Or. Fre. DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY STEEL COMMITTEE. Please find attached a document submitted by Ukraine to the Secretariat.

Transcription

1 Unclassified Or. Fre. Unclassified Organisation de Coopération et de Développement Economiques OLIS : 24-Sep-1997 Organisation for Economic Co-operation and Development Dist. : 26-Sep-1997 Or. Fre. DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY STEEL COMMITTEE CURRENT SITUATION AND OUTLOOK FOR THE UKRAINIAN METALLURGICAL INDUSTRY AND INVESTMENT OPPORTUNITIES IN RETROFITTING PROJECTS IN THE STEEL AND NON-FERROUS METALLURGY SECTORS Please find attached a document submitted by Ukraine to the Secretariat Ta Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

2 CURRENT SITUATION AND OUTLOOK FOR THE UKRAINIAN METALLURGICAL INDUSTRY AND INVESTMENT OPPORTUNITIES IN RETROFITTING PROJECTS IN THE STEEL AND NON-FERROUS METALLURGY SECTORS 1. The metallurgical sector is the cornerstone of the Ukrainian economy. It comprises 365 enterprises and organisations, including: 14 metallurgical plants and complexes, 7 pipe mills, 10 ironworks, 16 coking plants, 17 refractory works, 26 metal mines, 3 ferro-alloy plants, 20 non-ferrous metal plants, 35 recycling plants (steel and non-ferrous metals). At 1 January 1997, the sector employed people. 2. Last year, marketed metallurgical output represented 36 per cent of total industrial output (compared with 26 per cent in 1994 and 20 per cent in 1993). 3. The reason for this was probably that metallurgical output fell less than output in other sectors of the economy. Metallurgical undertakings comprise: 12 ore mines, 25 open pits, 11 concentration and pelletizing plants, 12 sintering plants, 50 blast furnaces ranging in capacity from 900 to m3, 19 oxygen converters ranging in capacity from 50 to 350 tonnes, 21 electric furnaces (capacity: 40 to 100 tonnes), 56 open-hearth furnaces (capacity: 130 to 900 tonnes), 66 rolling mills and other facilities (main and ancillary). 4. At 1 January 1997, the balance sheet value of the fixed assets of Ukrainian metallurgical enterprises was billion grivna; their current value is billion grivna, representing a depreciation of 55.6 per cent. 5. The highest production figures in recent years were: 35.7 million tonnes of coke in 1986, million tonnes of iron ore (marketed) in 1985, 48.6 million tonnes of cast iron in 1986, 56.6 million tonnes of steel in 1986, 40 million tonnes of finished rolled products in 1988, 7.2 million tonnes of steel tubes in Between 1988 and 1995, production of the main types of metallurgical products fell by nearly 50 per cent as a result of the country s economic crisis. 7. However, in 1995 the rate of decline of metallurgical output was only a third of that in 1994, and in 1996 output was flat compared with that of the previous year: Year Marketed metallurgical output (in % of previous year s output) Production in other sectors of the economy has not yet stabilised and the level of production in 996 ( in percentage of that of 1995) was only 71.0 per cent for metal fabrication, 80.3 per cent for the coal industry and 56.7 per cent for the construction industry. These sectors were formerly the biggest consumers of Ukrainian metallurgical output. The domestic market for metallurgical products has thus practically disappeared, obliging Ukrainian firms to seek customers abroad. Currently, over 60 per cent of 2

3 finished rolled products are exported; domestic consumption of these products is only about a fifth of what it was in The problem of selling metallurgical and mining output in the domestic market is thus directly attributable to the country s general macroeconomic difficulties. 9. The value of total metallurgical output (at 1996 prices) was grivna (US$ 9.2 billion), broken down as follows in percentage of 1995 output: million tonnes of iron ore (96.6 per cent); million tonnes of sinter (98.3 per cent); million tonnes of ore pellets (87.9 per cent); 3.06 million tonnes of manganese ore (96.0 per cent); million tonnes of coke with a moisture content of 6 degrees (92.5 per cent); million tonnes of cast iron (99.9 per cent); million tonnes of steel (100.4 per cent); million tonnes of finished rolled products (103 per cent); 1.96 million tonnes of steel tubes (120 per cent); tonnes of wrought iron products (82.9 per cent ); refractories; tonnes of ferro-alloys (86 per cent). 10. At end-1996, 31 of the 50 last furnaces, 31 of the 56 pen-hearth furnaces, 13 of the 19 converters and 52 of the 66 rolling mills were functioning. 11. According to the figures for 1996 and the current year, iron and steel output has risen. 12. Non-ferrous metal output in 1996 was 6 per cent up on At the same time, production of mercury, zinc, nickel and rolled non-ferrous metals fell sharply in Production of alumina, industrial silicium and primary aluminium was comparable to that in 1995 (respectively 99.0 per cent, 89.0 per cent and 93.0 per cent). 13. Production norms were exceeded for ilmenite concentrate (by 17.8 per cent), rutile concentrate (by 60 per cent), and zircon concentrate (by 60 per cent). Production of lead and of polycrystalline silicium and its components recovered. 14. The economic and financial situation of metallurgical enterprises is still precarious. Profitability was only 3.7 per cent in 1996 compared with 12.4 per cent in 1995, 24.5 per cent in 1994 and 41.9 per cent in Metallurgical exports in 1996 totalled US$ 5.4 billion, of which US$ 2.62 billion to non-cis members (5.5 per cent up on 1995). In 1995, exports to non-cis countries amounted to US$ billion (16 per cent up on 1994). These export earnings made it possible to invest nearly US$ 250 million in 1995 and nearly US$360 million in 1996 in industrial construction, reconstruction and retrofitting. Centralised state funding accounted for no more than 4-5 per cent of these investments, i.e. they were almost entirely self-financed. 16. In , nine metallurgical enterprises launched production of 33 types of rolled section that were previously imported. 17. The Ministry for Industry drew up, in collaboration with research and design institutions, a Development Programme for the Ukrainian mining and metallurgical complex to the year This programme has been ratified by the government. The first objective of the programme will be to stabilise production at the level needed to meet domestic demand, and to develop production of import substitutes and products for which there is an export demand, in order to earn foreign currency. The forecasts of the Ministry of the Economy, the Ministry for Industry and the National Academy of Sciences estimate that output of finished rolled products will be 20 million tonnes by the year 2000 and 25 million tonnes by If the domestic and world markets pick up, industrial undertakings could 3

