Ukrainian steel market 2006: achievements and disappointments

In 2006, metallurgy was one of the most profitable industries in Ukraine. According to the preliminary data, the domestic steel industry showed growth of six percent, producing about 40.7 million metric tons of crude steel. Due to frost and cold weather at the beginning of 2006, Ukrainian steelmakers commenced the year badly, with decreases seen in both productivity and in financial results. However, as the year went on, the Ukrainian steel producers were able to increase their production and sales, and managed to end 2006 on a positive note. In 2006, the scarcity of raw materials (scrap and iron ore) due to exports was less serious than in previous years. The Ukrainian companies, decreasing their scrap and iron ore exports dramatically, were able more or less to fully satisfy the needs of the domestic market. In the international market, regardless of the loss of the Asian markets mainly to Chinese competitors, Ukrainian steel producers increased steel exports in 2006. According to the preliminary data, about 80 percent of all steel produced in Ukraine was exported. However, the structure of exports has been changed to the detriment of the Ukrainian steel industry. Thus, in 2006 the share of high value added steel products in the country's steel exports saw a drop, while that of semi-finished steel products increased to 44 percent. However, in 2006 the Ukrainian steel sector experienced more problems, both new and old, than it did achievements. The main problem of the Ukrainian steel industry still remained the scarcity of raw materials. Although, the exports of raw materials sharply decreased, the low domestic production posed considerable problems to the work of the domestic steelmakers. First of all, in 2006 Ukrainian steelmakers felt a sharp scarcity of coking coal. It seems very ironic that the country which possesses one of the world's largest coal deposits has to import coking coal from nearby states – Kazakhstan and Russia. According to the preliminary data, in 2006 Ukraine imported about 11 million metric tons of coking coal. The main problem of the coking coal industry is its underdevelopment and underinvestment. Although, in the last month of the year the government announced that it will build new mines, it will take time to produce the necessary volumes. In addition, the question of privatization in the coal industry still remains open. The problem with iron ore supplies is of a different nature. Although Ukraine has no scarcity in actual volumes of iron ore, the main steel producers have started to buy this raw material on the world market. The main reason for this is the disagreement between the steel producers and iron ore suppliers over the prices of material. According to recently released data, the Ukrainian domestic iron ore price is 20-25 percent higher than the international market rate. Consequently, Ukrainian steelmakers have started to import iron ore, leaving domestic producers of this raw material with full stocks and no buyers in sight. However, the key problem of the Ukrainian steel industry is in the low collection level of scrap. Although in 2006, to satisfy the domestic needs in scrap, the exports of this raw material saw a decline, the continuous drop in scrap collecting levels still posed a serious threat to the industry. A possible source of imported scrap could have been Russia, but this neighbor had also started to experience similar problems. In addition, there were tensions between scrap collectors and the Ukrainian government on the matter of VAT payments and rebate, and between the scrap collectors and the steel mills on the question of late payments. At the end of the year, the Ukrainian government took some steps towards resolving the existing tensions with the scrap collectors by abolishing VAT on scrap operations from January 1, 2007. This law was passed in line with other World Trade Organization (WTO) requirements to make the country's economy more transparent. Yet, although very promising, the real result of the law will be seen only in the middle of this year. The above-mentioned problems will continue to affect the Ukrainian steel sector negatively unless the government takes the necessary measures to solve them. The solution of these problems will require massive investment in the industry.