Domination by the largest - gbreports.com · production of manganese ferro-alloys including ore...

UKRAINE

1 Steel Times International October 2004

*The authors are with Global Business Reports, London Tel +44 207 079 0042 Fax +44 207 637 0419 e-mail [email protected]

Consolidation has been the nameof the game in the internationalsteel industry for the past 15years. Europe and the US havewitnessed mega-mergers,

concentration of resources andstreamlining of operations between steelmills, raw material suppliers, iron and steelmakers, equipment manufacturers, traders,etc… Ukraine had to go through the sameprocess, but did it while managing its postcommunist transition and trying to find theright formula to ensure the survival of thelargest and most crucial sector of itseconomy. Today, the sector is showing aradically different face than 15 years ago,when most of the industry was in the handsof the Ukrainian state. As of today, theprivatisation process is largely completewith the last major mill sold beingKryvorizhstal, the country’s largest. Only afew, ill placed companies are still listed bythe state as waiting for a private owner torevive their destinies.

Ten years ago there were 32 iron and steelworks in the country, including integratedworks. A decade on, a number of them haveshut down or almost totally phased out steelproduction, leaving room for the fittest tosurvive and become the much sought-afterassets in a movement of consolidation thathas now been almost completely achieved.Today, the sector gathers 365 enterprises,including 14 metallurgical factories andplants, 7 pipe production plants, 10 plants ofhardware production, 16 coke chemicalplants, 17 plants producing refractoryproducts, 26 ore mining enterprises, 3 ironalloy plants, 26 plants for non-ferrous

Domination by the largestWith privatisation all but complete in the Ukrainian steel sector, three major combines have emergedcontrolling assets from mining to distribution, and leaving little to enable the few remaining independentmills to compete.BY G VALENTIN & C COURONNE*

products and 35 enterprises producingblackplate and coated items. The figureshighlight a wide distribution of productionfor iron and steel, while almost all of theoutput of crude steel and pig iron is actuallyproduced by 11 steel mills making over amillion tonnes a year. Five main steel worksare generating two third of the sector’srevenue, with the balance spread between atleast 15 plants. This also suggests a ratheratomised sector, from upstream down, whilethe level of concentration is actually veryhigh and is the result of intense activity inthe political, financial and industrial fields.

RESTRUCTURING STEELThe concentration and restructuringmovement in the Ukrainian steel industrywas a period coinciding with greatinstability in the country and a climate ofviolence that could have discouraged manywilling to invest in the sector. Rival clans,commanding competing industrial assetsfrom the two major bases of steelproduction in the country; Donetsk –capital city of the Donbass region andDnepropetrovsk – the main city of theDniepr Basin, were jockeying forownerships and political influence.President Kuchma, himself a former metalworks manager from Dnepropetrovsk, hadto rein in the warring factions to keep orderin the industry and the country’s loosedemocratic principles. For a long period oftime, hazy dealings, fragmented ownershipand difficult court cases complicated thework of the industry to a huge degree, tothe extent that some companies had troubleknowing who really owned them at any

given time. The intense concentrationobserved today derives from this period ofinstability and dubious dealings andnevertheless managed to turn theUkrainian iron and steel industry into aglobal business, despite majorshortcomings notably due to thetechnological backwardness of parts of thesector. Today, with sky-high steel, iron oreand coke prices, the sector is in the best ofpositions to successfully manage itstransition one step further.

INTERPIPEDuring this decade of consolidation,groups comprising financial institutionsand industrial assets have emerged, soon tobecome the dominant forces in theeconomic life of the country. Three majorIndustrial-Financial entities have surfacedfrom Ukraine’s transition to assumecontrol of the largest works and rawmaterial suppliers and turn the industryaround. From the shadows of the earlyyears, Dnepropetrovsk and Kiev-basedInterpipe, owned by Victor Pinchuk,President’s Kuchma son in law became akey contender in the steel pipe businessworldwide. Turning over $900M andexporting to 70 countries, the organisationis involved in seamless and welded pipemaking, manufacturing of railway wheels(10% of the world’s market share) andproduction of manganese ferro-alloysincluding ore extraction (11.4% of theglobal markets). The building of what isnow the fourth largest pipe-makingconglomerate in the world and the largestin Ukraine took over a decade and putInterpipe into a very strong position ofpower within the industry.

Today, the group controls the largest pipe

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making factories in the country:Nizhnedneprovsk tube rolling plantproduces over 800kt/y of hot deformedpipe and is leading the pipe industry inUkraine in terms of volumes produced.Novomoskovsk Tube Mill has thelargest production capacity, at 1.3Mt/yof welded pipes, and the factory is notproducing at full capacity. Followingthe Russian inspired slump in themarket in 1998, most of the sectorsuffered steep reductions in purchasedvolumes and it took some time toreadjust production to reduceddemand. Yet today orders are up again;on the back of sustained high oil prices,the oil industry is buoyant andinfrastructure work is on the rise,fuelling a strong demand for pipesworldwide. Novomokovsk Tube Mill,for instance, saw its production levelsshoot up 33% year on year in 2003.

Besides these two major mills,Interpipe also controls smalleroperation such as the NikopolSeamless Tube Plant Niko producing justless than 300kt/y of products, as well as ahandful of smaller works and mills. TheInterpipe Corporation also controlsferroalloy production through the NikopolFerroalloy Plant, Europe’s largest producerof ferroalloys (annual capacity 1.2Mt),specialising in the production ofsilicomanganese and ferromanganese. Themain advantage of the plant is its localsource of raw materials, which allows thecompany an unrivalled domination in theCIS ferroalloy market. Over 70% of outputis exported throughout the world. It holdsapproximately 57% of the CIS market, 48%in Eastern Europe, 39% in the Middle East,and 15% of European Union’s markets.With the latest massive upsurge in prices offerroalloys, fuelled by sustained Chinesedemand, the Nikopol Ferroalloy Plant is aprime asset for Interpipe in the overallmetallurgical picture. And it is a disputedone: Interpipe and Igor Kolomoisky’sPrivatbank fought hard to obtain acontrolling stake in the ferroalloy plant,originally put for sale at $10M the stake waseventually sold after a very acrimoniousbattle and went to Interpipe for $77M,more in line with the company’sinternational value.

INDUSTRIAL UNION DONBASSThe second large industrial-financial group that built a positionas an iron and steel conglomerateis the Industrial Union of Donbass(IUD) or ISDJ. The company isvertically integrated and gathersunder its control some of thecountry’s largest mills. It has alsobuilt a strategic alliance with Swissbased trader and steel plant owner,Duferco, and hence gained marketaccess in one of the greatest steelmarketing platforms of the world.As far as productive assets, IUD isa key contender in Ukraine:Alchevsk Iron and Steel Combinehas a capacity of 3.3Mt/y and iscurrently undergoing an upgrade ofits plant that should help boost itsprofitability and sustaincompetitiveness. In September2003, IUD and Duferco signed acontract with Voest-Alpine

Industrieanlagenbau (Austria) for thesupply of two continuous casters and twoladle furnaces for Alchevsk. The cost ofthe modernisation project amounted to€140M, and has the objective of boostingoutput and quality at the Alchevsk plantto 5Mt/y.

Another member of the IUD group ofcompanies, until June of this year, theDniepropetrovsk Petrovsky Steelworks, isone of the oldest works in Ukraine and isshowing signs of its age. Today work isunderway to renovate one of its blastfurnaces although IUD has sold its 42%stake to Pryvat Bank, who was alreadyholding a stake in the company, alongsidestrong participations in other ferroalloyconcerns (Zaporizhia Ferroalloys,Stakhanov Ferroalloys, NikopolFerroalloys) as well as in coke plants. In thecase of Petrovsky, it seems that the twostakeholders could not agree on a commonconcept for the future of the works andIUD decided to call it quits, hardly a yearafter taking the controlling stake.

This year IUD was also on the acquisitiontrail with its purchase of theDnieprodzerzhynsky Iron and SteelCombine confirmed this year for a price of$133M and the commitment to investanother $180M in plant upgrades by 2008.

The corporation also used to controlthe Azovstal mill, the country’s secondlargest, as well as the Khartsyzsk tubeworks, also one of the country’s best,but lost them to another heavyweightmetallurgical corporation of Donetsk,Donbass: System Capital Management(SCM). Today, besides its remainingmajor steel mills at Alchevsk andDnieprodzerzhynsky, the strength ofIUD lies in its vertical integration incoal, coking coal and in its diversedownstream activities in pipe making,construction engineering, machinebuilding and mechanical engineering.In the area of mining, the very strategicconcentration of IUD allowed it toproduce and deliver more than 5.5Mtof coal concentrates to coke andchemical plants and more than 4.2Mt ofcoke to iron & steelworks in 2002.

Its partnership with Swiss-based steeltrader Duferco gives IUD a muchbroader market penetration potentialto the products of its mills, pipe works,

mines and heavy manufacturing companies.Interestingly enough, the company has alsobeen very active abroad, successfullybidding for the Dunaffrer works inHungary, the largest steel mill in thecountry, although it did hit harder timeswith Huta Czestochowa in Poland whereIUD was initially declared the winner of thebid, but was shunned by the formergovernment who then declaredmultinational giant LNM, already owner ofHuty Stali (PHS), Poland’s largest mill,winner of the privatisation bid. Since then,the process has run into further troublewith the victory of LNM contested in thecourts and the new Polish governmentdisplaying a will to revert to the originaldecision. The European Commission alsorefused the contents of Poland’srestructuring programme for the mill and isabout to launch an inquiry concerningillegal state support. During the process,smear campaigns against IUD, highlightingthe shadowy origin of its funds and the lackof transparency of its structure, wereconducted and the corporation had a hardtime clearing its name and fighting for itsreputation. Today, it is engaged in a battleof proceedings to have its victory in the bidfor Huta Czestochowa recognised. Why somuch effort to pursue this purchase? One

of the reasons for the latest andvigorous foray can be found into theincreasingly competitive marketconditions in it home markets.

