Owing to a reduced worldwide demand for metals, Ukraine’s steel-making industry is losing ground step by step. The Bloomberg agency reported recently that, according to the Delphica Project research company, the production of steel in Ukraine in June 2012 dropped by 4.3 percent to 2.79 million tons against 2.92 million tons in May, as the demand in Asia and Europe is on the decline. The same source claims that Ukrainian exports of steel went down to 11.7 million tons, or by 6.6 percent, in the first six months of 2012, whereas they were 12.5 million tons in the same period of 2011.
The government has received a lot of proposals which call for an integrated approach to solving the problems of the mining and metallurgical industries. But it seems to be unprepared now, on the eve of the elections, to allocate major budgetary funds for supporting the metal-making sector. It is far easier and cheaper to resort to palliatives.
For example, the Cabinet intends to amend its earlier resolutions on the procedure of registering foreign economic contracts about the export of metal scrap. Exports having been limited to 900,000 tons in 2012, the current intention is also to tighten demands to businesses that export ferrous and nonferrous metal scrap. A draft governmental resolution calls for making changes to the resolutions dated February 15, 2002, and May 3, 2012. Under the draft, a business that plans to export ferrous and nonferrous metal scrap must have at least 50 employees whose average wages should not be lower than average wages at mining and metallurgical enterprises in the previous year. Besides, a potential scrap exporter must have export-grade scrap of its own (at least 50 percent of the declared export batch) and submit information on its current technological capacities, including those intended for recycling scrap. It should also submit a copy of the contract on the accumulation of scrap at a port or a railway station and copies of the balance sheet, the financial report, the report on the money turnover, and the expert examination conclusion, including identification of the commodity code, etc.
The draft resolution sets out new requirements for scrap collectors and the intermediaries who have expressed willingness to deal with exports. One of the most controversial decisions is that of the Ministry for Economic Development on the registration of foreign economic contracts that deal with scrap. The decision will be made with due account of the projected and actual (assessed by the balance between the accumulation and consumption of metal scrap in Ukraine) quantity of scrap in a certain year, the quantity of the metal scrap sold by the economic entity on the domestic market for metallurgical processing, and the amount of debt payments to the budgets of all levels in terms of a ton of the procured scrap.
It is everybody’s guess why the government has chosen to regulate export deliveries of metal scrap in this very way which is clearly nothing but a usual hard-to-hide bureaucratic hurdle. In all likelihood, the government thus wants to kill several birds with one stone, but it may hit some of its own birds, too. Firstly, the increasing red tape is expected to reduce the exports of metal scrap and, therefore, bring down budget revenues, which will boost the country’s trade deficit and affect the national currency’s rate. But, aware that it is far more profitable for the country to export metal rather than metal scrap, the government decided to just ignore the losses that result from reducing the export of metal scrap. All the more so that exporters somewhat overdid it in January-April this year by increasing deliveries abroad by 59.2 percent against the same period of 2011. At the same time, Ukraine collected metal scrap in the first quarter of the year by a one-third (29.1 percent) less than in the same period of the last year. Can it be exported in this case? By putting a bureaucratic sieve to the flow of the exported scrap, the government seems to hope that it will mostly go to national enterprises rather than to their rivals in other countries. If you create some difficulties for them, you can gain some advantages and with the competition.
Meanwhile, what also hit the headlines, along with the draft Cabinet resolution, is the address of the Ukrainian Secondary Metals Association (Uavtormet) to the Ministry of Economic Development and Trade. It expressed a request to normalize the issue of licenses for exporting ferrous metal scrap and noted that this would help improve the financial situation at this sub-sector’s enterprises and reduce this country’s foreign trade deficit. There is also a kernel of good sense in this. If other fields of metallurgy face a reduction of orders, it will be perhaps a good idea to show flexibility and bank on at least the export of scrap.
“In the conditions when Ukrainian steelmakers began to radically cut scrap prices and stopped paying for the supplies, the state is artificially restricting the export of scrap and is in fact hampering the work of scrap recyclers on foreign markets,” says Valentyn Makarenko, Chair of the Uavtormet Supervisory Board.
In an interview with The Day, MP Vasyl Hureiev classified the draft Cabinet resolution that hampers the export of scrap from Ukraine as an attempt to manage the sector “in the manual mode.” The MP believes that there is in fact no reason why state should block this source of export earnings, as scrap prices in Ukraine and on the world market do not almost differ.
TO THE POINT
In the past four months, as scrap was supplied to Turkey and East Asia countries, world-market prices have varied within very narrow limits – about $430 to $465 a ton. But the equilibrium was upset in late May. Quotations nosedived abruptly, coming by the end of the first week of June to a record low level over the past 18 months. The weakness of the metal scrap market looks quite natural. It is the echo of a fall of the prices for and trade turnover in long-length rolled metal, which began in May on all basic markets. Besides, the global economic crisis dealt a heavy blow at the construction industry, which reduced demand for concrete reinforcements and, accordingly, for metal scrap. This finally turned out to be even a more powerful factor than a reduced collection of recyclable materials as a result of the crisis. In addition, it is in May that many mini-factories in Turkey, Korea, and Southern Europe underloaded their capacities and the monsoon season began in Asia later last month, which effectively reduced the need in raw materials.
The slump in late May and early June occurred on all basic markets, but it most severely affected the exporters of scrap. For instance, domestic quotations for scrap in the US abruptly plummeted by $50-60 a ton in June. In Japan, the Tokyo Steel Manufacturing company has been reducing scrap purchase prices three times since early June, bringing them down by an average 3,000 yens a ton. Tokyo Steel mills are now paying about $323-345 for a ton of scrap plus delivery. The price of scrap in Germany and the Benelux countries went down by about 20-25 euros a ton in June.