, import of copper wire rod and cathodes indicated 11,145 tonnes (the main products supplied under tolling contracts). The ratio of copper scrap supplied vs end products would settle at 30.27% then. In 1999, the scrap to end products (cathodes and wire rod) ratio equaled 13.08% (76,080 tonnes of scrap and only 9,953 tonnes of end products).

The main importers of both copper and aluminum products for the electric technical industry of Ukraine are LLC Catex-Electro, LLC NPF Forum, LLC Electa-West, LLC Akvaton, LLC JV Pankom-Yun, OJSC AZOCM, and Energoprom, though the number of tolling suppliers of copper and aluminum scrap is far higher.

Back in the Soviet times, Ukraine developed a powerful base for collection, storage, preliminary treatment, and metallurgical recycling of nonferrous scrap and waste.

Specialized enterprises within Vtortsvetmet system were the basis for collection of scrap metal, namely, the North-Western section (Kiev, Chernigov, Zhitomir, and Vinnitsa regions); South-Eastern section (Dnepropetrovsk, Zaporozhje, Kherson and Poltava regions); Western section (Lvov, Volyn, Ternopol, Ivano-Frankovsk, and Rovno regions); the Black Sea section (Odessa, Kirovograd, and Nikolaev regions); Donetsk section (Donetsk and Lugansk regions); Crimean, Sumy, and Kharkov sections. This system was aimed at old scrap, industrial waste, and partially at household scrap. Additionally, the recycling enterprises and cooperation unions were involved in collection of household scrap.

Starting 1991, the right for dealing in nonferrous scrap was granted to the enterprises within Vtormet system, and starting 1997, to all the businesses and individuals holding relevant licenses.

It is worth mentioning that the most powerful, technically equipped, and professional facilities are the enterprises of Vtortsevetmet system, which have a developed system of finance, collection areas, as well as stationery and mobile reception sites.

Recycling of nonferrous scrap as a metallurgical raw material was introduced by the following types of metal:

• Aluminum and aluminum alloys – JV Intersplav, JV Ukrgermet, JV Obimet, and partially Zaporozhye Aluminum Smelter;

• Copper and copper alloys – JV Donkavamet, JV Ukrgermet, and AZOCM partially;

• Lead and lead alloys – Ukrzinc mill, Megatex;

• Nickel and nickel alloys – Pobuzye Ferronickel Factory and partially Lugansk Accumulator Mill.

Other groups of nonferrous metals (Sn, Zn, Ti, Mg, Co, W, Mo, Cd, etc.) were barely recycled in Ukraine. The only exception is mercury and its compounds salvaged at Nikitovka Mercury Works.

It should be noted that Ukraine can only mine magnesium, titanium, zinc, partially aluminum and mercury, ferronickel and several other metals for the needs of domestic nonferrous metal industry. Some 60-70% of aluminum and copper alloys production, and about 95% of soft lead and soft lead alloys are based on recycling metal scrap.

Hence, it is necessary to consider scrap and waste containing copper, aluminum, lead, and nickel as strategic raw materials. The balance of formation and consumption of the latter supports the security of the State.

By organization type, most enterprises within Vtortsvetmet system, metallurgical mills, and powerful commercial firms are merged in the Ukrainian Scientific and Production Concern Ukrtsvetmet, a non-profit-making organization, which introduces corporate interests to the republican and local authorities, and international institutions.

Ukrtsvetmet comprises over 30 enterprises, namely, all the enterprises within Vtortsvetmet system. The most powerful ones are CJSC Vtortsvetmet (Kiev), CJSC Krymvtortsvetmet (Simferopol), JSC Vtortsvetmet (Lvov), CJSC Tsvetmet Prichernomorje Enterprise (Odessa), LLC Meta (Kharkov), LLC Poltavavtortsvetmet (Poltava); metallurgical works in the field of nonferrous metallurgy (JV Intersplav (Sverdlovsk, Lugansk region), LLC Obimet (Odessa), OJSC Ukrgermet (Kharkov), JV INNKO (Donetsk), South Regional Group (Odessa), Ukrstal (Donetsk), OJSC Megateks (Konstantinovka, Donetsk region), OJSC Porshen (Zaporozhje), Ukrainian Industrial Company Subsidiary (Kiev), CJSC Svinets (Konstantinovka, Donetsk region), LLC Forum (Zaporozhje), multi-profile enterprises (LLC JV Ladmet (Lvov), Ukrkolioroprom (Dnepropetrovsk), LLC BiK (Donetsk) and sectoral scientific institutions in the field of nonferrous scrap and wastes (State Institute DonICM).

The main objectives of Ukrtsvetmet include:

• coordination of activities of the enterprises within the Concern through effective use of scrap and waste, and raw sources for production of nonferrous metals;

• coordination of joint scientific, technological, and conjuncture research and development;

• lobbying of industrial interests in the governmental bodies;

• partaking in the state programs for development of nonferrous metal industry of Ukraine, rendering assistance to central and local executive bodies, when supervising adherence to the legal requirements for scrap usage, in drafting of laws and by-laws that regulate the nonferrous metal business;

• search for new markets for products, works, and services of the enterprises within the Concern.