SYSTEM CAPITAL MANAGEMENTThe expansion of Donetsk-basedSystem Capital Management (SCM)might appear as irresistible toanyone observing the Ukrainian ironand steel sector of the last decade.Reputed to being controlled byUkraine’s richest man, RinatAkhmetov, the group has pursued anaggressive policy of vertical andhorizontal integration that leavestoday’s SCM with pretty much mostof the prime assets of the industry.Alongside its associates, Danko andARS, SCM controls the largest ironore mine, a number of majordressing and concentration plants,coal mines and coking plants, as wellas the largest steel and metals

The industrial concentration of the Ukraine ferrousmetals production, by total sales revenue, 2002Source: Vlad Mykhnenko, Rusting Away? The Ukrainian Iron and SteelIndustry in Transition

Ownership structure of Ukraine’s metals sector and its majordomestic customers, as of 31st December 2002Source: Vlad Mykhnenko, Rusting Away? The Ukrainian Iron and Steel Industry inTransition

The remainder19.9%

Top tencompanies

80.1%

Top fivecompanies

59.2%

The second five:Alchevsk,Donetskstal,NikopolFerroalloys,NyzhniodniprovskTube Works,Donetsk Iron and

The first five:Kryvorizhstal,Mariupol Ilyich,Azovstal,Zaporizhstal,Dnieprodzerzhynsk

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trading organisation of Ukraine,Switzerland-based LemanCommodities. SCM affiliate ARS issaid to control about 90% of Ukraine’scoking coal mining and coke producingcompanies, giving it considerableleeway in the domestic sector, and toput it bluntly, massive control. Furtherdownstream, the list of assets isimpressive: The Azovstal Iron and SteelCombine (output 2003, 5.34Mt) theYenakievo Iron and Steel Works(capacity 3Mt) and the Khartsyzsk TubeWorks were the jewels in the crownuntil being eclipsed by SCM’ share inthe recent privatisation of Ukraine’slargest iron and steel concern,Kryvorizstal.

Teaming up with the InterpipeCorporation to form the InvestmentMetallurgical Alliance, SCM and itsnew associate took control of the plantand its iron ore base for $800M,keeping at bay some of the world’s bestknown iron and steel players alljockeying for control of this muchcoveted asset, the largest and mostprofitable combine of Ukraine.

The positioning of SCM as thedefinitive leader of the industry alsomarks the end of the majorconsolidation within the local industry.A few worthwhile assets remain on theprivatisation list, notably the Makiivkaplant in the Dnepropetrovsk region anda number of coalmines still undergovernment control. But, in general, thesector is consolidated and in the handsof what seems like aggressive, yetfocused organisations that have showedtheir intentions of investing in thedevelopment of the industry and thesustainability and expansion of itseconomic value. The concentration alsohighlights the rise and today’spredominance of the Donbass regionand its regional capital Donetsk overDnepropetrovsk.

Kryvorizstal is in itself a clear indicationthat things have changed, and theindustry has matured to one that cannow take on the world. Today,problems arise for those left aside in themovement, and hang on to the illusionof independence. With the most intenseconcentration arising upstream, in rawmaterial supplies, and furtherdownstream in the control of the mostpowerful marketing channels, little isleft to those who are alone. Mills thathave decided to opt for a stand-alonepolicy will be pushed out of theUkrainian metallurgical sector by lackof access to the key resources, ores,energy and capital. For example, theMariupol Ilyich works is calling uponpolitical assistance to help it survive,but Ukrainian politics, already placedunder the influence of the metallurgicalsector, has already taken into accountthe sweeping changes and is supportiveof its corporations and the oligarchsthat have emerged.

The fiscal advantages offered to themetallurgical sector in the Donetskregion and its tailor-made investmentregime are a further testimony of thatrecognition, and of the fact that thepolitical and industrial balances ofpowers have shifted east, much closerto the Russian border than before.And Ukraine’s new attitude towardsEU and NATO memberships, nolonger priority items on the nationalagenda, are also a recognition ofthese facts: Russia is Ukraine’snatural trading partner, supplyingmuch needed energy to Ukraine’smetallurgical sector, and buying alarge part of its production. But alsoboth countries compete and partneron the world iron and steel markets.A strong source of influence inUkraine, Russia is now paying closeattention to the rebirth of Ukraine’sheavy industry.

Ukraine’s steel companies by annual sales share, 1999-2002 averageSource: Vlad Mykhnenko, Rusting Away? The Ukrainian Iron and SteelIndustry in Transition

Ukraine’s tube mills by annual sales share, 1999-2002averageSource: Vlad Mykhnenko, Rusting Away? The Ukrainian Iron and SteelIndustry in Transition

The consortium established betweenInterpipe and SCM to win the bid for

The Ukrainian industry, mainlyconcentrated in the southeasternregions, revolves around three

major poles: Upstream, iron ore isextracted from a variety of deposits,located along the lower Dnieper riverregion. Similarly, coal is extracted fromthe Donbass basin. Downstream, twomajor centres struggle for both industrialpredominance and political influence inKiev and the national institutions. TheDonbass region, with Donetsk as itscapital is host to thirteen iron and steelworks and thirteen coal-coking plants. Onthe city’s doorstep is the coastal town ofMariupol on the Sea of Azov,concentrating the second and third largestcombines of Ukraine: Azovstal integratedsteel mill (8.3Mt/y capacity) and Ilyich(7.2Mt/y capacity) and employing 23000people. Further downstream, machinemaking is thriving in Mariupol, withmachine builder Azovmash leading thenational pack. Tube and pipe makers areactive both in the Dnepropetrovsk and

Donetsk regions. More capacity can befound in Lugansk, in the most easternpart of the country and at Alchevsk.

The whole industry suffered heavilyfrom the collapse of the Soviet Union in1991, already having to face steepreductions in consumption in the late1980s, it found itself deprived of marketprospects, short of cash, sometimeswithout energy to run the plants andoperated by managements that hadlimited international experience andexposure to the world market’s harshrealities. A period of barter deals,featuring steel for energy tradesemerged, where the reputation of theindustry was affected and productionlevels plummeted.

For a decade, the Ukrainian iron andsteel industry was shadowy, ripe withscandals and not in the best of shape. Tenyears on, the picture is radically different:Ukraine is back in focus as the seventhlargest producer of steel worldwide, andone of the three largest exporters of steel.

The sector has almost completed itsownership restructuring, its consolidationfrom raw material extraction through tosteel products is solid and the Ukrainianiron and steel industry is now looking atstrengthening the next phase of itsevolution: its anchorage in the worldmarket and the competitiveness of itsindustrial tool.

Recently, the privatisation of thecountry’s largest integrated iron ore andsteel plant, Kryvorizhstal, attracted animpressive short list of local andinternational contenders and expectationswere to see the plant go for at least$1.5bn.

Yet, hopes were short lived asKryvorizhstal was snapped up by localcontenders, at a discount and afterinternational bidders were mariginalisedin a dubious fashion. Following thisepisode, most questioned the country’swillingness to open up and signal itsattachment to market values as well asbest business practices.

OLD AND NEW WAYS

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The authors are with Global Business Reports,London Tel +44 207 079 0042 Fax +44 207 637 0419 email [email protected]

1n the 1870s Ukraine was a land ofopportunity and transformation: thediscovery of iron ore deposits inmany parts of south easternUkraine, along with coking coal and

anthracite deposits found in abundance inthe Donbass region led to an influx ofentrepreneurs, some of them foreigners,willing to tap into this subterranean wealthand turn mineral reserves into iron and steel.For instance, a Welshman, John Hughesfrom Merthyr Tydfil, established the firstlarge iron and steel plant at Hughesovka(now Ukrainian Donetsk) in 1869. Today,the country’s iron and steel industry ismainly a direct descendant of those earlydays though shaped by later developments.Further plants were built in the 1930s, whenUkraine had both the misfortune ofsuffering from Stalin’s implacable repressionof peasants yet also had the chance ofparticipating in the edification of an iron andsteel powerhouse designed to fuel the SovietUnion’s industrial development.

Inherited from this double-edgedhistorical development, the regionalconcentration of the industry is strikingand allowed many synergeticdevelopments along ore reserves,power resources provided by theDnieper river’s hydroelectricinfrastructure and transportationpotential thanks to navigable rivers,Ukraine’s coastline on the Azov andBlack sea and the extensive railwaysystems developed under Stalin’s rule.

Today, after going through theradical overhaul of its fundamentalrole, ownership structure and raisond’etre, the industry is emerging fromover a decade of confusion andprotracted struggles as an almost fullyintegrated iron and steel cluster, featuringthe complete production cycle of iron andsteel, from raw material extraction throughto semi-finished and finished metalproducts. Possessing iron ore, including highconcentration ores, manganese, as well asmetallurgical limestone, kaolin, dolomite,coking coal in the Donbass region,anthracite and a range of other miningproducts, Ukraine was clearly destined to bea metallurgical hub. Twenty years ago, thecountry was one of the world’s top fourproducers of pig iron and crude steel,churning out up to 57Mt of crude steelbefore plummeting while the country wascoming to terms with its post-communismtransition.

The significance of steel production in thecountry’s economy is immense and Ukraine

cannot be economically viable for longwithout a strong steel sector. Despite thesteep decline in production volumes from themid-1980s onwards, the industry startedshowing some signs of recovery in the mid-90s. From just below 57Mt of crude steelproduced in 1986, output declined to under25Mt in 1995, representing almost a 60% lossof output, before rebounding to over 35Mt inthe past two years (2003: 36.9Mt). Exportvolumes picked up with ferrous metalsaccounting for up to 30% of the country’soverall foreign sales and 80% of the domesticiron and steel production total sales.Reorganising the industry was painstakinglydifficult, protracted and a somewhat gloomybusiness and the shadows from this periodare still very present in many Ukrainianmemories. Finally, the harder times are nowbehind, at least as far as setting up a coherentsector organisation. But beyond knowingformally the names and address of who ownswhat, lies another critical issue for theUkrainian iron and steel sector: the shape ofthat which is owned.

AGEING TOOLSThe industry is clearly showing its ageregarding the production processesemployed in the country. In 2003, 45.9% ofsteel was produced from open-hearthfurnaces, placing Ukraine in the number twoposition of open-hearth produced steel inthe world. Oxygen steelmaking (BOS)accounted for 48.6% or the overallproduction (17.9Mt) and only 5.4% wasproduced from electric arc furnaces (2Mt).With 16.9Mt of open-hearth output,Ukraine has the undesirable title of beingsecond only to China for this mostantiquated production method, and Chinesesteelmakers appear to be phasing out open-hearth furnaces much quicker thanUkrainians. This highlights one of the majorissues at stake in the industry: the unfitnessof most of its production tool and its severelack of modern, profitable and efficient,steelmaking facilities. Yet, the leaders of thesector are displaying a tendency to tackle theissue with a mix of bullishness, vision and forsome, resignation.

