At the moment, the market for most types of steel tubes, which has taken shape in Ukraine, is definitely oligopolistic. It is characterized with different enterprises supplying similar commodities to the market.
STATE CONTROL IS NEEDED
Peculiarities of the Ukrainian steel tube market and economic aspects of demonopolizing the tube sector.
At the moment, the market for most types of steel tubes, which has taken shape in Ukraine, is definitely oligopolistic. It is characterized with different enterprises supplying similar commodities to the market.
Manufacturers of small-diameter (up to 108 mm) electric welded tubes and cold-finished tubes can enter the market easily enough. For manufacturers of hot-rolled and large-diameter (over 480 mm) electric welded tubes, there are very limited opportunities to enter the market due to a large initial outlay and longer period of return on investments.
Manufacturers don’t have much opportunities to pursue independent pricing policies on the tube market owing to large supply of similar commodities manufactured by different plants. First of all, this relates to hot-rolled conventional tubes and thin-wall electric welded tubes of carbon steels.
Though the Ukrainian market for steel tubes is oligopolistic in general, manufacturers of selected types and standard sizes of tubes enjoy monopoly on the market. For example, this is true for manufacturers of electric welded tubes for oil and gas pipelines, 1,220 mm and 1,420 mm in diameter, large-diameter tubes with corrosion-resistant coating (manufactured at OJSC Khartsyzsk Tube Works), rolled bearing and heavy-duty casing tubes (OJSC Nizhnedneprovsk Tube Rolling Works), rolled stainless tubes, alloyed tubes for high-pressure boilers and thin-wall seamless stainless tubes (OJSC Nikopol Yuzhnotrubny Works), welded galvanized tubes for water and gas conveyance (CJSC Lugansk Tube Works).
Monopolization of the Ukrainian tube sector has its historical roots, namely in order to save resources the former USSR practiced establishment of mighty specialized tube mills to manufacture particular types of tubes. Such an approach was economically justified when tube output was completely distributed among consumers.
Market relations require new manufacturing and marketing approaches. Due to this, the pattern of Ukrainian metal market (including the tube market) has changed noticeably.
Under these conditions, state control is needed to run a well-balanced tube market with economically advisable competition among manufacturers. It is enough to mention that, out of the major iron & steel manufacturers, Japanese and US companies are the only ones that are not under direct state control and regulation. One of the main issues of such a control is execution of economically justified policy in demonopolization to give shape to a normally functioning metal market.
The tube sector, which is an integral part of the iron & steel industry, manufactures a wide range of products and applies a variety of technologies. This calls forth numerous factors influencing economic environment for demonopolization in the tube sector, as well as a vast number of approaches to the demonopolization process depending on the type of manufacturing and type of tubes.
Analysis of the factors influencing the demonopolization process in tube-making has revealed the following situation on the Ukrainian tube market.
The tube sector in Ukraine took shape and developed with aim to satisfy the tube demands of all the former Soviet republics and regions. Almost two thirds of the manufactured tubes were exported beyond Ukraine. For example, only 28-30% of Nikopol Yuzhnotrubny Works’ tubes (mainly tubes for defense industry, aerospace, nuclear power and power engineering) were consumed within Ukraine.
Ukrainian tube-making capacities are more than 2.5 times greater than the domestic market actually needs. It is quite a big problem for Ukrainian tubes to enter foreign markets because these markets are well-supplied with tubes and developed economies (first of all, European countries) impose strict limitations on metal imports from Ukraine and other CIS countries. Besides, sometimes selected performance attributes of Ukrainian tubes fail to comply with international standards mainly because Ukrainian tube mills lack modern test, control, finishing and packing equipment.
Considering this, retention and expansion of the traditional CIS markets is the most important task, the main condition for survival of Ukrainian tube plants and a guarantee of incoming export revenues, which can be used in settlements for fuel and power imports.
Analysis of technological and organizational peculiarities of tube manufacturing has revealed the following possible ways of demonopolization: on the one hand, establishment of concurrent conventional tube-making by putting new tube facilities into operation; on the other hand, expansion of the range of manufactured products by commencing output of new tube types and sizes. At the same time, economic expediency of the demonopolization process requires that average prices of demonopolized products be below monopolist prices and below prices on the traditional foreign tube markets.
Analysis of the actual technical and economic performance of various tube mills shows that practical compliance with the aforementioned conditions is quite difficult at the moment (even completely impossible in some cases). Furthermore, manufacturing of more similar products at the functioning tube mills often results in extensive works on reconstruction and upgrades. In many a case, these works cannot be covered with enterprise’s own means (retained earnings and depreciation funds) as they are insufficient. Besides, tube manufacturers cannot accept commercial loans due to high interest rates in the country.
There are even fewer opportunities to set up concurrent production of particular types of tubes at new premises (i.e. arrangement of manufacturing employing new equipment).
Ukrainian machine-building companies have a poor record of manufacturing tube-making equipment, while foreign equipment (together with assembling) is outrageously expensive, which steeply limits the opportunities for arrangement of concurrent manufacture for medium- and large-diameter (over 108 mm) hot-rolled and welded tubes. The very same factors hold back establishment of new cold-finishing tube facilities. It is estimated that construction of a modern hot-rolling shop costs some USD 150-300 mln. At the same time, in 1998 the overall net profit of all the Ukrainian tube works only amounted to some UAH 26 mln. In the 9 months of 1999, all the tube plants, except Nizhnedneprovsk Tube Rolling Works and Khartsyzsk Tube Works, reported financial losses. Thus, at present, none of the tube plants is capable of engaging in such a new construction. The state budget is also incapable of allocating that much money for these purposes.
