Editor's Note: In 2015, the Kyiv Post will offer more coverage of the leaders who run Ukraine's biggest and best companies in the CEO Watch feature.
Ukraine’s largest steel mill – ArcelorMittal’s prized possession in Dnipropetrovsk Oblast’s Kryvyi Rih – is one of the reasons why the nation remains one of the world’s top 10 steel producers.
Occupying a sprawling area, the plant has the capacity to annually produce 6.7 million tons of crude steel and 6 million tons of rolled products. It mines 90 percent of its own iron ore requirements, and produces coke, the two key steel-making ingredients.
Leading this gargantuan operation and workforce of 28,000 and 6,000 contractors is Paramjit Kahlon. ArcelorMittal sent him to Ukraine in 2008 to work on projects and strategy just three years after the world’s largest steel producer paid $4.8 billion for the mill, marking the Ukrainian government’s most lucrative privatization to date.
Kahlon became further immersed in the enterprise as chief technology officer and then chief operating officer, before being promoted to CEO in February.
“We’ve seen many ups and downs, but we are still staying strong and on our feet,” Kahlon told the Kyiv Post on Oct. 16, referring to ArcelorMittal’s 10th year in Ukraine. The fact that he’s never worked in a country for more than two years is a testament for his love for Ukraine.
“I’ve been grounded here since I came to Ukraine,” he said. “I love this place.”
As for the ups, the Kryvyi Rih plant has remained competitive on the flooded global steel market by saving $100 per ton through cost-cutting initiatives introduced last October. On Nov. 10, pulverized coal-injection will be installed, further cutting natural gas consumption by 60-65 percent, to 350 million cubic meters yearly. The use of an outdated, inefficient open-hearth furnace was discontinued and time-saving production practices were introduced.
“We are surviving because of these measures,” Kahlon said referring to the mill’s $2 billion in capital expenditures since 2005. “We’ve plans to invest an additional $1.2 billion through 2020.”
Despite the constant drive to boost energy efficiency, the Kryvyi Rih mill’s products still sell at $10-$15 more than its Chinese competitors. Consuming almost half of the world’s produced steel and its largest maker, the Chinese economy’s declining growth and massive output has driven down steel prices.
Russia’s war in eastern Ukraine has also caused steel production and coking coal supply disruptions from Donetsk and Luhansk oblasts, where roughly half the nation’s 45-million ton steel capacity lies.
The Kryvyi Rih mill only gets 15-20 percent of its coking coal domestically, and like other steel producers such as Metinvest, has to buy more expensive coal abroad.
“There’s no bad news as such, but bad things are there,” the steel mill CEO said of the market’s downturn. “The steel industry and mining sector, especially in the last 20 years, are facing their worst crisis in terms of sales.”
Last year brought the Ukrainian steel industry back to the mid-1990s, with production of steel and pig iron standing at 27 million and 25 million tons, respectively.
“But international traders started to increasingly avoid Ukrainian steel products because there was no guarantee some steel mills would be able to fulfill orders given the tenuous circumstances,” Platts, an independent news source on energy and metals, reported in May.
So, as Ukraine’s economy spiraled, so did the steel industry, which relies on the construction, automotive and locomotive sectors for much of its sales.
ArcelorMittal Kryvyi Rih, which used to sell close to 90,000 tons of steel products monthly in Ukraine, now hardly sells 55,000 tons. Its main export markets are in the Middle East and North Africa.
“We export 86 percent of our products, which may go toward 90 percent because consumption in Ukraine has been declining for the last 1.5 years and… it could still go down even further,” he said.
Steel historically held a leading share in the nation’s gross domestic product and exports. In the first eight months of this year, metals were second behind food and agriculture, accounting for 26 percent of exports, and about 4 percent of gross domestic product, according to research conducted by Kyiv-based investment house SP Advisors.
Kahlon would also like to see subsoil rental rates reduced for iron ore. It currently stands at 8 percent, having increased 6.4 times over the last 18 months. Eliminating what he describes as double taxation is also on the agenda, because taxes are levied on production costs as well as on the total volume of steel produced.
ArcelorMittal is also taking steps to improve infrastructure by investing in the Oktyabrsk sea port in Mykolayiv, where the company ships 65 percent of its export capacity of 4.5 million tons.
It seeks to slash its 28,000-strong workforce by a “good percent,” but the labor code stands in the way. “I’ll give you an example. We have a similar plant with similar capacity in France. There, our production total is about 6.5 million tons of crude steel. And here we produce about 6.5 million tons…And the number of people there is about 8,000,” Kahlon said.
But positive signs are beginning to emerge. Ukraine’s statistics agency reported that the decline in industrial production slowed in September on a yearly basis to -5.1 percent. Metals were a key driver, demonstrating growth for the first time since July 2013, rising 3 percent in August versus -1.8 percent over the same period last year.
Reflecting the notable quietening down of the war in Donbas, coal extraction and coke production surged by 15 and 51 percent, respectively, on a yearly basis.
Although ArcelorMittal Kryvyi Rih hasn’t been profitable since 2011, the steel plant can return to the black in two to three years, according to Kahlon.
“We take the long view, we see things could become profitable again in 2017-2018,” he said. “Winners never quit, and quitters never win.”
When he’s not “overcoming a new challenge each day,” according to Kahlon, the executive enjoys appreciating and taking long walks in nature and “following current events in the world.”
Kyiv Post editor Mark Rachkevych can be reached at [email protected].