KRYVORIZHSTAL NEWLY PRIVATISEDThe largest organisations are spread acrossthe southeastern region. Some players arebenefiting from real ‘house-holdrecognition’ on international markets, forgood reasons, like being recognised as partof the first league of global exporters, or forbad, like being at the centre of sometimesunjustified controversies. By revenue,profits and production volumes, thecompany that stands out from the pack is therecently privatised Kryvorizhstal (SeePrivatisation in Ukraine: – Could they havedone better? in this issue). The world’s 26thlargest steel company by output and fully

vertically integrated, the giant is reapingthe benefits of a continuous supply ofiron ore from Ukraine’s largest mineand is also the steel mill with the largestturnover in the country, with over abillion dollars in sales and strongprofitability levels. It is squarely placedat the centre of an industrial hubcomprising one of the largest iron andmanganese ore deposits, open castmines, ore processing andagglomeration plants, and the steelwork’s is Ukraine’s largest producer,with an output of 6.9Mt of crude steel in2003, and employing 52 000 workers. Aninvestment plan was a condition of asuccessful privatisation offer. It is hoped

that the new owners, a mighty alliance ofDonetsk-based System Capital Management(SMK), the biggest powerhouse in Ukraineand Dnepropetrovsk and Kiev-basedInterpipe (controlled by President Kuchma’sson-in-law), will combine their efforts indeveloping further the giant into an evenlarger player in the years ahead. This willcome to pass provided its new ownersimplement the right mix of large-scaleinvestment and sound marketing policy. Butbefore looking to these future hopes, theinvestment simply required to maintain suchiron and steel works and to push them intothe next stage of development is anticipatedto be huge and must be made. And with sucha large-scale workforce, productivity cannotbe expected to be high. Despite the statedcommitment of the new owners to invest inthe works and preserve employment, somefear that it may not be enough. Yet, the keeninterest displayed by the big names of the

Difficulties in moving forwardfor the Ukrainian steel industryOut of date plant and the concentration of the ownership of most rawmaterials in the hands of a few major steel groups is challenging thesurvival of the second tier steelmakers in the Ukraine. BY G VALENTIN & C COURONNE*

The 5.3Mt/y Azovstal steel plant is situated atthe port of Mariupol on the Sea of Azov

Azovstal plans to increase output from thepresent 5.3Mt/y to 7.5Mt in 2006


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world’s iron and steel industry during theprivatisation process are a further testimonythat the Ukrainian steel works conveyed alot of appeal, despite the associatedupgrading works.

AZOVSTAL INVESTSThe dilemma of refashioning and shapingold production workshops into efficient steelmaking facilities is faced by all the sector’sleaders: Azovstal, formerly the country’slargest steel producer, is following inKrivoyrizhstal’s footsteps, producing5.340Mt of steel in 2003 (3.8Mt is BOS steeland the rest is open-hearth). The companyplans for 2004 and beyond involve ratchetingup output from 5.9Mt (4.4Mt by BOS) thisyear to 6.5Mt in 2005 and 7.3-7.5Mt by 2006,including around 6Mt of BOS steel. For this,Azovstal, one of the two giant mills of theseaport Mariupol, has embarked on a vastmodernisation programme to keep up withacceptable levels of competitiveness andoutputs. Mr Velyi, Azovstal GeneralDirector gave a few highlights on the majorrestructuring undertaken by the company:“At the moment we have five working blast-furnaces, and we are currently rebuildingfurnace number 2, which has been stoppedsince 1998. The new furnace will be fired inJune 2005. We have also undertaken somereconstruction in our BOS converter shop,connected with continuous slab casting, andwe are building a caster. The reconstructionof two casters is being undertaken byNovokramatorsky Mashinostroitelny ZavodJS Co, a leader in production equipment forthe steel industry, using technology from theAustrian based plant builder, VAI. Besides,we have bought a liquid oxygen plant fromthe French company Air Liquide. The totalinvestment is approximately $320-350M.This year we will spend $208M and the restnext year.”

The company is presently producing X80-X90 grades and will be able to produce X110and X120 steels by the addition of a ladlefurnace and a vacuum degasser.

The investment effort put together atAzovstal is a sign of confidence, as well as amark of maturity.

Despite increasingly competitive offersfrom domestic technology suppliers,Ukrainian steelmakers are also turning tointernational service providers to upgradetheir plants. For instance, Azovstal calledupon the services of Germany’s SMSDemag for mastering rapid cooling of thickrolled steel while keeping all the product’sstrength characteristics. New technology isgoing into all aspects of the company’sactivities, including managementprocedures, integrated IT systems and

redeployment of sales and marketingefforts. “This effort is a revolution in manyrespects,” affirms Mr Velyi.

ILYICH GLOOMY PROSPECTSOther key players like Ilyich, the secondgiant works of Mariupol, are looking atmaximising the use of their abundantworkforce and versatile production,diversifying into ship building, agriculturalland, manufacturing apparel and cannedfood production. The strategy of suchdiversification may bring straightforwardprofit. In its core business, the factory is agiant by all standards, employing astaggering 60 000 workers and producing6.5Mt of steel in 2003, mostly using open-hearth technology. For more than 100 yearsOJSC Ilyich ISW has produced high-qualitymetal products: cold- and hot-rolled metal,galvanised sheets and coils, seamless oiltubes, longitudinally welded tubes, pressurevessels, and ferroalloys are amongst theproduct list and the works has received manycertificates for shipbuilding steel of normaland high strength, boiler steel, strip, bridgesteel, structural carbon and low-alloy steel,electro-welded tubes. But clearly today,challenges are piling up, as the company wasleft outside of the industry’s concentrationphase. Today, Ilyich’s independence,

guaranteed by its employee andmanagement ownership, may become itscurse, as access to raw material, in particularto Ukrainian iron ore and coke productionis now fully controlled by the verticallyintegrated ‘majors’ that have emerged fromthe market’s concentration. This isthreatening the status of the works andcould in the future precipitate thecompany’s purchase, locally, or its economiccollapse. In this case, Vladimir S Boyko, thecompany’s Chairman of the Board is callingupon the state to help the company goingthrough hard times: “We need strong actionfrom the government to guarantee thatcompanies like Ilyich have access to rawmaterials, under market conditions. Today,everyone thinks that the market is withoutrules and big groups are dictating their rulesto us. This is how, despite working at highcapacity, we still lose money.”

Despite modernisation attempts of itsindustrial plant, the company remains oneof the most archaic iron and steelmanufacturer in the country and the cost ofstaying both alive and fit for the globalmarkets is extremely high and is notexpected to decrease. With the largestemployment in the sector, the productivitylevels per worker are lagging behind mostinternational counterparts. Industry-wide,these levels are said to be very low, assuggested by some researches pointing outthat an average Ukrainian steel workerproduces only 76% of a Polish steelworker’s output, 18% of a Brazilian’s, 14%of an EU steel worker, 11% of a UScolleague and 10% of the average SouthKorean’s output. (Vlad Mykhnenko,Rusting Away? The Ukrainian Iron & SteelIndustry in Transition, 2004) In this case, theclock is ticking for the very survival of workslike Ilyich. In sum, the litany of woes andlife threatening issues faced by the companymeans the future of one of the greatest ironand steel works appears increasinglygloomy.

Ilyich employs 60 000 workers in Mariupol andproduced 6.5Mt in 2003 but mostly by openhearth furnaces

Dnieprospetsstal located inZaporozhye on the river Dnieperproduces special steel grades


siphoned off some of the company’sassets and left its 4.05Mt ofcapacity, scarcely used, and brandnew production equipment halfinstalled due to lack of resources.The company notoriously has abrand new 3500mm rolling mill stillwaiting for final installation andValery Dudnik, its director is eagerto underline the inner value of theindustrial plant: “We want to beoptimistic, as this works has beeninvesting in the upgrading of itsproduction capability, before beingturned astray by some. Today, wewant to put all our efforts intotaking this company out of adifficult time and back to where itshould be”. This may be achievedthanks to the arrival in thecompany’s shareholder structure ofthe Ukrainian State, through state

company Naftohaz Ukrainy, the oil and gasstate company. At stake, is the very survivalof the Makiivka metallurgical combine. Thestate operator bailed it out taking on boardthe company’s $31M debt, and committingitself to helping the company find newmarkets and secure its energy needs.Privatisation of the plant is expected to takeplace this year, and India’s Tata Steel, atone stage interested in the privatisation ofKryvorizhstal, also mentioned Makiivkathen as a potential target. Following theeffective exclusion of foreign bidders duringthe privatisation of Kryvorizhstal, Makiivkamay have to make do with a lower turnoutof eager foreign investors but the industry isnevertheless attracting much overseasinterest and Makkivka’s senior managementis hoping to benefit from this renewedinterest to ensure the survival of one of thelarger works in Ukraine.

Behind these individual stories, thedominant pattern emerging is one ofcombining crucial issues stemming from thecompanies ownership structure and owners’will. Following the intense concentrationperiod of the last decade, new steel mogulshave arrived and are yet to show their fullintentions with regards to the industry’sfuture. Resource allocation, concentrationof raw material supplies under a few playersand the cost of major restructuring willundoubtedly prove to be fatal to the survivalof some companies. The companies that arecurrently under-utilised, too costly toupgrade and offer a limited product mixlacking real long term commercial value willfeel the pain. And this is a real challengethat the industry will have to face: movingfrom the current ensuring survival – largelyhelped by a cyclical upsurge in global steelprices – into the next stage of creating asustainable future. To prove its worthinessand ensure its long-term success whilst alsolimiting the socio-economic costs of asecond wave of ‘readjustments’ and to takethe whole of Ukraine into the next stage ofits economic revival , the iron and steelindustry is now facing a monumental task.Some have started tackling the challengesand are busy working to perpetuate theeconomic importance of the industry inUkraine. Others may have to faceextinction and shall come to illustrate theexcruciating difficulties of a completetransition movement, from one economicand political system to another radicallydifferent one.

