The looming foreign-debt crunch is forcing the government to sell another piece of steel-making giant Azovstal, but experts say the 20.56 percent stake won’t prove much of a draw to foreign investors.
The sale of a tiny stake in the mill back in 1997 generated enormous enthusiasm among investors – the auction for the shares was seven times oversubscribed.
But the much larger stake on offer this time round, valued at Hr 163 million, comes with strings attached. The winner of the tender for the stake will have to invest Hr 25 million in upgrading the mill’s equipment and pay off Hr 5 million in debts. On paper, Azovstal looks like a good investment.
Dubbed a Ukrainian blue chip as soon as the Soviet Union fell apart, the steel mill has a capacity of 7 million tons a year, and is Ukraine’s third largest steel-maker. The factory’s proximity to the Sea of Azov and Ukraine’s iron ore and coal basins yields lower production costs than most of its competitors.
According to annual rankings compiled by InvestGazeta, Azovstal was the country’s fifth largest exporter and 12th on the list of Ukraine’s most profitable companies in 1998. The company’s profits amounted to Hr 189 million in 1998, compared to Hr 182 million in 1997. Azovstal is also a major supplier for the country’s shipbuilding industry and growing pipe rolling plants.
But analysts say the company’s profits would most likely turn into losses if its books were calculated to Western accounting standards.
The mill’s profits have been milked by a web of intermediary companies that emerged during the last few years, several industry experts told the Post on condition of anonymity. They said that trading companies, backed by influential businessmen, have bought the mill’s steel at dumping prices to later resell at a handsome markup. The difference lands offshore, with little cash making its way back to the mill.
Ivan Kompan of the Wood & Company investment banking firm said the new owner of a minority stake could face high corporate governance risk due to the small investor’s inability to influence the running of the mill.
‘Azovstal is an empire,’ one analyst said. ‘I don’t think small investors would have vast powers there.’
The mill’s outdated technology is another headache, experts say. One industry analyst said the mill’s equipment is so old that filmmakers could use it as the setting for a movie about steel making in the United States in the 1930s.
Anti-dumping sanctions against Ukrainian steel makers around the globe could also threaten the mill’s profits, Kompan said.
With domestic demand having plummeted through the 1990’s, Ukrainian steel makers have become increasingly reliant on exports. Analysts estimate that exports now account for about 60 percent of the industry’s total sales. Azovstal is no exception, selling more than a half of its steel abroad.
But every time the country’s steel mills start exporting to new markets, a rash of dumping allegations follows. Faced with quotas in Asia, Ukrainian steel producers turned their attention to new markets such as Western Europe and South America. But steel makers in those areas also resented the flood of low-priced Ukrainian steel, leading to a new string of anti-dumping sanctions. But the situation isn’t all bad at the mill.
Dmytro Tupchiyenko, a lawyer for Azovstal, said the factory’s prospects improved somewhat when a new management team took over last year. Tupchiyenko said that new management had decided to channel all exports through one trader, the Swiss company Leman.
Leman’s Ukrainian director, Ihor Holchenko, confirmed that his company was handling Azovstal export orders, but that the mill’s sales inside Ukraine were still dispersed among several traders. He added that Azovstal had purchased a fully integrated SAP management information system and hired PricewaterhouseCoopers to conduct an audit.
In addition, Tupchiyenko said that the mill’s efforts to fend off dumping allegations were more effective now that a sole exporter was used to market Azovstal’s product abroad.
Even so, analysts don’t expect to see much interest in the company from foreign investors.
Instead, the stake will more likely attract domestic investors, something that the government and parliament might find more palatable anyway.
Sale of a large stake in the company like Azovstal has long been a taboo in Ukraine, where both government and parliament have balked at the prospect of losing control over strategic industries.
But with some $3.1 billion in external payments falling due later this year and reserves running low, the government is now embracing privatization as a revenue-raising measure.