4 increase their production and exceed the objectives of the state programme without any need for outside investment, i.e. from their own resources. 19. The stabilisation phase of the programme will entail the following: shutting down obsolete facilities and unprofitable plants; completing projects now in progress and renovating the main metallurgical plants; diversifying production resolving social problems maintaining export potential. 20. The programme addresses the problems of the metallurgical sector at three levels and sets milestones for their resolution. 21. It maps out a long-term plan (maximum potential) for the renovation of the mining and metallurgical complex to the year 2010, and lists the investment projects that will be required. According to the enterprises proposals, investment projects to the year 2000 will amount to US$ million a year. To bring the enterprises up to standard, both technically and commercially, the following investment will be required: US$ 3.1 billion in the metallurgical sector, US$ 2.5 billion in the iron ore sector, US$ 3.2 billion for non-ferrous metallurgy. The enterprises in the mining and metallurgical complex consider that it will be necessary, all told, to invest US$ 13 billion over the period to On the basis of the current depreciation rates, major construction projects amounting to US$ million per year could be financed out of the enterprises own funds (depreciation provisions and a 30 per cent rate of profit). 23. The medium-term objectives relate to retrofitting projects during the period , financed primarily out of the enterprises own resources. Loans, credits and state investment will, however, also be needed. The financing required amounts to US$ 680 million for 1996, US$ 914 million for 1997 and US$ 734 million for The programme for the current year includes state-financed retrofitting projects, primarily in the energy area, and which require either no, or little, investment. 25. Energy-saving measures will be introduced with a view to reducing energy consumption by mining and metallurgical plants by 3 million tonnes a year between 1997 and 2000 (requiring an investment of US$ 110 per tonne per year). These measures will take 1.5 to 2 years to show a return. 26. Up to the year 2010, energy consumption for the production of finished rolled products will fall from 1.8 to 1.2 mtpy thanks to the use of continuous casting, the introduction of pulverised coal as fuel in blast furnaces, and the replacement of open-hearth furnaces by more modern facilities. 27. The Programme also aims to reduce environmental damage by cutting harmful emissions by the mining and metallurgical sectors by 40 per cent between 1995 and 2000 and by reducing considerably the discharge of polluted water into the regional basin. It is also planned to reclaim more than hectares of land. 4

5 28. Regarding the conditions of foreign participation in the programme, i.e. the new legislative framework, which is designed to improve the climate for foreign investors, it is clear that Ukraine will need several tens of billions of dollars to make its economy more efficient. Ukraine has every reason to believe that foreign investors will participate in the process. 29. For the foreign investor, Ukraine has several advantages over other East European countries: a large market; large, relatively rich, natural resources; a major scientific potential and an advantageous geopolitical position. 30. The number of foreign investors in Ukraine is rising every year and the rate of increase of investment is accelerating. According to data from the Ukrainian Ministry of Statistics, foreign direct investment totalled US$ 264 million in 1994, US$ million in 1995 and about US$ 450 million in The development of collaboration between Ukrainian and foreign entrepreneurs and companies is regulated by Ukrainian law in the same conditions as in other countries. 32. The Ukrainian government is endeavouring to create a legislative framework that will allow Ukrainian and foreign firms, particularly in the industrial area, to do business in a stable environment. 33. With the ratification of the Law Concerning the regime for foreign investors, tight restrictions on foreign capital have been replaced by a regime equivalent to the one for domestic investors. It guarantees equal conditions of competition and state support for certain investment projects with foreign participation. Foreign investors are free to invest in the Ukrainian economy. Foreign investments are exempted from customs duties. International law gives foreign investors a state guarantee against confiscation and intervention by the government, and guarantees the freedom to transfer income, profits and other payments resulting from an investment. There are practically no restrictions on the sectors in which investments can be made. 34. Certain firms carrying out investment projects in collaboration with foreign investors, which are in accordance with the government s objectives for priority areas of the economy, and with social and territorial development objectives, enjoy advantageous investment and commercial regimes. 35. In application of the Law Concerning the Foreign Investment Regime, the Ukrainian Council of Ministers has adopted a number of decrees concerning the registration procedure for foreign investors, agreements and contracts between foreign Ukrainian investors, duties on imports of assets representing a foreign investor s contribution to the charter capital of a private enterprise, etc. 36. The Ukrainian Constitution of 1996 laid down the equality of all forms of property, these being the democratic foundations of the State. Article 26 of the Constitution states that foreigners legally resident in Ukraine have the same rights and freedoms and obligations and responsibilities as Ukrainian citizens. It thus applies to foreign investment in Ukraine. 37. Pursuant to an order by the Cabinet of Ministers and further to the adoption of the Ukrainian Constitution, a number of draft laws are currently being drawn up, which, once passed, should have a positive effect on the investment environment. A tax code is being drawn up, the basic principle of which will be an easing of the tax pressure on firms (the number of taxes will be reduced, tax rates will be lowered, the tax base will be widened). 38. Privatisation offers another important opportunity for foreign investors. At the present time, foreign investors are allowed to acquire assets in companies privatised by competitive tender or auction. 5