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ZAPORIZHSTAL SEEKS AUTOMARKETThe Zaporizhstal works, inZaporizhia is another one of thecountry’s top five mills, ranked as55th steel producer in the world.Far from complacent, the companyhas here again engaged in a raceagainst time to strengthen theefficiency of its production plantand brace itself for tougher daysahead, should steel prices follow adownward trend. Producer ofcarbon, low alloy, alloy andstainless hot rolled coil and coldrolled coils, the company comprisesa sinter shop (six sinter machines),five blast furnaces, an open-hearthfurnace shop with nine furnacesand a shop for preparation of ingot-mould trains. The company also hasfour rolling mills for hot and cold rolled flats,strip, tinplate and cold rolled formedsections. Total annual production of theWorks is 3.5Mt of flats and 600kt of coldrolled formed sections.

Zaporizhstal is investing for increasedperformance: it is for instance completing a$66.5M investment to refurbish its blastfurnace No 2 and improve the energyefficiency of the unit. It is also starting theinstallation of a 300kt/y capacity ladlefurnace in the teeming bay of the open-hearth furnace shop for processing mediumand high-carbon and low-alloy steels. Thework is being undertaken by a variety oflocal suppliers, notably NovokramatorskiyMachine-Building Plant, Ukraine andinternational leaders such as Germany’sSMS Demag, Austria’s VAI; and Danielifrom Italy. Zaporizhstal is also building apickling unit, at a total cost of $40M overthree years, started 2003. The company isalso prompting a number of other primeinvestments, following indications thatleading carmakers may increasingly chooseUkraine for sourcing high qualityautomobile sheet. The purchase andinstallation of a galvanising line and paintline at Zaporizhstal is, for instance, plannedaround 2007-2008, at a cost of $100M.

Such major capital expenses, alongsideother planned investments, are a furthertestament that the sector is not standing still,and that despite the advanced age of most ofthe production plant, the industry is workinghard to sustain competitiveness and qualityand is fighting for keeping a leading positionamongst top global suppliers.

DNIEPROSPETSSTALDnieprospetsstal Special Steel Works is avery dynamic operator in the market also.Maker of special steels, (bearing steels, heatresistant, structural steel, high speedsteel,…) it relies on a 5.8Mt capacity and isalso investing heavily to expand, notablyputting the final touches to a finishing shop.“We benefit from the edge of our productsin the first place” explains Alexey Alekhin,Chairman of the Board. “But this cannot bethe complacent approach to privilege. Intoday’s market place, we have to strive forexcellence and competitiveness and this iswhere we direct most of our efforts. We arepermanently listening to market demandsand are implementing an ambitious reformprogramme, both on the production side aswell as in the management of this

organisation. Our goal is to be recognised asone of the best suppliers of special steels inthe world.”

MINIMILLSInvestment programmes are trying tosustain the self-proclaimed bullishness andimprove energy efficiency and flexibility toenable Ukraine to play its part in globalmarkets. Oxygen converters and electric arcfurnaces are being purchased and installedand the industry is working overtime tocatch up with the world’s standards ofproduction. Here, the experience of smallersteel mills, such as the Istil minimill, inDonetsk, is of great value. The company isone of the rare foreign investments in thesector and therefore has been somewhat ofa pioneer, as well as a rarity in Ukraine.Originally a UK and US company, Istil hasits main manufacturing base in the Donbassheartland, following the acquisition ofDonetsk Metal works in 1996. It also hastwo finishing mills outside Ukraine, one inthe south of England – the formerQueenborough Rolling Mill, and one inMilton, Pennsylvania, USA. In Ukraine, thecompany has been constantly upgrading itsminimill, investing a total of $85M in anelectric arc furnace, a vacuum degasser,continuous caster and upgrading some ofthe blooming mill equipment. The companyis trying to adopt a strategy ofdifferentiation, producing round billetsfrom 80mm to 330mm diameter to respondto an increasing, yet exclusive, marketdemand in machine making andconstruction worldwide. “We want toimprove the value added side of ourproducts by increasing the size of ourrounds but we are also planning to install aheat treatment unit in the near future. Wehave to be very proactive in keeping up withthe best technology”, explains Dr FarooqSiddiqi, Senior Vice President of IstilUkraine. Extending his analysis to the othercompanies of the sector in Ukraine, headds: “The companies that won’t do it herewon’t be able to compete with lower costsproducers. It is more than a conundrum, it isa life necessity for the industry”.

MORE TO PRIVATISEMakiivka metallurgical Combinat is on theprivatisation list for this year but thecompany has had to go through a numberof misfortunes that pushed it to the brink ofbankruptcy. Unscrupulous ‘investors’

Minimill Istil based in Donetsk has twointernational subsidiaries, one in UKand one in USA

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Ukrainian steel:– vulnerable overseas, weak at homeUkraine’s remarkable recovery in steel output since the collapse of1991 is heavily export dependent with 70% of output exported. Thedomestic market has not kept pace with the recovery of the steelindustry making steel vulnerable to world markets, often hostile to theUkraine.BY VLAD MYKHNENKO*

Before the end of the Cold War andthe collapse of the Soviet Union in1991, Ukraine had been theworld’s fourth largest steel-producing country after Russia,

Japan, and the United States. TheUkrainian steel industry entered the periodof the post-communist transformation as afully-grown and densely locatedmanufacturing sector. Yet, as the result ofexogenous trade shocks caused by thecollapse of the internal Soviet steel marketin the early 1990s, and due to the overalldisorganisation of production, managementand commerce, the main outcome of theUkrainian steel industry’s transition to themarket was a massive, sharp, deep, and longdecline in the ferrous metals output. In thefirst half of the 1990s, Ukraine’s crude steeloutput declined by 58%, from 52.6Mt in1990 to just 22.3Mt in 1995.

Radical market and structural reformsinitiated at the end of 1994 by theUkrainian government, fast large-scaleprivatisation, and the reportedimprovement of the business climate inthe country, have returned the steelindustry back on the growth path.Already in 1996, the Ukrainian steelindustry recorded a 12% annual salesincrease; and 8% growth followed in1997. In absolute volume terms,Ukraine’s crude steel output increasedto 25.6Mt in 1997 – for the first time inthe country’s independent history. In2003, the Ukrainian steel enterprisesproduced 36.8Mt or 70% of the 1990output level. On the international scale,the turn of the Ukrainian iron and steelindustry towards recovery and growthhas put the country back into the league ofthe largest steel producing countries.Currently, Ukraine occupies seventhposition in the world steel ranking, behindGermany, South Korea, Russia, and theworld’s top three steel-producing giants –China, the United States and Japan.

VULNERABLE OVERSEASThe apparent recovery of Ukraine’s ferrousmetals sector has been propelled by aremarkable export expansion. Between1990 and 2002, the country’s share in theworld steel output halved to 4%.Nevertheless, by the late 1990s, Ukrainebecame one of the world’s top three majorsteel-exporting countries. In 2002,Ukrainian steel companies exported25.9Mt of steel, slightly behind Russia’s27.7Mt and Japan’s 35.2Mt. Consideringnet export figures, Ukraine, on a par withRussia, is currently the world’s second

*PhD Candidate, Darwin College, University ofCambridge, UK.email [email protected]

Ukraine’s ferrous metals sector: raw materials and crude steelproduction, 1990-2003 (volume index, 1990=100)Source: Vlad Mykhnenko

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largest steel exporter. The Ukrainian steelcompanies sell annually abroad aroundUS$6-7 billion worth of crude steel, whileferrous metals account in general for about40% of the country’s total exports.

EXPORT RESTRICTIONSThe overseas steel market expansionnotwithstanding, since gainingindependence in 1991, Ukraine has beenfaced with what a recent InternationalMonetary Fund report describes as ‘aplethora’ of unwarranted anti-dumpinginvestigations and external marketrestrictions. Export opportunities for theUkrainian iron and steel producers havebeen badly damaged by a wave of anti-dumping sanctions, import tariffs,quantitative restrictions, and otherprotectionist measures imposed by theEuropean Union, the United States, and anumber of other steel-producing countries.

Currently, 69 restrictive measures imposedbetween 1999 and 2002 against Ukrainiansteel exports are in place. According to theWorld Trade Organisation and IMF data,Ukraine has been ten times more likely tohave anti-dumping measures imposedagainst it as the country’s share in theinternational trade could suggest. Forinstance, over the January 1995 – June 2002period, out of a total 1161 anti-dumpingmeasures, WTO member countriesimposed 37 measures on Ukraine. The 3%share of measures imposed on Ukraine isdisproportionate to the 0.3% Ukrainianshare of world exports, but it is partlyexplained by WTO members’ propensity toimpose measures on metal trade (one-thirdof all measures) and the dominating role of

metal products in Ukraine’s total exports.WTO trading partners that have imposedanti-dumping measures against Ukrainianexports include Canada (3 measures), Chile(2), Colombia (2), EU (8), India (4),Mexico (4), Turkey (2), US (5), andVenezuela (2). Apart from the impositionof antidumping duties, Ukrainian exportsare also subject to quotas and licensingbased on intergovernmental agreements.Agreements currently in place governexports of various metal products to theEU, the US, Indonesia, and Russia.

The European Union and the UnitesStates have both designated Russia andKazakhstan as market economies, but, forspecific political reasons, Ukrainian effortsat receiving a similar designation has notmet with success. Furthermore, theUkrainian steel companies are at acompetitive disadvantage vis-à-vis the newEU member-states from Central Europe.After the EU enlargement in May 2004, thecompetitive disadvantage of the Ukrainiansteel industry in comparison with the newEU members of the single market haveincreased; at the same time, exports toCentral Europe have been negativelyaffected, as these countries adopted thecommon EU tariff and other protectionpolicies. As the great bulk of the Ukrainiansteel export has been barred from the USand EU markets, the primary target for theUkrainian steel exports are China, South-East Asia, and Russia. The rest of the worldappears to be of secondary importance.

