A Fair Share of Ore: Steel Industry Still Feels December Price Shock
Whoever owns raw materials lays down the rules. This was confirmed in early December of last year, when the owners of the largest ore-mining businesses hiked prices by 20-34%, thus forcing some of Ukraine’s major steel mills to grind to a halt. This primarily affected those who were short of their own sources of crude ore, e.g., Mariupol’s Illich Steel Mill, Dnipropetrovsk’s Dzerzhinsky Steel Mill, Alchevsk’s Steel Mill, and Zaporizhstal. Their owners were not prepared for these high prices, as a result of which almost one-half of all metal products were manufactured at a loss.
What caused this price hike was not a shortage of raw ore. According to Anatoly Fediayev, acting deputy minister for industrial policies, data on the first eleven months of 2004 shows that all steel mills were fully supplied with raw ore, which allowed the metallurgical sector to raise the output of cast iron by 6% compared to 2003. Moreover, throughout the year the ministry made every effort to cut imports (in 2004 imports dropped by 2.5 times to fewer than 3 million tons), so that steel mills could primarily use indigenous raw materials. It can thus be suggested that the drop in the output of cast iron (by 2-8 thousand tons a day) resulted solely from the actions of the financial-industrial groups that own the iron ore mines, considering that the steel mills they also own — Azovstal, Kryvorizhstal, Dnipropetrovsk’s Petrovsky Steel Mill and others — remained unaffected by the price increase. Although a meeting of steel mill and iron ore mine managers, convened by the Ministry of the Economy and the Ministry of Industrial Policies soon after the price hike, advised the ore mines to restore the November prices for their products, the situation remained tense. Anatoly Holubchenko, president of the Ukrainian Association of Ferrous Metallurgy Enterprises, told The Day that many steel mills are still not working normally.
The Day also learned from the chief of the Antimonopoly Committee’s second department of research and investigations, Yuriy Prokopenko, that powerful monopolies, which appeared in Soviet times, have now cornered every segment of the iron ore market. The situation in these markets had remained practically unchanged until recently: all the businesses were state-run and the Ukrrudprom state joint-stock company was put on the list of monopolist entities. However, steel makers did not complain when the monopoly was held by the state.
Things changed when the Verkhovna Rada passed the Law “On the Particularities of Privatizing Ukrrudprom Enterprises” in the spring of 2004, whereby state- owned shares of the iron ore mines were sold to owners who already possessed these enterprises’ shares worth no less than 25% of their authorized capital. Moreover, owing to the absence of competition, the enterprises were sold at prices that were lower than their true value.
As a result, each of the markets was taken over by a specific owner. For example, the owner of Northern Ore-Dressing Works, the main producer of steel pellets, also bought Central Ore-Dressing Works and could thus in fact control this whole market. The same applies to agglomerates and concentrates. Mr. Prokopenko notes that this merger of markets has only reinforced the monopoly of the entities that have cornered this market. However, the law states that the Antimonopoly Committee had no right to intervene and is now unable to de-monopolize the market. All it can do is supervise and conduct research.
However, the study of steel makers’ complaints indicates that the ore mines were not to blame for the price hike. The blame was placed on intermediaries in the ore-mining mill — the steel mill chain. Interestingly, the number of these intermediaries is not limited. After leaving the mill, the raw ore batch is fragmented, then put back together, and only then delivered to a steel mill, so the more intermediaries, the higher the final price of the commodity. According to Mr. Holubchenko, many of them belong to the same people who own the mills, and these financial- industrial groups are devising schemes that leave no place for the Ukrainian steel businesses that they do not own.
Since no final agreement was reached about the supply of raw ore to the domestic market, and Ukrainian metallurgical businesses still face grave problems, the Ministry of Industrial Policies has suggested, according to Mr. Fediayev, that the Ministry of Economy leave intact the raw ore export regime imposed on January 1, 2005. However, Mr. Prokopenko thinks that this measure is not enough to resolve the emerging problems. At the same time, a maximum surcharge on the purchasing price, on which the intermediaries depend for their living, has to be set. If, as Mr. Prokopenko believes, this surcharge is to be within 20%, irrespective of the number of intermediaries in the chain, this will permit a reduction in the purchasing prices. To further combat monopoly prices for raw iron ore, the Antimonopoly Committee has drawn up a law calling for changes to certain legislative acts. In particular, it defines certain methods for proving the existence of an anti-competition deal — for example, if two or three intermediary firms have simultaneously raised prices without any economic justification.
At the same time, Mr. Holubchenko believes that the root of the problem is that the ore-mining industry is now striving to work for export. In his view, the problem can be solved if the state becomes a domestic competitor of foreign import companies. It should draw up a price policy with due account of international prices and try to draw crude ore to the national market, foiling any unmotivated attempt to sell it abroad. The Day’s experts agree unanimously that re- privatization in the ore-mining industry would deal too strong a blow to the interests of all Ukrainian steel makers and ore miners. This is why the option proposed by Mr. Fediayev appears preferable: exchanging shares, naturally under the state’s supervision, by the owners of steel mills and ore-dressing works, whose interests have not thus far coincided.
