The shortage of ferrous scrap metal has been a problem at Ukrainian metallurgical plants for many years. But it was in 2015 that the metallurgists experienced the shortage particularly acutely.
As of August, Ukraine's metallurgical industry was short of approximately 600 tons of scrap metal to operate normally. At the same time, the country's scrap metal exports totaled 993 tons.
Production volumes are falling, putting hundreds of thousands of jobs at risk. Industrialists have long been asking the government to limit export quotas. They've been ignored.
Scrap metal exports are the main reason for the shortage of scrap metal in the domestic market. The volume of exported scrap metal could completely cover the shortfall in supplies to Ukrainian consumer plants. It's worth noting that revenue from sales of metallurgical products on foreign markets generates significantly higher state revenue than from scrap metal exports. For example, the budget receives a 10-euro duty on one ton of exported scrap. Metallurgists, on the other hand, pay 8,5 times more—2100 hryvnias—for one ton of scrap metal melted into steel.
It would seem that it would be far more profitable for the state to support Ukrainian steelmakers than secondary steelmakers. But no, the government is choosing in favor of the secondary steelmakers.
"While metallurgists (those who actually create jobs and pay billions in taxes) are experiencing a shortage of raw materials, scrap metal exports are receiving maximum support. In August, another 180 tons of scrap quotas were distributed. This volume is in demand by Ukrainian metallurgists! But the state regulator, with the authority to halt exports, is not making the necessary decisions," says the Ukrainian Miners and Metallurgists' Union. "Where will metallurgists work, and who will provide orders to small and medium-sized businesses if large enterprises are shut down?"
The trade union claims that state regulation of scrap metal exports is carried out in the interests of the Turkish and Transnistrian industries and to the detriment of Ukrainian metallurgists.
"By receiving scrap metal of Ukrainian origin, Turkish and Transnistrian metallurgists retain their jobs, while Ukrainian metallurgists lose theirs," say trade unionists.
It seems to me that the issue here is primarily not in the interests of foreigners, but rather in the interests of the Ukrainian market. But a "black" market.
According to Forbes, the annual turnover of the scrap metal market is estimated at $1 billion, of which about $700 million is in the shadows.
In August of this year, tax police officers from the State Fiscal Service and the Security Service of Ukraine (SBU) exposed scrap metal exporters who, in 2015, had used "fictitious" companies to launder scrap metal on a large scale, causing the state losses of 400 million hryvnias. More than 35 accounts used by these companies were blocked. During searches at the port of Mykolaiv, 13,8 tons of scrap metal worth approximately 55 million hryvnias were discovered, some of which had already been loaded onto a ship.
On July 1, tax police uncovered tax violations amounting to 1,6 billion hryvnias in the illegal scrap metal trade. The company involved in the case used forged documents to purchase and sell scrap metal abroad through seaports in 2014-2015. Police conducted searches on a sea transport vessel in a port in the Odesa region. A total of 2,9 tons of scrap metal, intended for export, with an estimated value of 15,5 million hryvnias, was discovered and seized.
That same month, tax police in the Odessa region seized two vessels flying the flags of Malta and Cambodia, which were attempting to export 8,5 tons of scrap metal worth over 45 million hryvnias from Ukraine.
According to media reports, both recent cases resulted in criminal proceedings being opened against the same company. Investigators declined to disclose the name.
There are countless such examples. But even a couple of them are enough to understand: this business is clearly indestructible, meaning there are some serious people behind it. What does this mean? It means that export quotas are unlikely to be lifted. The state is more likely to kill its mining and metallurgy industry than for the shadowy "scrap metal" business to disappear altogether.
One of the largest scrap metal exporters from Ukraine is the financial and industrial group Ukrmet, owned by Andriy Kiselev, the former head of the Party of Regions faction in the Donetsk region. Export volumes here amount to approximately 2 million tons per year. Ukrmet held a leading position in 2012-2013, when the Party of Regions was "highly regarded." As Forbes reported, law enforcement was once involved in the establishment of Ukrmet's network of procurement centers to influence entrepreneurs engaged in scrap metal collection.
The second-largest scrap metal producers (over 1 million tons per year) are Yevgeny Kazmin's KVV Group holding (according to media reports, Kazmin has been present on the Ukrainian market since 1990, when he was involved in the removal of decommissioned Black Sea Fleet ships from Ukraine) and Ali Mohammad Hani Omran's Euro Metal Invest (in 2012, the media reported that Viktor Yanukovych's friend Yuriy Ivanyushchenko had become a co-owner of the group, but this was never officially confirmed).
Next come two companies from the Promresurs group of former Industrial Policy Minister Valeriy Mazur and Ukrainian Metallurgical Company Ltd., owned by the Chairman of the Ukrainian Association of Secondary Metals, Valentin Makarenko.
These companies receive the greatest assistance in exporting scrap to the foreign market.
Despite the government's direct influence on this sector, the list of market leaders hasn't changed since the change in government. The Ministry of Economy approves scrap metal removal contracts monthly. Given the number of criminal cases and arrests, no one is even considering abandoning smuggling and shady schemes.