As long as China and the countries ofSouth-East Asia generate strong economicgrowth, the Ukrainian steel industry shouldhave enough space for output growth and

market expansion overseas. At least,this view seems to be widely shared byUkraine’s top steel managers. Yet,China, Japan, South Korea, andTaiwan – the largest economies ofSouth-East Asia – are also amongstthe world’s twelve largest steel-producing as well as steel-exportingnations. The Southeast Asian steelcompanies are in strong competitionwith their Ukrainian counterpartsboth domestically and overseas.Moreover, with the most recentefforts by Beijing to stabilise thecountry’s overheated economy,China’s ‘steel hunger’ could well bealleviated. Where could theUkrainian steel industry turn in that

case?

WEAK AT HOMEA potential disruption of the steelexpansion overseas would be the greatesttrouble the Ukrainian steel industry hasbeen faced with since the collapse of theSoviet Union. On the whole, the Ukrainiansteel producers export between 75 and 85%of domestically produced steel. While inthe late 1980s the Ukrainian domesticmarket for steel was as large (on a percapita basis) as that of any industriallyadvanced economy of the West, by 2002 itcontracted by 80%. The current level ofUkraine’s per capita crude steelconsumption (84kg) is half that of theworld’s average (162kg) and far below thelevel of such steel producing giants as Japan(571kg) or the US (406kg). To date,Ukraine’s heavy engineering andconstruction industries – the two major

FOUR/FIVE/NICO/LEMAN 9/17/04 3:47 AM Page 1

products; we need stablequality at every stage.The second point is thatby having our own steelproduction, we can workon the development ofnew products. And whenwe address ourcustomers, we can bringin a very long chain ofinnovations. We do nothave to explain to thecustomers ourcommercial interest inthe development of anew product. We have todo it. We have to takethese risks. Without thiswe will lose our markettomorrow.”

HOME MARKETSOther areas whereUkraine has pressedahead with expansionare mechanicalengineering, machinebuilding and heavymanufacturing. After a

dramatic slump in orders in the early 1990s,the machinery sector of Ukraine seems tobe bouncing back, albeit not at the levelsexperienced when Soviet Union orderswere abundant. Major machine andproduction equipment makers likeNovomokovsk Machine-building plant(NKMZ) and Azovmash, in Mariupol, arepushing the domestic consumption of ironand steel up, helping compensate for thedifficulties encountered by iron and steelexporters faced with trade sanctions, quotarestrictions, anti-dumping actions andother protectionist measures. Steel makersin Ukraine are increasingly turning to thedomestic market, hoping to find secureexits for their products. It is then onlylogical that finished productsmanufacturers have also become part of theconsolidation movement and are beingabsorbed by the newly emergedconglomerates. The Industrial Union ofDonbass (IUD), for instance, controls anumber of mechanical engineeringenterprises (Slavtyazhmash,Starokramatorsky Engineering Plant,Druzhkovka Engineering Plant,Donetskgormash) that have become primeusers of steel rolled in the IUD mills.

MACHINE BUILDERSThe System Capital Management groupcontrols Azovmash, in Mariupol, one of thecountry’s two largest mechanicalengineering firms, jockeying for title ofleader with NKMZ. The factory’s numberone output and a global sales success that hassustained the company’s results is

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The authors are with Global Business Reports, London Tel +44 207 079 0042 Fax +44 207 637 0419 e-mail [email protected]

The 1990s witnessed the collapse indomestic demand in Ukraine andother CIS countries due to the rapiddecrease in military orders from theUkrainian State and its Russian

neighbour and the slump in heavy machinerysales, both at home and abroad. The financialdifficulties faced by the iron and steel sectorand the Russian financial collapse of 1998 didthe rest to send production spirallingdownwards. Russian orders plummeted andthe industry found itself in deep trouble.Meanwhile, the tube and pipe makers werealso feeling the blow and suffered a completecollapse in orders, which accelerated therestructuring and concentration of this sub-sector of the steel industry.

Consider these facts the revival is all themore impressive. The companies behindthese achievements have also gained theirstatus in the first league of world producingand exporting steel mills, and the finishedproducts manufacturers have had astaggering revival, proving the resilience ofan industry that many were forecasting todisappear when their export marketscollapsed. The pipe industry hasaccelerated a restructuring process thatmade it one of the world’s largest exportproducers and the major industrial andfinancial conglomerates of the country havebeen prompt in asserting control over abranch of the industry that, at times of highoil prices, is benefiting from infrastructureinvestments and from the renewedoptimism in oil and gas producingcountries. The chief export market for localpipe makers is obviously Russia, anddespite the occasional Russian attempts tocurb market access, the mood is set onoptimism. Pipe makers had to readjust theirmarket strategy swiftly as, aside fromRussia’s erratic purchases, Europe, anotherobvious and traditional market, was strikingthe pipe sector with trade barriers.

Illya Shapiro, General Director ofDnepropetrovsk Tune Works, a mediumsize mill belonging to System CapitalManagement, when asked about where themajor market challenge occurred for hiscompany, replies: “The European market.It’s very serious and important. Theenterprise used to have its market beforethe new policy of transitional quotas andduties. People used to know what toproduce and how to produce for thismarket, and there was appropriate control,as we knew the particularities of eachcountry and the exact type of product theyneeded. Tubes for Portugal or Sweden arecompletely different, and if you look at therange of products we produce, you’ll see agreat variety. As the production getsaccustomed to a particular market, whenyou lose this market, you have very littletime to get re-oriented”. Industrialconsolidation that created giants likeInterpipe, controlling two of the largest pipe

Ukrainian steel fostering a domestic marketDomestic demand for steel is being grown by major steel combines investing in downstream heavyengineering activities, sometimes with international partners, to ensure a market for their steel output.BY G VALENTIN & C COURONNE*

plants in Ukraine,alongside a handful ofsmaller mills, or likeSystem CapitalManagement, owner ofthe Khartsyzsk TubeWorks, one of the mostprofitable pipe makingoperations in thecountry, has created avacuum. It is only thosewith strong marketingability to reach andredevelop their sales andredeploy their strategyfast enough to ensure theviability of their works.

Smaller players havehad to struggle twice asmuch to gain theirposition in the limelight.The company UVIS,manufacturer ofcorrosion resistant pipesand running the NikopolStainless Tube mill, isone of them. YuriyAtanasov, CommercialDirector, explains that tosuccessfully manage themarket challenges of the year ahead,innovation is required. The company may,for instance, be considering producing itsown stainless steel. “Plans are very active,and we need a lot for active development.And we need it not in 10 years, but now.Approximately two years ago, when we firstapproached international markets, weunderstood that we needed our own steelproduction. Not only from the point of viewof optimising costs and controlling theprocess, but to guarantee the quality of our

The machinery building sector in Ukraine is agrowing market for domestic steel

Khartsyzsk tube works owned by SystemCapital Management is highly profitable

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common composition steels. How could youcomment on this situation?We have no problems rolling standard steelgrades. I agree that the market for alloys isa very expensive and a specific one.Sometimes, certain steel grades are theprerogative of only one manufacturer. Butnothing is impossible for us in respect toalloys: requirements for chemicalcomposition in our GOST Standards differlittle from the equivalent Westernstandards. Basically, we have alreadymastered the main foreign alloys and todaywe are going to include them into ourspecialisation.

Speaking about the CIS market, here ourposition is strong in nickel-base alloys. Inthe days of the Soviet Union, they were partof the specialisation of our Hot-Extrusionshop. However, taking into account thepresent situation with the high price ofnickel, today our experts are engaged indeveloping new pipe materials made frommore economic alloys and nickel-free steels.

At present, we are mastering the duplexsteel grades, which are in extraordinarydemand in Europe. And of course, forwestern customers, we are seriouslyprojecting manufacture of pipes made ofhigh-nickel and carbamide grades of steel.

STI – What serious industrial problems areyou still facing?As before, we are still facing the problem ofmanufacturing those sizes, which were notpreviously produced by NSTM. Wemanufacture tubes from 4mm minimumdiameter to 168mm maximum diameter.Today, we have the desire to expand theassortment of hot-rolled commodity pipesto meet the requirements of the western

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STI – Mister Atanasov, how after four yearshas the Nikopol Stainless Tube Millpositioned itself in the world market and whatare the basic priorities in relations withwestern customers?I believe we are not beginners in the worldmarket already. We are known both inEurope and in America. Although ourpresent output is not as large as such giantsas Sandvik and Tubacex, we are among theworld’s five largest manufacturers ofstainless tube. We position ourselves as oneof the largest specialised enterprises inEurope that manufacture seamless stainlesstube. Today we produce the range of pipesthat is most popular and is in greatestdemand by European consumers. Weproduce austenitic steels, ferritic steels(410, 405, & 417), and are entering intoduplex steels, which are not offered by allmanufacturers of stainless pipes.

In our business, quality is and will be thepriority. It is the only thing that allows youto win and maintain the interest of theestablished buyer. STI – NSTM was established on theproduction shops of the former NikopolJuzhnotrubny Plant, and you have inherited,we should say, not the most up-to-dateequipment. What have you done aboutupdating the production facilities?We have repaired and essentiallymodernised various equipment. Speakingabout the concept of technical developmentof production lines as a whole we are relyingon the recommendations and conclusions ofdomestic and western advisers and havemade a decision to focus on outstrippingscientific and technical development insteadof simply catching up with modernisation.That is, our position is not just localimprovement of out-of-date equipment, butthe systematic purchase of new modern

machines and technological lines.Today, the plant is engaged in setting up

the product flow in the pipe-drawing shopfor production of high-quality 24-meter longpipes. A Mahler bright-annealing furnace isalready operating. Within the next two yearswe plan to buy all the equipment for thisline including a cold-rolling mill, a unit forhigh-quality cleaning of pipes, straighteningand grinding mills and non-destructivetesting facilities. We have started work onthe production line for finish processing ofpipes that will be used by the nuclearindustry: the pipe straightening mill fromBronx (UK) has already started operatingand our near plans are to acquire Loesergrinding machines from Germany.

In 2004-2007, we are planning to replacesix old cold-rolling mills by modern close-type units and to update the rolling millsand the draw benches. We are alsoconsidering the possibility of purchasingpipe-bending and heat-treatmentequipment for the manufacture of U-bentpipes. The estimated cost of the technicaldevelopment project for NSTM in 2004-2008 exceeds $20M.