Aluminum and copper based scrap and waste as the raw materials for production of liquid products are in strong demand in the international trade and therefore are the vital components of the Ukrainian export potential.

It should be mentioned that nonferrous metals and products made of nonferrous metals are also in demand on the world market and are exported from Ukraine in large quantities. The total physical export amounted to approximately 235,000 tonnes worth US$311 million in 1998, and 418,000 tonnes worth US$434 million in 1999. To define the efficiency of domestic scrap usage, let’s compare export prices in tables 4 and 5.

Thus, metallurgical recycling of nonferrous scrap enables increasing prices by US$/t 160-400 for exported products within the aluminum group and by US$/t 70 – 140 for the copper group.

The main Ukrainian manufacturers of aluminum and aluminum products are Zaporozhye Aluminum Smelter (120,000 tonnes), Ukrainian-Spanish JV Intersplav (75,000 tonnes), Obimet works (20,000 tonnes), and JSC Ukrgermet (25,000 tonnes).

There are no local Ukrainian raw materials to get primary aluminum and partially primary alloys, and the need in bauxite is covered solely by imports. The other source of raw is the scrap, which meets 90% of the demand of manufacturers of foundry alloys and deoxidizers. The available Ukrainian capacities to manufacture secondary aluminum alloys account for over 130,000 tonnes annually and are utilized by 40-45%.

Usage of aluminum scrap at local metallurgic mills is advisable from the viewpoint of the following factors:

1. This way one can keep the sufficient number of jobs in the metal industry, refractory, and machinery industries, which consume aluminum-based materials. Calculation of labor inputs enables assessing the number of employees in these industries per each thousand tonnes of scrap received for appropriate processing:

• 10 people in the metal industry;

• 1 person in the refractory industry;

• 20 people in machine-building*.

(* – incl. all the manufacturing operations from processing to end products).

Thus, in 1999 the number of people employed in aluminum scrap recycling increased by 377 + 38 + 900* = 1,315 people as against the previous year.

(* – taking into account that 90% of products made of aluminum alloys are forwarded to machinery).

It should be mentioned that further decrease in volumes of aluminum and aluminum alloy scrap recycling outside Ukraine down to the objectively calculated level of 15,000 tonnes will enable creating over 320 additional jobs.

2. Increase in gross aluminum output, both in terms of physical quantities and monetary valuations by 77,100 tonnes and US$56,480,700 respectively.

This, in turn, enables replenishing tax revenues of the country’s budget with US$11,296,100 of VAT and US$2,033,300 of corporate income tax, (by US$14,388,400 on the whole, taking into account expenditures for social security and other areas).

The performed calculations in regard to processing of copper scrap and waste indicate that increase in copper production in 1999 vs 1998 makes 39,700 tonnes (+US$39,655,000).

Additional revenues of the budget come to US$7,931,100 of VAT, US$1,427,600 of income tax tax, and totally, taking into account expenditures for social security, US$10,102,100.

Considering the increase in global prices for aluminum and copper, which, according to the forecasts, can reach US$1,750-1,850 and US$2,000-2,100, respectively, one should foresee an increase in gross taxable revenues by some 15-20% in 2000.

The current problem of regulating scrap transactions foremost origins from prevention of the shadow metal trade.

Shadow turnover of metal is primarily initiated by the opportunity to purchase scrap for cash, without any control over its origin and without taxes; and secondly by illegal or half-legal metallurgical remelting of scrap, when previous physical and chemical composition of the metal is altered. Thus, there exists a true opportunity to avoid official and transparent banking payments and implement a number of illegal actions making nonferrous ingots to be further exported beyond Ukraine.

As the premium measures for the current situation, it is worth banning usage of cash when purchasing scrap; close all scrap reception sites, except for specialized industrial areas and affiliates of scrap recycling mills; supervise activities and adherence to standards of modern equipment and technologies, ecological and fire safety at over 400 enterprises, which have the right to perform metallurgical recycling of metal scrap. Afterwards, on the basis of analysis of nonferrous alloy and product consumption, and balance of nonferrous scrap and waste formation, one might switch to imposition of quotas on scrap recycling.

Reverting to the issue of tolling activities, it should be mentioned that the scale of such activities should be in line with the present needs of Ukrainian consumers of nonferrous metals. Internal consumption should comprise production of end products, namely, machines, mechanisms, electrical devices, etc., but not only wire rod and electric current conductors.

Such a regulation has to be completely executed by the State Committee for Industrial Policy, which adjusts the nomenclature, quantities, and quality requirements of scrap imported to and exported from Ukraine.

This, it is the only way, provided full and timely reimbursement of manufactured products to Ukraine, to effectively prevent the currently-practiced shadow export of scrap.

Here is the last point: the ban on export and strict regulation of tolling recycling outside Ukraine should be applied to the most crime-exposed types of nonferrous metals (aluminum, copper, lead, and nickel), processing of which can be run at domestic enterprises, while local natural resources are unavailable. As to the large amount of nonferrous metals, such as tin, zinc, magnesium, titanium, cobalt, tungsten, molybdenum, and others, it is necessary to liberalize the system of export and tolling processing, since Ukraine has no local capacities to treat these.

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