"Scrap metal has been and remains one of the most shady and corrupt export schemes," says Prime Minister Arseniy Yatsenyuk.
"This is largely a cash, black market with all the processes that go with that," agrees Deputy Minister of Economy Maxim Nefedov.
However, the same Nefedov patronizingly declares:
"We're saying that anyone who wants to export, please come. We're giving you a shipload of it. If you use it up, come back and see us again. We'll give you more."
In 2015, major exporters were able to export 99% of their scrap metal requests to the Ministry of Economy without any problems. Even during the Yanukovych era, such assistance for scrap metal traders was unheard of.
The government's position on this issue might not have raised any questions if it weren't for regular appeals from Ukrainian metallurgists to the Ministry of Economy asking to cancel or limit the export of scrap metal from the country due to a catastrophic shortage on the domestic market.
In June, the Ukrainian Metallurgists and Miners' Union even threatened the government with large-scale protests if the country's scrap metal shortage led to the collapse of their industry and, consequently, job losses. Did the government react? No. Did Prime Minister Yatsenyuk pause? No.
The fact is that for many metallurgical companies, scrap is the only raw material, while for others, it's a secondary one. When it's unavailable, plants shut down or adjust production plans downward. Sometimes, if a plant's production cycle allows for the substitution of cast iron for scrap, such a substitution is made. But this is only true for companies with older technology. Moreover, cast iron is an expensive and energy-intensive raw material, so such a substitution increases production costs and, consequently, weakens the competitiveness of Ukrainian producers in foreign markets. Ultimately, scrap shortages threaten jobs not only in the industry but also in related industries.
"The mining and metallurgy complex is an export-oriented industry, accounting for approximately 10% of the country's GDP and 25-27% of its foreign exchange earnings! It's no exaggeration to call it the backbone of the Ukrainian economy. The mining and metallurgy sector and related industries employ over 500 people, collectively accounting for approximately 40% of Ukraine's GDP," says Vasyl Shevchenko, Chairman of the Dnipropetrovsk Regional Committee of the Perm State University. "The consequences of such state economic policy will be dire: loss of markets, wage arrears, unemployment, and social unrest. It's easy to shut down plants. It's easy to chop up their equipment for scrap metal and export it abroad. But they're very difficult to build. And it's very difficult for hundreds of thousands of metallurgists to understand the government's motives for such actions."
According to the Ukrmetallurgprom association, as of August 2015, large Ukrainian plants were experiencing a significant scrap shortage. ArcelorMittal Kryvyi Rih had a scrap metal shortage of 109 tons. Interpipe Steel (Dnipropetrovsk) had a scrap shortage of 62 tons. Dneprovsky Iron and Steel Works (Dneprovsky Dzerzhinsky Iron and Steel Works) was short 90 tons, Energomashspetsstal (Kramatorsk) was short 13 tons, and Elektrostal (Donetsk) was short 9 tons.
Zaporizhstal was unable to find 19 tons for normal operation, the Ilyich Iron and Steel Works of Mariupol was unable to find 56 tons, Azovstal was unable to find 84 tons, and the Yenakiyeve Iron and Steel Works was unable to find 91 tons.
"Corruption in the determination and establishment of scrap metal export quotas by the Ministry of Economy will be eliminated. The new quota-setting mechanism will be more transparent: only scrap metal not in demand by domestic metallurgical companies will be exported, and scrap export quotas will be sold at open auction," Oleksandra Kuzhel, Deputy Chair of the Verkhovna Rada Committee on Entrepreneurship, Regulatory, and Antimonopoly Policy, solemnly promised.
At the same time, she admitted that the initiative has very serious opponents representing the interests of scrap metal exporters who are seeking the complete abolition of any export restrictions.
In 2015, the Ministry of Economy distributed scrap metal export quotas twice, but the results were not made public. According to media reports, the ministry cites existing internal documents that effectively prohibit the disclosure of information about the licensing commission's work.
Yatsenyuk, commenting publicly on metallurgists' appeals, called on the Ministry of Economy to develop a balanced approach to distributing export quotas to ensure all Ukrainian enterprises have sufficient raw materials.
The Prime Minister voiced this request at an extended meeting of the ministry, although he noted that Ukraine “has an obligation not to close exports.”
"But, unfortunately, scrap metal has been and remains one of the most shady and corrupt export schemes. We need domestic production in Ukraine: to provide Ukrainian companies with scrap metal so they can create added value," he said.
The Dnipropetrovsk region is experiencing the lion's share of the scrap shortage. But even here, metallurgists have found no support.
A month ago, the regional committee of the relevant trade union appealed to Dnipropetrovsk Oblast Governor Valentin Reznicenko with a request to initiate an appeal to Kyiv demanding either the abolition or a significant reduction of quotas.