STI – What foreign standards do you usetoday in your business?Everything depends on the requirements ofour customers. We master the standardsthat are most demanded in the market. Atthe same time, we are trying to expandspecialisation to the maximum. Today wedeliver pipes produced according to suchforeign standards as ASTM and UNI 6904,as well as the domestic GOST standards.

STI – Concerning steel grades, what strategyare you adhering to? Today, 70-80% of worldsteel manufacturers are producing thestandard 304L and 316L steel grades, andonly a few producers are making other less

Nikopol Stainless Tube Mill Nikopol Stainless Tube Mill (NSTM) made its first delivery to WesternEurope four years ago and has successfully become a recognisedsupplier of seamless stainless pipes. A $20M investment in reequippingproduction facilities is currently underway.In an interview with Steel Times International, Yuriy Atanasov, Director foreconomic and commercial activity of parent company UVIS Ltd and member ofthe Interpipe Group, tells about the sales strategy and production plans of theNikopol Stainless Tube Mill. Yuriy Atanasov, Director for Economic &

Commercial activity UVIS Ltd

Nikopol Stainless Tube Mill (NSTM) isone of seven pipe producing enterpriseswhich were established from the largestformer USSR stainless producer, NikopolJuzhnotrubny Plant when it was re-structured by the Government. In 2000,the Dnepropetrovsk metal company UVISsuggested privatisation of the stainlesspipes facility. The project was recognisedas the best solution, and the same yearUVIS became the main shareholder of theClosed Joint-Stock Company NikopolStainless Tube Mill. This new enterprisecomprises the Hot-extrusion Shop No4and Cold-drawing Shop No2 of the formerNikopol Juzhnotrubny Plant.

Today, the plant manufactures about

1000 standard sizes of pipes of more than60 domestic and foreign grades of steel.Products are manufactured to meetASTM, DIN, NF, UNI, GOST and TUstandards.

The quality control system of NSTM hasbeen certificated by the GermanCertification Centre TUV Nord and meetsthe international standard ISO 9001-2000.The plant has international certificates forproducts in compliance with the PressureEquipment Directive PED 97/23 EN forhigh-pressure boilers and the EuropeanRegulations AD.2000-WO. Today, work onthe mill’s system for environmental safetyto meet the requirements of the ISO 14000standard is in its final stage.

NIKOPOL STAINLESS TUBE MILL

Seamless tube ready for dispatch


given the highly volatile and, at times,politically-charged nature of the world steelmarket, the weak standing of the Ukrainesteel industry at home will remain theindustry’s greatest challenges for years tocome.

Base metals in Ukraine’s foreign trade, exports of ferrousand non-ferrous metals, 1994-2002, US$ milionSource: Vlad Mykhnenko

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CONTACTYuriy Dinets, Manufacturing & Commercial Group UVIS, Tel: +38 0562 389-157 Fax: +38 0562 334-711 email: [email protected] www.uvis.ua

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market. Alas, for the time being we areunable to start production of long hot-finished pipes, which are in great demand.To solve this problem we are planning toinstall an extrusion press of 2000t forcecapacity in the Hot-Extrusion Shop in thenear future to manufacture H/F pipesranging from 36 to 75mm outer diameter.

STI – Until recently, the Swiss companySepco SA was your international distributor.This year, it seems that you have changed thedistributor?Not exactly. A group of Sepco SA’s expertshas set up a separate division – the companyUAS (Ukrainian Allied Stainless), which,started operations on May 1 of this year.This is now our official internationaldistributor. Unlike Sepco, UAS will focus itsbusiness exclusively on sales of stainless

pipes manufactured by twoUkrainian enterprises –Nikopol Stainless TubeMill and Nikopol TubeCompany. The prioritymarkets for UAS areWestern Europe and NorthAmerica. As for ourcompany, we are alsoengaged in independentsales of pipes to the CIScountries where we have anextensive dealer network,as well as to EasternEurope and other areas.This year we are planningto sell about 3kt of pipesthrough the UAS, and by 2008 to increasethese sales to the Western market to 10ktper year. For today, these are only plans, but

with the help of UAS we hope to strengthenour position in the market and to find newcustomers.

World markets for stainless tube in 2003 and share of NSTMsupply (kt)

domestic steel consumers) – are lagging farbehind the steel industry in recovery. In2002, market sales of the Ukrainian heavyengineering firms were only 46% of the1990 level, whereas construction orderswere down to 22%.

The post-communist storyof the tube-rolling branch ofUkraine’s ferrous metalssector indicates one potentialgrim scenario for the industryas a whole. After the collapseof the Soviet market, theoutput of steel pipes declinedfrom 6.5Mt in 1990 to 1.2Mtin 1999, or by 82%. Given theabsence of viable domesticconsumers, by 2003, theUkrainian tube-rolling millsmanaged to recover to theannual output level of 2.1Mt,or to just one-third of theirproduction level a decadeago. Opportunities for anyfurther market expansion ofthe Ukrainian tube-rollingbranch are severely limited tothe capricious behaviour of

Ukraine: reported annual profit rates (sales-costs),steel industry and total industrial sector, 1992-2002Source: Vlad Mykhnenko

Russia’s gas monopoly Gazprom, the majorconsumer of Ukraine’s steel pipes abroad.

As the drastic collapse of the domesticmarket for the Ukrainian ferrousmetals has not been reversed and

00� Ukrainian steel: – vulnerable overseas, weak at home...

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railway tank cars, but Azovmash is alsoengaged in the production of armouredvehicles, once the major product churned outof its assembly line. Today, this activity ismarkedly reduced but thanks to its in-houseproduct development and innovative designs,the company has struck a few internationaldeals that keep this activity alive.

Finally, and representing a growing thirdof its turnover, the company is producingsteelmaking plant, notably in cooperationwith engineering firm Danieli of Italy forthe refurbishment of some of the Ukrainianiron and steel mills. Furnace rollers,continuous slab casters and other heavysteel making equipment can bemanufactured by Azovmash, who sees abright future in the type of cooperation itestablished with Danieli, Kunkel-Wagnerand other world-class design andengineering companies: “We decided thatthe key strategy for our success would be to

combine our efforts with such world-knowncompanies. These companies give us thedesign project and we provide them withthe finished products. If we propose a betterdesign, they agree to work to ourspecification, if their design is preferred wedo the manufacturing of the units. And thecost of manufacturing equipment inUkraine is cheaper in comparison with mostparts of the world. That’s why our productshave the highest technical standards and arecheaper: all this makes them competitiveand we expect to see more cooperation ofthis nature in the years ahead” explainsAnatoliy D. Chepurnoy, Azovmash Vice-President.

This example of cooperation is in itselfbearing much optimism for local operators.NKMZ, the other giant heavy engineeringcompany in the Ukraine producing a widerange of rolling mill machinery, reinventeditself. To ensure the sustainability and the

00� Ukrainian steel fostering a domestic market... success of its industrial base machinery,metallurgical, press and forging equipment,the company has also had a number ofsuccessful alliances with world-classmetallurgical equipment makers. Despitethe strong handicap of lack of financingcapabilities, these organisations have asound base of know how, inventiveproduction abilities and are open forcooperation. This offers greatopportunities for partnership and shouldprovide some room for manoeuvre to theiron and steel industry.

From tube and pipe makers through toheavy engineering, the dedication,bullishness and will of Ukraine’s domesticsector are striking. Despite productionlevels still lagging way behind the pre-transition ones, the industry has reactedwith courage and should be reckoned withon the global stage. Here again challengesabound but Ukraine is a country that hasfaced many of them before. Today, the onesat hand seem addressable.


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June 2004 might have been a turningpoint in Ukrainian history and in theeconomic development of the nation.For a transitional economy such asUkraine, privatisation is not only a

zzznecessary step towards economiczzzdevelopment, it is the only way to attractforeign investors.

In 2003, Ukraine received only US$6.7bnof foreign investment, that is less than 10%of the $68bn received by neighbouringcountry Poland over the same year. Thehighly lucrative privatisation process of theKriyviy Rih Mining and Smelting Plant –better known as Kryvorizhstal – was one ofthe major steps of the UkrainianGovernment’s privatisation programmeannounced for 2004 and an opportunity tosee the country’s share of FDI increase. Asstated by Mr. Anatoliy Kinakh, the thenPrime Minister of Ukraine, “TheGovernment of Ukraine considersprivatisation as part and parcel of theestablishment of a market-economy and asan integral component of the structuralreforms of the national economy”.

Kryvorizhstal is one of the world’s largeststeel plants, and produces nearly 7Mt ofsteel per year (2002 = 6.9Mt). Itsprivatisation thus promised to attract ironand steel giants from around the world, as

well as local interests who had beenjockeying for control of the works since thestart of the privatisation process in the 1990s.

Much to the annoyance of the participantsfrom afar, it was the local bidders who won. Aconsortium of two Ukrainian national giants,the Interpipe Group and System CapitalManagement (SKM), called InvestmentMetallurgical Alliance won with a final priceof $800M (4.26bn HRV) and were rewardedwith a 93.02% stake in the steel works. Thegroups are controlled by Mr Rinat Akhmetov,the Ukraine’s wealthiest man for SystemCapital Management, and by Mr ViktorPinchuk, son-in-law of President LeonidKuchma for Interpipe – clearly a powerfulconcoction. For Ukrainian patriots, the resultcan only be seen as a success; Ukrainianbusiness remains Ukrainian. Unsurprisingly,the losers and the international press claimedthat there had been foul play and the playingfield not level (a caveat had been added thatany bidder must have produced and sold atleast one million tonnes of coke in theUkraine in recent years). Even patrioticUkrainians raised an eyebrow when theyconsidered that the bid starting price was$1200M – 50% above the winning price; andthat the steel giant LNM had offered a bidamounting to $2700M.

However, from the outset, it had alwayslooked as though it was going to be verydifficult for the foreign firms to compete. Ina country whose industry is dependent onsteel and one that contains some of the

Privatisation in Ukraine:– Could they have done better?Ukraine’s largest steel plant, the 7Mt/y capacity Kryvorizhstal wasprivatised this June with ownership passing to a consortium of twomajor Ukrainian companies, Interpipe Group and System CapitalManagement, despite much higher offers from international bidders.Whether the price of this desire to keep Kryvorizhstal in national handsmakes commercial sense remains to be proven.BY G VALENTIN & C COURONNE*

world’s largest reserves of ore and cokingcoal, it is not easy to walk away with its largestand most strategic national steel works.

