Deflated global steel prices, higher domestic production costs and a stronger hryvna have squeezed the profit margins of Ukraine's export-oriented metallurgical industry, the nation's largest source of hard currency.
Profits for many of the country’s 12‑plus steel makers, most of which boosted production by more than 10 percent, fell by between 30 percent and 50 percent.
Pre‑tax profits at Ukraine’s largest steel mill, Kryovorizhstal, fell by 30 percent to Hr 763 million in 2001, while third‑ranked Azovstal returned profits of Hr 346 million, down 50 percent from 2000 levels.
Mariupol‑based Illich Metallurgical Plant, Ukraine’s second‑largest steel mill, took an even harder hit. Illich posted profits of just Hr 242 million, less than a quarter of the Hr 1.146 billion in profits generated the year before.
Smaller steel makers were also hit hard – Dnipropetrovsk‑based Petrovsky Metallurgical Plant’s profits faded to Hr 8.9 million from Hr 37 million a year earlier.
Industry analysts and plant officials blame several factors for the downturn including a global steel glut, increased domestic energy and raw material costs, a weakened dollar and a reduction in tax privileges.
Ihor Zhyhyr, an industry analyst at Prometal, an Internet publication dedicated to the industry, said overproduction deflated steel prices internationally.
“Last year we saw some of the lowest steel prices in 10 years,” Zhyhyr said.
“Prices for steel fell a striking 30 percent to 40 percent after the Sept. 11 terrorist attacks in the U.S.,” said Illich Metallurgical Plant spokesperson Serhy Mahera.
Domestic factors, principally higher production costs, took another bite out of the industry’s profits. Steel mills, which are large consumers of electricity and natural gas, saw electric power rates increase by 40 percent and natural gas prices increase by 43 percent. Prices for raw materials jumped by between 10 percent and 60 percent.
“The fact that the dollar fell in value relative to the hryvna after the terrorist attacks was also a big negative for exporters,” said Illich’s Mahera.
The government’s decision last spring to increase a privileged profit tax rate for the industry from 9 percent to 15 percent also had an impact on firms’ profit picture, Zhyhyr said.
Though still just half of the 30 percent tax rate applied to other industries, the tax increase still made a difference, he said.
Illich’s Mahera could not predict whether his export‑dependent steel mill would have better profit margins this year.
“We don’t know. It’s impossible to predict these things – Sept. 11 proved that,” he said.
Prometal’s Zhyhyr said Ukraine’s steel industry, the world’s seventh largest, will likely be forced to follow its global competitors and reduce output this year.
That could further reduce profits, and lead smaller mills to close.
He said antidumping investigations initiated by foreign competitors and a slowing global economy would also hurt Ukraine’s mills.
Zhyhyr said decreased profits could delay badly needed modernization of Ukraine’s Soviet‑built steel mills. Without upgrades, the mills will become even less competitive on the world market as time passes, analysts fear.
“The industry is in a very tough situation. Now that profits are down, it will be more difficult for them to modernize,” Zhyhyr said. “Yet they can’t afford to further put off modernization. If they don’t do it in the next two to three years, they could simply be forced to shut down.”
Illich’s Mahera downplayed the woes facing the industry. He said his plant moved toward modernization last year. A $22 million investment in the plant resulted in increased production volume.
“Our profits are still large enough to enable us to continue with upgrades,” Mahera said. “And we expect that the world steel market will stabilize in 2002.”
