Ukrainian metal seems too fragile
Ukraine’s mining and smelting sector, which accounts for one-fifth of the country’s national budget, reacted sharply to the global financial crisis with the price of square billets (the base product of metallurgists) dropping from US $1,200 per ton in March-June to US $570-600 by mid-October. The seasonal slump in business activity in Islamic countries, which are major consumers of Ukrainian metal, also had an impact on the metallurgy sector.
In addition to that, the Ukrainian domestic market experienced stagnation caused by a reduction in construction volumes and the growth rates of machine-building, which accounts for the lion’s share of demand for metallurgy products in the country.
One more negative and probably the most important factor is continued and uncontrollable rise in the prices of raw materials and transport costs inside the country. Since April 1 the price of iron ore raw materials rose 60-70%. On the wave of steady growth in the prices of metal products, metallurgists managed to painlessly compensate for the growth in raw material costs. Be that as it may, consumers of raw materials have ended up in dire financial straits. Besides that, Ukraine’s railway administration UkrZaliznytsia raised the cost of rail transport of products of the metal mining industry by 70-80%.
As a result, Ukrainian metallurgists are forced to cut back their presence on the market by halting production and suspending investment programs. For example, the Donbas Industrial Union (DIU) announced the curtailment of all of its investment projects in Ukraine. Meanwhile, the corporation had planned investments of US $2 bn into the Alchevsk Metallurgical Plant and US $1.2-1.5 bn into the Dnipropetrovsk-based Dzerdzhynskiy Metallurgy Plant.
Accordingly, the reduction in investments will result in wage cuts and a major layoff of employees.
As the COB of the Mariupol Ilyich Metallurgy Plant Volodymyr Boiko said, the wages of the plant’s employees were cut by 5-10% in September and will be cut even further.
Meanwhile, ZaporizhStal, Arcelor Mittal Kryviy Rih and DIU have all announced plans of cutting employee wages or layoffs.
At the end of this summer metallurgy enterprises turned to the government for assistance. Of the list of requests, tariffs were lowered for railway transport and targeted mark-ups on the price of gas were temporarily cancelled.
The remaining orders of Premier Yulia Tymoshenko have not been executed for a variety of reasons, mainly due to bureaucratic red tape. When the situation reached critical point in mid-October the premier proposed a number of additional measures to stabilize the mining and smelting sector. In particular, starting October 1 payment for railway transport services will be deferred to the end of the year for a separate list of enterprises, a zero targeted mark-up for the consumption of gas will be introduced and a moratorium on raising electricity tariffs will be set for those enterprises.
Though these tactical measures of the government will alleviate the burden on metallurgy enterprises, they will not resolve the industry’s systemic problems. Industry expert believe the roots of the crisis lie in the structural imbalance of the mining and smelting sector, the underdeveloped domestic metal products market and the unpredictability of government policy.
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