6 The Cabinet of Ministers has validated the list of enterprises and industrial entities to be privatised with the participation of foreign investors. There are no restrictions on the size of foreigners shareholdings in open joint-stock companies. 39. The government is currently taking steps to develop the necessary infrastructure for foreign investment activity. 40. The Ukrainian Credit and Investment Company was set up to obtain capital for investment projects. Its role is to provide back-up and finance for investment projects. 41. An autonomous department, the Foreign Investment Agency, has been set up in GOSINVEST, the state investment body. The Agency compiles and disseminates information on foreign investment. It examines potential investment projects, carries out appraisals, selects projects under a competitive procedure, looks for firms to carry out projects, provides advice to foreign investors, trains investment specialists and handles advertising and publishing. 42. An advisory committee on foreign investment in Ukraine was set up for the purpose of examining, in conjunction with foreign investors, proposals for improving the investment climate in Ukraine, the foreign investment regime, macro-economic regulation and state programmes to attract foreign capital, and of enhancing the image of Ukraine to foreign investors. 43. Also, the Ukrainian National Agency for Reconstruction and Development was set up with a view to creating the right conditions for developing international economic collaboration and co-operation with international financial organisations, regional organisations and foreign organisations in the area of foreign investment. 44. The legislative programme of the Cabinet Ministers includes the creation of favourable investment conditions for all economic agents. A decree of 1996 introduced new rules on depreciation to enable enterprises to increase their depreciation reserves for renewing capital; the new system provides for higher, inflation-linked depreciation allowances, accelerated depreciation, etc., with a view to ensuring that capital is renewed normally. 45. To improve efficiency in the metallurgical sector, certain parts of it have to be restructured. The aim is to create firms capable of operating efficiently in the new conditions of a market economy and of producing a range of competitive products that will meet the needs of the market. 46. Implementation of the above-mentioned measures and programmes will improve considerably the operation and performance of the Ukrainian mining and metallurgical sectors. These measures can be summarised as follows: restructuring, retrofitting, the introduction of efficient, modern equipment and new production processes, foreign investment, privatisation of steel and non-ferrous metal undertakings. 6

7 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CAPACITY UTILISATION RATIO IN THE UKRAINIAN METALLURGICAL SECTOR IN Coke Iron ore Cast iron Steel Rolled products Tubes Ferroalloys 7

8 DECLINE IN METALLURGICAL PRODUCTION (in percentage of previous year's production) year %

9 SECTORAL BREAKDOWN OF OUTPUT IN 1996 (in percentage of output in 1995) Metallurgy Chemicals Energy Coal-mining Textiles Engineering Timber Construction 9 %

10 OUTPUT OF THE METALLURGICAL INDUSTRY BY SECTOR IN 1996 (in percentage of output in 1995) Coke Iron ore Cast iron Stell Rolled products Tubes Ferroalloys Nonferrous metals %

11 TREND OF METALLURGICAL OUTPUT year Rolled products Cast iron Steel Million tonnes

12 PROFITABILITY OF METALLURGICAL ENTERPRISES (in percentage) year 12 %

13 METALLURGICAL EXPORTS TO NON-CIS COUNTRIES year 13 billion dollars

14 INVESTMENT REQUIREMENTS OF THE METALLURGICAL INDUSTRY BY SECTOR TO THE YEAR 2010 (in US$ billion) Steel Iron ore 0.9 Non-ferrous Tubes 0.5 Small metal products Refractories Coke 0.6 Ferro-alloys Auxiliary branches

15 ENERGY CONSUMPTION FOR THE PRODUCTION OF COAST IRON AND ROLLED FERROUS PRODUCTS (in kg of fuel per tonne) year 15 Cast iron Rolled products Kg of fuel per tonne

16 FOREIGN DIRECT INVESTMENT IN UKRAINE (in million US$ per year) year 16 Million US$ per year