LONDON (Reuters) – Investment-hungry metal industries in Ukraine and Russia are generating interest abroad but many will fall short of the requirements needed to lure Western capital, delegates at a conference said on Wednesday. 'There is no way, in my opinion, that the enormous financial needs of the [former-Soviet] metals industry can be met in full from Western sources,' Christopher Stobart, managing director of Resource Strategies told the Adam Smith Institute conference on metal sectors of the former Soviet Union.
Bankers and analysts at the conference said transparency, international accounting methods, and reliable, up-to-date financial data were still key worries for potential investors and lenders, despite some improvements in recent years.
'Russians and Ukrainians are saying 'Give us money, we know what to do with it.' But they don't want us to look after it,' a Swiss bank representative said on the conference sidelines.
Papers presented at the conference focused on the struggling ferrous and non-ferrous metal industries of Ukraine and Russia, which have suffered a severe drop in output and domestic consumption since the breakup of the Soviet Union.
Foreign investment has focused more on metallurgical industries, primarily steel and aluminum, rather than mining because of the lack of easily-financed projects. Metal industry leaders from the former Soviet republics speaking at the conference listed projects to modernize and expand, some of them running into the billions of dollars and largely dependent on foreign input.
Oleksiy Nogovitsyn, an official of Ukraine's industrial policy ministry, said the Ukrainian steel industry had an annual investment shortfall of $300-$400 million, and the chief executive of Ukraine's Mykolayiv alumina plant, currently being privatized, called for $1 billion in long-term investments.
Ukraine is looking to build up a fund for developing the sector, Nogovitsyn said.
Metallurgy in Ukraine is in a particularly critical condition, with reduced domestic consumption, outdated production, and a large social burden on individual plants. In 1990, 50 million tons of steel were smelted and 41.5 million tons of raw steel were produced, but by 1996 steel production dropped to 22 million tons smelted and 17.5 million tons rolled.
'Estimates suggest that more than $700 million will be required each year to fund modernization programs at the major metallurgy enterprises,' said Nogovitsyn, adding that the enterprises own funds amounted to no more than $300 to $400 million per year.
Ukraine needs money for government priority programs to re-equip production facilities and restructure the sector. These include projects at the Illisch and Zaporozhstal smelting and rolling facilites, and at the Azovstal, Krivorozhstal, Alchevsk and Dneprovsk plants. 'We need $3.5 billion in total.' Nogovitsyn said on the sidelines of the conference.
But from a western perspective, such plans will remain castles in the sky barring big changes in the sector and economy overall.
'They will have difficulty getting external financing for the [Mykolayiv plant] – they'll have to restructure the whole industry first,' said a delegate from a European mining company.
And the Ukrainian steel industry's problems at home are being exacerbated by the contraction of export markets in Asia, said Paul Schuilwerve, head of trade and commodity finance at brokers Mees Pierson.
'The Asia flu is only part of the problem that the Ukrainian metallurgical industry is facing, but now comes on top of a prolonged economic downturn,' he said. Most steel produced in Ukraine is low-grade, and producers have increasingly depended on new export markets, with a significant proportion of exports destined for the fast-contracting markets in South East Asia. Production in the metallurgical sector fell last November by 5.3 percent in response to slower exports Schuilwerve told the conference.
Now Ukraine's Black Sea ports were wall to wall with steel and producers and traders were forced to seek other markets in North and South America, the Middle East and South America.
'Rerouting exports to some other markets is particularly difficult for Ukraine in view of its low quality material and the export restrictions placed on it in the form of anti-dumping and quotas,' he said.
The Asian crisis comes on top of obsolete equipment and rising production and maintenance costs plaguing the sector, he added.
