Vladimir Shlyomin

    Having received new bills for natural gas, Ukraine’s steelmakers have comprehended that they could foot them only at the expense of lower profitability of their production. The All-Ukraine Union of Mining and Steel Industry Employers have forwarded the Ukrainian President Victor Yushenko an appeal to interpose into the situation otherwise, the appeal was quoted as reading, «the national economy would be doomed to a long-lasting recession».
    Ukraine’s companies will not enjoy any more a price of $ 95 per 1,000 cubic meters at which expensive Russia’s gas was previously estimated at the customs frontier after being blended with relatively cheap natural gas from the Central Asia. Now they will have to buy it at a price of approximately $ 122-147 per 1,000 cubic meters. Ukraine’s employers are sure that at such prices for natural gas production costs of steel products will inevitable soar thus undermining competitive ability of the Ukrainian steel industry, which as a result may loose its traditional sales markets.
    Vladimir Vlasuk, the head of the Ukrainian state expertise agency, offers a pretty dismal outlook on this. While reminding that major consumers of Ukraine’s steel products are still developing countries, he notes that China, a used-to-be importer which has evolved into a world major exporter, has not only reduced the volume of its purchasing Ukrainian steel but also squeezed Ukraine’s steel makers from some markets in the South-Eastern Asia. So, today Ukrainian companies have to reorient their sales activities to India, Iran Pakistan and African countries. However, now all their efforts may be reduced to nothing by higher prices for natural gas which will inevitably result in higher production costs.
    According to estimation of Ukraine’s steelmakers, at the currently formed exorbitant prices for natural gas their losses in 2006 will reach $ 2 billion, while their current profitability will go down by 13 % and reach 3-3.5 %. If the natural gas price exceeds $ 160 (this scenario is pretty possible assuming Turkmenia’s intention to increase prices for its natural gas), profitability of Ukraine’s steel makers will be equal to zero.
    Many observers ask a logical question: why steel makers in Europe, where natural gas costs not less than $ 250-$300 per 1,000 cubic meters, are running pretty successfully, while those in Ukraine, where natural gas prices are twice as much, get panic?
    The reason is that cheap Russian gas, Ukraine was enjoying during the fifteen years of its independence as a mostly preferred partner of Russia, has served Ukraine the bad turn. Ukrainian energy consumers have never seriously thought about energy saving. According to statistics offered by the Ukrainian Ministry of Fuel and Energy power intensivity and energy consumption in Ukraine’s industry now exceeds the average world level in 2.6 times.
    World leading steel making companies have yearly implemented their in-house long-term programs of re-engineering and shifting to energy saving technologies. However, it would be very difficult for Ukraine` s steel makers to implement similar programs under the «gas shock».
    Vladimir Boiko, the chairman of the Board of the Mariupol Integrated Iron and Steel Works n/a Illitch, informs that after a 15 % reduction in gas consumption his company has suffered a 20 % decrease in its production volume. Mr. Boiko warns that his company is approaching the point at which it will have to cease production entirely.
    Having taken to handling the problem of power saving as early as 2004, Azovstal, another Ukrainian major steelmaker, has reached some positive results. Thus, re-engineering of the second blast furnace, which is to be finished in Q1 2006, will permit a 15 % saving of energy resources. The re-engineering program undertaken by Azovstal also envisages shifting its in-house heat electric generation plant from natural gas to coke gas. However, the program is based on an assumption that the natural gas price would never exceed a limit of $ 100 pre 1,000 cubic meters. At a higher price the company will have to stop implementing all its re-engineering and upgrade investment projects.
    According to Oleg Dubina, an ex-director of the Energy Company of Ukraine and now the effective General Director of the Dnepropetrovsk Integrated Iron and Steel Works n/a Dzerzhinsky, Ukraine’s steel industry, which annually smelts 38.4 million tonnes of pig iron fuelling for blast furnaces with natural gas, will need only $ 2.2 billion to shift them to coal injection. All in all Mr. Dubina estimates the industry` s demand for investments to upgrade production facilities at $ 9 billion.
    According to data available with Sergey Yermilov, the director of the Scientific Institute of Ecology and Energy Saving, the companies, which have already taken to introducing new energy saving technologies, will be able to finish their re-engineering programs not earlier than in five years, while those still thinking about implementation of such programs will not complete them even in seven years».
    The Ukrainian government considers a possibility to support national steel makers in their efforts to reduce powers costs. Thus, in particular, it is proposed to introduce a specially designed regime of granting credits for the companies which undertake to reduce energy intensivity of their production by 30–35 % in a three year prospective. However, it looks like these incentives will not suffice. A group of industrial companies, including the Makeevsky Integrated Iron and Steel Works, the Mariupol Integrated Iron and Steel Works n/a Illitch, the Yenakievsky Integrated Iron and Steel Works, Zaporozhstal, the Nikopolsky Ferrous Alloy Smelter, the Altchevsky Integrated Iron and Steel Integrated Works, as well as a number of ore mining and processing integrated works, insists on taking extraordinary measures. In their appeal to the Ukraine President they propose to establish an extraordinary committee on the national energy safety, to develop and adopt a National Energy Saving Program as well as to introduce a state support to alternative fuel sources (e.g. methane, wind power and biological fuel).
    Vladimir Granovsky, the head of the steel industry department at the Ukrainian Ministry of National Industrial Policy, promises that the Cabinet of Ministers will do its best to mitigate the price shock for the core branch of Ukraine’s economy.
    However, it looks like the Ukrainian government has no recipes on how to save this branch of its industry. The Ukrainian state has for so long supported its steel industry with major tax and other preferences in the framework of a so-called «economic experiment», that in practice it has just weakened competitive ability of the national steel makers. Thus, for the present the only thing Ukrainian authorities can recommend the national steelmakers is «to reduce their consumption of natural gas». 

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