OBSCURE CONDITIONSSome people describe the conditions statedin the tender as ‘patriotic’. Others describethem as ‘discriminatory’. Nevertheless, thetender attracted a great number ofprospective buyers from overseas whoshould have noticed that one criterion ofthe bid was to produce a minimum of onemillion tonnes of coke in the Ukraine;almost a de facto ruling out of any foreignparticipation. Interpipe and System CapitalManagement however control considerablereserves of coke in the Donetsk region,ample to fulfil the tender’s conditions. Anyforeigners hoping to get a look in on thedeal might have been wiser to team up witha Ukrainian partner is the way same waythat Mr Akhmetov and Mr Pinchuk didwhen forming their InvestmentMetallurgical Alliance, specially designedfor the tender.

Despite this and similar clausespromising an uncertain bidding process,world giants still dispatched their bestteams to the Krivoy Rog region, in anattempt to win the coveted productionplant. The Indian company Tata Steel, theRussian company Severstal, the world’sbiggest metallurgical concern Arcelor, aswell as the LNM Group and US Steelconsortium offered some of the mostimpressive efforts to win this bid. Joiningforces, LNM with US Steel submitted thestrongest bid comprising $1.501bn for the93% equity plus an additional $1.2bn forthe implementation of a capitalexpenditure programme. The consortiumalso made a point of complying withinternational environment rules as well asto the national requirements for thedevelopment of the plant. The LNM-USSteel Consortium declared “itscommitment to maintaining and improvingsocial harmony at the plant” and proposeda development plan to reach a steelproduction superior to 11Mt, to provideaccess to global markets as well asincreasing supplies to the domestic market,to “ensure EU compliance onenvironmental issues”, and finally tocommit to purchasing Ukrainian rawmaterials including iron ore and coke.

Yet on June 14, Mikhail Chechetov,Chairman of the State Property Fund,announced that the Ukrainian bid hadbeen successful.

Scandalous as it may seem, nationalinterests will always trump internationalnorms of fairness and, with stiffcompetition for resources access in thecapacity constrained steel industry worldwide, there is extra incentive to maintainthe asset in national hands.

Kryvorizhstal will now belong to theconsortium of Kiev-based Interpipe Groupand Donetsk-based System CapitalManagement. Interpipe is already themajor share holder in the pipe business,including companies NizhnedneprovskTube-Rolling Plant; Novomoskovsk PipeProducing Plant and Nikopol SeamlessPipes Works Niko Tube making Interpipethe fourth largest pipe producer in theworld, and the second largest supplier ofmanganese ferroalloys.

For its part, System Capital Management

The authors are with Global Business Reports, LondonTel +44 207 079 0042 Fax +44 207 637 0419 email [email protected]

Privatisation involves securing raw materials as well as steel plants

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PART TWO/SIX 9/17/04 3:46 AM Page 1

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recognize that there are big Ukrainianmechanic engineering enterprises, such asNKMZ and AzovMash, but unfortunatelythey have no possibility of meeting thelong-term investment programmes we needat this stage.

Q: Your group is active across a wide range ofactivities, from energy and gas, through tomining and the metallurgical sector, but alsoin the agro food business. What is the relativeshare of metallurgy in the overall picture?SA Taruta: I’d like to put it in other words.The share of metallurgical and supportindustries in our turnover is 83-85%.Including the machine building industryand coal mining – everything that is neededfor metallurgy. Our company has severaldirections, and we are reinvesting theincome from these into our development,but the metallurgical drive is the main one.Currently, there is a restructuringprogramme in the Alchevsk Iron and SteelWorks, and there’s going to be the sameprogramme at the DnieprodzerzhynskyIron and Steel Combine.

A joint group from VAI and ourspecialists has already started thedevelopment of the preparatoryprogramme depicting the strategy andstages. And this year we have alreadystarted several projects.

Q What is the investment envelop for this year?SA Taruta: It’s a rather big sum of money.

But I wouldn’t like to announce the exactfigures, taking into account that we work inan aggressive environment. This money willgo into upgrading existing equipment andthe introduction of new capacity in blastfurnaces and steel-melting equipment. Wehave a government obligation to invest inour activities following the privatisationprocess: The investment required is in therange of $350-400M. And we areimplementing the investment programmefaster than originally planned.

Q: Another big story for the Iron and Steelcommunity is the Dunaferr operation inHungary. What sort of plans do you have forthis plant? How do you plan to build synergiesbetween your Hungarian operations and yourUkrainian assets?SA Taruta: Now we are at the final stage ofprivatisation (of Dunaferr). All thequestions are settled; technical andfinancial ones. We have a detailed businessplan. It appeared to be better than those ofour competitors. Investment, social andecological programmes are depicted there.The amount of investment is about $300M.We foresee a great potential in thisenterprise. First of all we will increase theoutput of steel within the limits of presentcapacity. This enterprise was interesting forus mainly due to its untapped potential andpossibility to increase capacity by selectivelyinvesting. Besides we’ll have surplus valueon processing of our semi-finishedproducts. We have a common border that

Q: A lot has happened to the Ukrainian ironand steel industry in the last few years and alot has happened to the Industrial Union ofDonbass and to its name for good and maybesome bad reasons. Could you tell us what hashappened to this organization in the lastcouple of years? Sergey A Taruta: A lot of changes haveoccurred in the last few years. First of allthe recognition of Ukraine as a real playerin the world market of metal. Coming backto Soviet Union times the USSR wasn’t asubstantial player on the foreign market,but nowadays, both Ukraine and Russia,along with Brazil, China and Australia,present the main resources for rawmaterials and semi-finished products. Andthe recent privatisation of Kryvorizhstalclearly shows that the privatisation activityof enterprises of the metallurgical complexis increasing, and is attracting the attentionof foreign partners.

Q: But for the privatisation of Kryvorizhstalthere was greater interest than ever, featuringthe biggest names of the industry, from LNMthrough to Arcelor, US Steel and Severstal.SA Taruta: Well, you know, if somebodyhad suggested $200M for Kryvorizhstalthree years ago, he would have been given amedal for courage. Not many believed inthe effective work of Ukrainian enterprisesor maybe there were some other restrictivefactors, such as the political factor. Thesituation nowadays has changedcompletely. We are becoming members ofthe world market. And the world markethas changed its attitude towards us, andtowards the steel industry in particular. Ifwe talk about the Industrial Union ofDonbass, we have completed many plannedtasks in the past two years. We have chosenthe path of a public company. We areintegrating ourselves with Europeanpartners. We participate in the privatisationof European enterprises. And this directiongiven to our activity gives us particularresults, where we have the possibility toinvest in the development of ourenterprises. We are actively working withthe company Duferco which is enlarging itstrade net. We have a positive experiencefrom cooperation with VoestAlpineIndustrieanlagenbau, (VAI) who is helpingus reconstruct our enterprises. We

An interview with Sergey A Taruta, Chairman of the Board of the Industrial Union of DonbassThe Industrial Union of Donbass (ISD) is one of three major groups that have emerged within Ukraine’ssteel industry. As well as acquiring two integrated plants on their privatisation, Alchevsk andDnieprodzerzhynsky, it also owns down-stream operations in Ukraine including engineering plants. It isvertically integrated assuring raw materials supply by ownership of coal and ore mines. It has aninternational outlook, having a partnership agreement with Swiss-based international trader, Duferco and isin the process of buying Hungary’s largest steelworks, Dunaferr (which now includes DAM). It alsounsuccessfully bid for Poland’s largest steel group, PHS and later its attempt to buy Huta Czestochowa wasthwarted by a decision of the Polish government, which is presently being challenged in the Courts. Here,Global Business reports speak with Mr Taruta.

Investments will include improved environmental protection


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allows us to supply energy resources, ie gas,electricity, coal and raw material. Besideswe plan to export some finished productsfrom Dunaferr to Ukraine. I mean productsthat are not produced here in the Ukraine.Alongside with this company, we have alsobought service centers. They were of greatinterest to us as the creation of servicecenters in Ukraine and outside the countrycoincides with our conception ofmarketing.

Q: It’s also a fantastic foot in the door to theEuropean market.SA Taruta: When we started theprivatisation of this enterprise three yearsago, we didn’t expect that Europe wouldcome so fast. This enterprise has immensepossibilities and perspectives. It’s the onlysignificant metallurgical enterprise inHungary and 60% of its output is destinedfor its domestic market – it’s a very stableposition. The remaining 40% is sold onforeign markets, to countries like Italy,Austria and Germany. We still have someproblems but I’m sure we’ll overcome themin a short time; and the plant will becomeprofitable. In recent years, the Hungarianstate had problems with the effectiveness ofthis enterprise. The programmes that aretaking place now in Alchevsk (Ukraine)aim to produce products that will bedelivered to Dunaferr as well. We have anobligation to maintain the number ofpeople working at the plant and objectivelythey are more than we really need. That’swhy we can cope with this obligation onlyby increasing production capacity anddecreasing costs. As for production ofcrude steel we evolve within limits, meaningthat we can’t increase production as it willinvolve a greater investment, notablyconcerning the ecological aspect. But as forrolled metal we can produce in addition tothe present programme up to 800kt. And inthis case the enterprise will be balanced.We hope to put out 2.3 – 2.4Mt/y of rolledmetal (from Dunaferr).

