Domination by the Largest

PART ONE/THREE 9/17/04 3:44 AM Page 1 UKRAINE Ɂ Ɂ Ɂ Ɂ Ɂ ɁɁ Ɂ Ɂ Ɂ Ɂ Ɂ Ɂ Domination by the largest With privatisation all but complete in the Ukrainian steel sector, three major combines have emerged controlling assets from mining to distribution, and leaving little to enable the few remaining independent mills to compete. BY G VALENTIN & C COURONNE* onsolidation has been the name products and 35 enterprises producing given time. The intense concentration of the game in the international blackplate and coated items. The figures observed today derives from this period of steel industry for the past 15 highlight a wide distribution of production instability and dubious dealings and years. Europe and the US have for iron and steel, while almost all of the nevertheless managed to turn the witnessed mega-mergers, output of crude steel and pig iron is actually Ukrainian iron and steel industry into a Cconcentration of resources and produced by 11 steel mills making over a global business, despite major streamlining of operations between steel million tonnes a year. Five main steel works shortcomings notably due to the mills, raw material suppliers, iron and steel are generating two third of the sector’s technological backwardness of parts of the makers, equipment manufacturers, traders, revenue, with the balance spread between at sector. Today, with sky-high steel, iron ore etc… Ukraine had to go through the same least 15 plants. This also suggests a rather and coke prices, the sector is in the best of process, but did it while managing its post atomised sector, from upstream down, while positions to successfully manage its communist transition and trying to find the the level of concentration is actually very transition one step further. right formula to ensure the survival of the high and is the result of intense activity in largest and most crucial sector of its the political, financial and industrial fields. INTERPIPE economy. Today, the sector is showing a During this decade of consolidation, radically different face than 15 years ago, RESTRUCTURING STEEL groups comprising financial institutions when most of the industry was in the hands The concentration and restructuring and industrial assets have emerged, soon to of the Ukrainian state. As of today, the movement in the Ukrainian steel industry become the dominant forces in the privatisation process is largely complete was a period coinciding with great economic life of the country. Three major with the last major mill sold being instability in the country and a climate of Industrial-Financial entities have surfaced Kryvorizhstal, the country’s largest. Only a violence that could have discouraged many from Ukraine’s transition to assume few, ill placed companies are still listed by willing to invest in the sector. Rival clans, control of the largest works and raw the state as waiting for a private owner to commanding competing industrial assets material suppliers and turn the industry revive their destinies. from the two major bases of steel around. From the shadows of the early Ten years ago there were 32 iron and steel production in the country; Donetsk – years, Dnepropetrovsk and Kiev-based works in the country, including integrated capital city of the Donbass region and Interpipe, owned by Victor Pinchuk, works. A decade on, a number of them have Dnepropetrovsk – the main city of the President’s Kuchma son in law became a shut down or almost totally phased out steel Dniepr Basin, were jockeying for key contender in the steel pipe business production, leaving room for the fittest to ownerships and political influence. worldwide. Turning over $900M and survive and become the much sought-after President Kuchma, himself a former metal exporting to 70 countries, the organisation assets in a movement of consolidation that works manager from Dnepropetrovsk, had is involved in seamless and welded pipe has now been almost completely achieved. to rein in the warring factions to keep order making, manufacturing of railway wheels Today, the sector gathers 365 enterprises, in the industry and the country’s loose (10% of the world’s market share) and including 14 metallurgical factories and democratic principles. For a long period of production of manganese ferro-alloys plants, 7 pipe production plants, 10 plants of time, hazy dealings, fragmented ownership including ore extraction (11.4% of the hardware production, 16 coke chemical and difficult court cases complicated the global markets). The building of what is plants, 17 plants producing refractory work of the industry to a huge degree, to now the fourth largest pipe-making products, 26 ore mining enterprises, 3 iron the extent that some companies had trouble conglomerate in the world and the largest alloy plants, 26 plants for non-ferrous knowing who really owned them at any in Ukraine took over a decade and put Interpipe into a very strong position of *The authors are with Global Business Reports, London power within the industry. Tel +44 207 079 0042 