According to the studies of hot-rolled oil tubes, the ratio of average annual fixed assets over products manufactured per year (hereinafter, the asset capacity) of new facilities is usually 4-7 times better than asset capacity of the currently employed equipment. Project output capacity is reached within the matter of 3-5 years, while the planned technical and economic performance is achieved in more than 7 years (mill 140 of Nizhnedneprovsk Tube Rolling Works). According to foreign investment standards, such projects are considered inefficient and unattractive.
The existing Ukrainian facilities for cold-finishing significantly exceed the actual demands (tube-drawing shops sit idle mainly owing to lack of purchase orders). Therefore, establishment of concurrent manufacture of these commodities is not justified. Furthermore, the cross opportunities of some shops and sectors at different enterprises nourish fierce competition in tube manufacturing.
It should also be mentioned that creation of competitive environment by organizing concurrent manufacture is related to the need in tube quality control equipment (which is all but costly). Installation of Rota-25 supersonic tube inspection unit by Nukem costs about USD 500 ths., which is almost the same as price of KhPTR mill equipped with stand of rolls manufactured by EZTM, Russia.
As regards small-diameter welded tubes (and partially medium-diameter ones, 159 mm to 219 mm), asset capacity of new manufacturing facilities is some 1.2 — 1.5 times higher than that of the facilities in operation. Project output capacity is usually achieved in the second year of operations and project production costs — in the second or third year. Provided commitment of an investor, due production management, skilled and trained personnel, the period of achieving project output and technical and economic performance may be lessened to one calendar year. Experience of achieving technical and economic performance figures at some mills 20-76, installed in the last 5-6 years, proves this possibility.
It should be mentioned that the competitiveness issue in the electric tube welding sector has lately been related directly to insufficient supplies of conversion strips. Total strips output at iron and steel works dropped considerably, while exports of strip from Ukraine increased. In the situation of shortage of current assets, Ukrainian tube enterprises are step-by-step ousted from the traditional CIS markets due to continuous shortage of strip metal. Though, revenues from exports of one tonne of finished tubes are 35-38% greater than those from exports of a tonne of conversion strips.
Considering the aforementioned, the following conclusions can be made:
-
steel tube market in Ukraine has an oligopolistic nature, which features availability of competitive environment with regard to some tube types and sizes, and economic inexpedience of competition as regards the others;
-
manufacturers of selected types and many standard sizes of tubes have monopolized the market. This has became particularly clear after collapse of the USSR, which caused significant deformation of the Ukrainian tube market;
-
demonopolization of the tube sector has its economically justified limits, which are mainly caused by technological peculiarities of manufacturing particular types of tubes;
-
the main principles and conditions for efficient demonopolization of the tube sector by means of establishing new (concurrent) manufacture are as follows: excess of the volume of unsatisfied demand over capacity of a tube unit, sufficient supply of conversion strip metal, modern equipment for quality control, finishing and packing. Besides, new manufacturers should sell their tubes at lower prices than charged for similar products of the existing enterprises;
-
setting up new facilities for large-diameter hot-rolled and welded tubes is unadvisable owing to low solvent demand and is practically impossible due to shortage of assets, lack of interested investors, considerable increase in asset capacity and lengthy introduction period of new manufacturing facilities;
-
organization of new hot-finishing facilities is inexpedient owing to satisfied market demands;
-
establishment of new medium-diameter (108-408 mm) electric welded tube manufacturing is possible only after recovery in tube-consuming industries;
-
demonopolization in small-diameter (up to 108 mm) welded tube manufacturing is going the natural way, sometimes even outstripping the demand. This is possible owing to installation of new electric tube-welding units at metallurgic mills and at various other factories (organizations): for instance, more than 20 electric tube-welding mills have been installed all over Ukraine recently mainly to manufacture Du 15 — Du 65 water and gas tubes. Along with that, it is necessary to retain export potential and competitiveness of tube products (this mainly relates to price and quality).
To ensure all this, we believe that the state should execute the following regulation to support competitiveness of tube products on both foreign and domestic markets.
To ensure competitive ability of tube products on the world market, encourage scientific and technical progress and build up the export potential, it is necessary to do the following:
-
merge manufacturing and financial resources. For this purpose, it is advisable to generate a state program on increasing tube competitiveness and setting up appropriate vertical-type industrial-financial groups with participation of tube plants and scientific research institutions;
-
monitor cost and price indexes for major types of Ukrainian products used at each particular metal conversion stage (especially, during centralized mark-up in prices for fuel and power, in freightage rates, communication prices, etc.);
-
compile a Regulation on Inter-industry Cooperation, which should stipulate both punitive sanctions for failure to make scrap supplies and economic incentives for supplies of conversion scrap metal to the final metal-making industries (tube and hardware manufacturing).
High tube quality and low production costs (owing to full utilization of tube mills) allow getting a foothold on the domestic market and are the essential conditions to enter foreign markets (including non-CIS markets). This will yield greater export revenues than export supplies of hollow sections and strips.
-
the Metal