Q: Another story that was in the headlines isabout Huta Czestochowa of Poland whichyou attempted to acquire. It has been a verycontroversial operation, and in the bid,politics played a dominant factor. Could youtell us your views on what happened there? SA Taruta: There has been so muchinformation published in the last six monthsabout the privatisation of this enterprise!Even when I called a vice-premier ofTurkmenistan, and that country has little todo with metallurgy, he asked me what wasgoing on with Huta Czestochowa… so, itwas a really burning topic of the day.According to statistics, this question eventook first place as the most frequent andargued topic in the mass media. ActuallyPoland has created this situation itself. Firstof all they had to decide whether theywanted to sell this enterprise or not. I had afeeling during all this process that they weretrying to create a deadlock. They didn’twant to sell it to anyone except LNM (whohad already purchased the largest Polishsteel group, PHS). And they didn’t expectany other company to participate in theprivatisation. This so-called tender tookplace at the same time as the Hungarianone. The Hungarian state used Price WaterHouse Coopers who clearly formulated anddefined all the terms of the tender. Theytypified all the propositions of all the

partners. There were rules; and all themembers of the Tender Committeeproceeded using these rules, and they had agenuine view while fixing the points ofcontention. In contrast, in Poland thePolish government formulated the tenderrules. The rules were constantly changing.That gave the ground to manipulate theresults. There were a number of financial,economic, and technical propositions. Butwhen they compared them it was clear, thatour proposition was the best. Hence furtherchanges were made (by the Polishgovernment). All this was done with thesole purpose of giving LNM the works andthere wasn’t a need for a tender at all.When the Privatisation Committee firstannounced Donbass as the winner, thePolish government reversed the decision,which concerned not only Poland butUkraine as well. During the 10 years ofUkrainian independence there had beenspecial relations between the two countries.Poland played the role of an elder civilizedbrother, who told us how to live, where toget an education, whom to love, whom to befriends with. And when all this storyhappened everybody, even those ones whodidn’t really like IUD, took it as a personaloffense. And there was a common negativeattitude from the part of our President,government and public. And the demand toexplain ‘why?’ was natural. All this was justa farce. The Polish arguement that theywanted to have only a producer of steel wascontrary to the idea of running this tender.They also mentioned that they didn’t planto increase the output of steel, ie openlysaying that this enterprise was sick and theypreferred it to die. This enterprise is nowbroke: It’s unprofitable because it doesn’twork. And the government says that it is notgoing to increase output – they took theposition to let the enterprise die. Therewere four official arguments. The first oneis that they wanted to see the players fromthe ‘First League’. And the last argumentwas that the origin of our capital was notclear to them. But they had eight months toclear up all the questions during thisprocedure. So, as you see, not a singleargument was grounded and solid enoughto justify their decision. Today we have wonin the Court of Justice and we have blockedthis process. And the new governmentunderstands that the Committee’s revisedconclusions were not right. I am sure thatthey will make the right choice. If they want

this enterprise to work, then they shouldgive us the possibility to privatise it. But ifthey don’t want (success), then they shouldannounce it openly.

Q: In the Central and Eastern European steelindustry, there has been a lot of interest fromkey competitors, from LNM through to Corusand US Steel. Here in Ukraine we have seenArcelor, Severstal and other major playerslining up for Kryvorizhstal… don’t you feelthat you may be punching above your weightin your own backyard? Or is it on the contrarya sign that IUD is entering the First League ofglobal steel groups?SA Taruta: I have already mentioned thatnowadays Ukraine is quite an active player.And the fact that we participate in theprivatisation of assets outside Ukrainespeaks for the fact that production volumesin Ukraine are insufficient. We look forenergy, energy that will provide us stabilityin the future and will help us to competewith new players. And the main player nowis China. A few years ago we were alllooking at the US market, now we are veryattentive to China. It’s very difficult tosurvive on the metallurgical demand ofEastern Europe. Especially for those whoare far from the ports because transportcosts and raw material costs aredeterminant factors. The level oftechnology is no longer the deciding factor,as it used to be. Having high standards inthe ecological sphere, having a high salary,plus expensive transport costs already makeit critical for the enterprise’s activity. If wetake Arcelor, it produces more than 40Mt/yof steel, but its income is the same as that ofKryvorizhStal. This shows that Ukrainianplayers have leading positions now. Wehave a favorable geographical position, awell-developed logistic net and naturalresources. Those are our advantages. AndI’m sure that step-by-step we’ll reach theecological level demanded and we’ll securebetter ways of living. This task demandsmore expense, and we’ll talk about anotherindex – a ‘surplus value’. All our investmentprojects in Ukraine are aimed at decreasingcosts, and improving quality. All ourenterprises provide the possibility ofcreating a surplus in value. Nowadays wesee the process of globalization andconsolidation of the metallurgical business.We are not substantial players on thismarket yet. What we see now is a process ofaggressive absorption by LNM of all the

The Alchevsk steel plant is to undergoing a Euro 140M investment which will eventuallyreplace its six open-hearth furnaces


world. Furthermore, a winner from abroadwould have been perceived as anencouraging sign to other potential foreigninvestors eager to do business in Ukraine,who might now be put off. But now it is leftto the new owners to prove what they cando with the plant and given the rapid rise ofthe two groups over the past decade, weshould expect to be hearing a lot moreabout them in the future.

at all the forecasts, seminars and programmesof the last three years, they haven’t come true.But the true fact is that the lower your coststhe more chance you have to survive. AndUkraine is very competitive in this aspect. Ifwe talk about IUD, we have increased slaboutput to 5.5Mt/y for the last three years.Some of the slab will be sold here (1.5Mt),and we will process the remaining 4Mt forexport in order to guarantee stability. Wehave joint-venture projects in the USA of1.2Mt capacity. Some steel would have goneto Huta Czestochowa in Poland. EUregulations put strict limits on the amount ofpublic support a state can provide for itscompanies. and Huta Czestochowa was notincluded in the steel-sector restructuringagreement signed between Poland and theEU.

We still have some spare capacity, andnow we are again thinking about whatassets to acquire, where to process thissurplus material. That’s why furtherintegration within the foreign marketcontinues.

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controls companies such as the vast steelproducer Azovstal, Leman Commodities,Yenakievsky, Silur, Azovmash andKhartzysk Tube Works. In a nutshell, theconsortium controls the lion’s share of thesteel industry in Ukraine from iron andsteel producing (Azovstal), machine andheavy equipment manufacturing(Azovmash), Tube and Pipesmanufacturing (Interpipe Group andKhartzysk), ferroalloys production andsteel trading via the Leman Commoditiessupport. Both groups have demonstratedtheir skill in turning around huge butoutdated assets that they have inheritedfrom the cash strapped state and each hasaccumulated the vast amounts of capitalthat they needed to win the tender and thatthey will need to modernise their new plant.Furthermore, the groups have becomesomething equivalent to nationalchampions and represent the very rareexample of Ukrainian companies with thestrength to become international players.This latest addition to their empires willensure that Ukraine will boast a world

beating company in the country’s singlemost strategic sector.

Investment Metallurgical Alliance’ssuccessful acquisition will ensure the twogiants control most of the supply andproduction chain for steel and have aplentiful supply of raw materials, especiallyiron ore and coke. Iron ore and coke rawmaterials are currently at peak demandlevels. With the ever-increasing demandfrom emerging China, companies andcountries, which control theseresources, are well placed to assurethemselves strategic leading positionsin the future.

The outcome should not come as asurprise given the history of Ukraine’sprivatisation process. The foreigninvestors kept at bay denounce thefailure of the Ukrainian governmentto seize an opportunity to increaseinvestment, technology and marketaccess which will be greatly needed forthe consortium now in control of oneof the most integrated steel-production infrastructures in the

Silur, owned by System Capital Management,adds value by making finished product

Eastern European steel producers.

Q: Coming back to the situation in Ukraine.As you said Ukraine is a key player – it is the7th largest steel producer in the world. Andthere are such major power steel houses asSKM and obviously the IUD. Are there anyprospects of concentration here and ofwitnessing the birth of one single majorplayer? There has been a lot of concentrationalready, and a lot of transfer of workingassets. The next stage could be aconcentration between the actors of theconcentration themselves…SA Taruta: I’m not sure that it may happen.At least not in the near future. Each groupis independent by itself. Each one isambitious. The success of each companydepends on the right choice of strategy. Butlet’s wait and see what will happen in thefuture, maybe there’ll be a fusion ofcompanies, on equal terms, or even theremay be absorption of the weaker companyby the stronger. Anything may happen, butwe are independent from each other at thisstage. Besides we have partners in Europe,and we can’t take decisions withoutdiscussing it with them. We don’t plan tobuy new enterprises in Ukraine; we plan toincrease the output of the existing plants.

Q: What would be an ideal scenario for thesteel industry here in Ukraine? Where do youexpect to see this industry in the next 10 years?SA Taruta: As I see it, there will be afurther process of globalization, and smallplants have no chance of survival, as there’sa process of globalization not only incapacity but in raw materials as well. All theplants will pass a stage of technicalreconstruction: that’s of great importancenow. Ukraine is going to integrate theworld market. Production of steel will becompetitive. The main competitors that wesee now are Brazil and China. Russia is ourcompetitor only on the Russian market.Then I can foresee pressure from the state.And here the situation will depend onevents that will happen in our country. Wedon’t have state enterprises anymore. Andthe government will make owners pay

attention to the ecological factor and willmake them raise salaries. Then thereshouldn’t be disproportion among thebranches. The energy costs are going uptoo, but that’s not going to be a crucialfactor. We have reserves fromimplementing energy saving technologies.Ukrainian metallurgy will be profitable,and it will be problematic for ourcompetitors, mainly for Western Europeand the USA, as our costs are lower. Anyincrease of output in Ukraine may lead todecrease of output in Europe. Q: As the president of one of the organizationthat has taken the Ukrainian industry outside ofUkraine where do you see IUD within the sameframe and where would you like to take it?SA Taruta: I see a future expansion on theforeign market, both from the trade andproduction points of view. UnfortunatelyUkraine doesn’t consume as much as it’sgrowing output. As far as we have a strategyof stepping up the output we’ll have to workin foreign markets. As for China forecasts,they are not favourable for us. But if we look

Ukraine 30 30 75 1.5 25 161.5 -

France 57 37 90 31 50 265.0 39

Russia 31 32 75 2.0 25 165.0 2

China 38 37 120 1.6 45 241.6 33

USA 63 36 105 38 47 289.0 44

Brazil 65 23 110 11 40 249.0 35

Japan 53 35 85 33 65 271.0 40

Australia 39 30 110 23 25 227.0 29

India 61 22 120 2.6 80 285.6 43Source: WSD, Hatch Research (Index calculated STI)

COST OF STEELMAKINGCoking Coal Iron Ore Scrap Labour Electricity Index Ukr. Cost

($/t) ($/t) ($/t) ($/h) (Mils/kWh) Total Advant. (%)

Table 1 Cost advantages of steel production in Ukraine

00� Privatisation in Ukraine – Could they have done better?...

The Donbass group portfolio includes longs, flats and pipe

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