Fax +44 207 637 0419 e-mail [email protected] Today, the group controls the largest pipe 1 Steel Times International October 2004 PART ONE/THREE 9/17/04 3:44 AM Page 2 UKRAINE making factories in the country: 100% The corporation also used to control Nizhnedneprovsk tube rolling plant The second five: the Azovstal mill, the country’s second The remainder Alchevsk, produces over 800kt/y of hot deformed 19.9% largest, as well as the Khartsyzsk tube pipe and is leading the pipe industry in Donetskstal, works, also one of the country’s best, Nikopol Ukraine in terms of volumes produced. Ferroalloys, but lost them to another heavyweight Novomoskovsk Tube Mill has the 75% Top ten Nyzhniodniprovsk metallurgical corporation of Donetsk, largest production capacity, at 1.3Mt/y companies Tube Works, Donbass: System Capital Management 80.1% of welded pipes, and the factory is not Donetsk Iron and (SCM). Today, besides its remaining producing at full capacity. Following major steel mills at Alchevsk and the Russian inspired slump in the 50% Dnieprodzerzhynsky, the strength of market in 1998, most of the sector The first five: IUD lies in its vertical integration in suffered steep reductions in purchased Kryvorizhstal, coal, coking coal and in its diverse Mariupol Ilyich, volumes and it took some time to Top five downstream activities in pipe making, domestic production share Azovstal, readjust production to reduced companies construction engineering, machine 25% Zaporizhstal, demand. Yet today orders are up again; 59.2% building and mechanical engineering. on the back of sustained high oil prices, Dnieprodzerzhynsk In the area of mining, the very strategic the oil industry is buoyant and concentration of IUD allowed it to infrastructure work is on the rise, produce and deliver more than 5.5Mt fuelling a strong demand for pipes 0% of coal concentrates to coke and worldwide. Novomokovsk Tube Mill, The industrial concentration of the Ukraine ferrous chemical plants and more than 4.2Mt of for instance, saw its production levels metals production, by total sales revenue, 2002 coke to iron & steelworks in 2002. shoot up 33% year on year in 2003. Its partnership with Swiss-based steel Besides these two major mills, Source: Vlad Mykhnenko, Rusting Away? The Ukrainian Iron and Steel trader Duferco gives IUD a much Interpipe also controls smaller Industry in Transition broader market penetration potential operation such as the Nikopol to the products of its mills, pipe works, Seamless Tube Plant Niko producing just Industrieanlagenbau (Austria) for the mines and heavy manufacturing companies. less than 300kt/y of products, as well as a supply of two continuous casters and two Interestingly enough, the company has also handful of smaller works and mills. The ladle furnaces for Alchevsk. The cost of been very active abroad, successfully Interpipe Corporation also controls the modernisation project amounted to bidding for the Dunaffrer works in ferroalloy production through the Nikopol €140M, and has the objective of boosting Hungary, the largest steel mill in the Ferroalloy Plant, Europe’s largest producer output and quality at the Alchevsk plant country, although it did hit harder times of ferroalloys (annual capacity 1.2Mt), to 5Mt/y. with Huta Czestochowa in Poland where specialising in the production of Another member of the IUD group of IUD was initially declared the winner of the silicomanganese and ferromanganese. The companies, until June of this year, the bid, but was shunned by the former main advantage of the plant is its local Dniepropetrovsk Petrovsky Steelworks, is government who then declared source of raw materials, which allows the one of the oldest works in Ukraine and is multinational giant LNM, already owner of company an unrivalled domination in the showing signs of its age. Today work is Huty Stali (PHS), Poland’s largest mill, CIS ferroalloy market. Over 70% of output underway to renovate one of its blast winner of the privatisation bid. Since then, is exported throughout the world. It holds furnaces although IUD has sold its 42% the process has run into further trouble approximately 57% of the CIS market, 48% stake to Pryvat Bank, who was already with the victory of LNM contested in the in Eastern Europe, 39% in the Middle East, holding a stake in the company, alongside courts and the new Polish government and 15% of European Union’s markets. strong participations in other ferroalloy displaying a will to revert to the original With the latest massive upsurge in prices of concerns (Zaporizhia Ferroalloys, decision. The European Commission also ferroalloys, fuelled by sustained Chinese Stakhanov Ferroalloys, Nikopol refused the contents of Poland’s demand, the Nikopol Ferroalloy Plant is a Ferroalloys) as well as in coke plants. In the restructuring programme for the mill and is prime asset for Interpipe in the overall case of Petrovsky, it seems that the two about to launch an inquiry concerning metallurgical picture.

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