The only response to this dire situation was a roundtable discussion at the Regional State Administration. The meeting was chaired by Deputy Governor Oleh Kuzhman (who served as Vice Mayor of Sevastopol during Yanukovych's presidency, and the city was then governed by V. Yatsuba).
"Metallurgy is one of the region's key development sectors. It generates budget revenues, creates jobs, and creates social partnerships. It's crucial today to find common ground between metal producers and metal exporters. A shutdown of either of these plants would lead to significant economic problems for the region and the country. That's why the Regional State Administration has established a platform for negotiations between representatives of these two industries," Kuzhman emphasized.
As stated on the regional state administration's website, "The regional state administration has set a clear requirement: everyone must submit their proposals within three working days. After that, work will continue until the situation is resolved."
In a comment to the author, Oleg Kuzhman reported that the Regional State Administration has already sent a letter to the Ministry of Economy requesting either the abolition of quotas or the inclusion of a representative on the commission issuing scrap metal sales quotas.
"Furthermore, we gave them (the metallurgists and recyclers – Author) the opportunity to sit down and discuss business matters with each other, matters we have no right to interfere with," Kuzhman said. "We're talking about metal prices and payment terms. As far as I know, they've already agreed on the terms with our scrap metal wholesalers. As for quotas, they're handing them out left and right to anyone and everyone, running around the country with them and selling them. And the volume of quotas is greater than the amount of scrap metal in Ukraine. No one monitors the balance sheet (how much scrap metal is in wholesale companies' warehouses, how much large companies need for processing); it's not maintained by the Ministry of Economy. We can influence this process. Let's say there's a million tons of scrap metal. We determine that our companies need, say, 600 tons. Then we can issue a quota for 400 tons."
Oleh Kuzhman confidently asserts that only Viktor Pinchuk's Interpipe plant faces scrap metal shortages. Others (the vice governor cites ArcelorMittal Kryvyi Rih as an example) have no such problems.
"I hope that the process of mutual love has already begun," the deputy governor concluded, expressing hope that Interpipe and the heads of the Vtormet enterprises have already agreed on working conditions.
The deputy governor has a strange position.
Firstly, the Ministry of Economy's Quota Commission is not responsible for balancing the books and determining the volume of quotas issued. Essentially, the commission's prerogative is to decide whether an applicant is eligible for a quota. Simply put, it decides who will receive the quota—Vasya or Petya. The volume of quotas is the prerogative of the Ministry of Economy, not the commission.
Secondly, Interpipe isn't the only one experiencing raw material problems. It's just that Interpipe was the first to publicly report these issues.
As of August 2015, ArcelorMittal (the same company that, according to Kuzhman, has no shortage of scrap) had a scrap metal deficit of 109 tons. It's odd that one of the leaders of a region whose economy relies heavily on the mining and metallurgy sector is unaware of this.
Thirdly, metallurgists claim that complaints from directors of scrap metal trading companies that Ukrainian companies are delaying payments for delivered scrap do not hold up to scrutiny. The only delays occurred in January and February, when production volumes fell due to blockages in shipments to Russia. Today, payment deadlines are being met.
"The scrap metal market is 70% 'illegal.' If everyone started operating legally, it wouldn't be profitable. Scrap metal accumulates in garages and is resold to small wholesalers, who in turn sell it to large scrap metal traders. This is how 'illegal' scrap becomes 'legal.' And then the tax authorities file complaints against us, trying to find out where we got the scrap," metallurgists say. "Do we really have the opportunity to buy 'legal' scrap? No."
This issue has not been and still is not regulated in the country.
The Interpipe plant says that this year they were forced to remain idle for 38 days due to a shortage of scrap metal.
"It's not about our region or the lack of dialogue with our scrap metal recyclers. There's a scrap metal shortage across the country! In our region, our factories consume 2 million tons, but we only have 600 tons available for purchase! We buy scrap from all over the country and even abroad. We can't buy from Russia right now; Kazakhstan has banned exports due to the same problems we're experiencing. Belarus has also banned exports; their factory is consuming all the scrap," they say at Interpipe. "And importing it from abroad is expensive: the duty per ton is $10."
Traders of Ukrainian scrap metal find it profitable to sell it abroad; the difference in purchase price is approximately one thousand hryvnia per ton.
"We understand that the regional government isn't addressing these issues. We asked them for only one thing—to file a complaint with Kyiv and open their eyes to the scrap metal situation," Interpipe explains. "But today, we feel like we've simply been taken advantage of. We received an invitation to the roundtable the night before. We don't know who else was invited, but only we and the Dzerzhinsky Iron and Steel Works attended. And they made us out to be the ones causing trouble, saying we can't find common ground with scrap metal dealers. We can. The issue is different. Ultimately, we see that the deputy governor's support went not to the metallurgical industry, which produces added value and creates jobs, but to one of the most shadowy and criminalized sectors in the country..."
The situation in the Dnipropetrovsk region clearly demonstrates the now-obvious fact that no one in power wants to create a most-favored-nation regime for domestic producers. This means that our country's recovery from the crisis is far off the horizon. The flip side of this coin is the regime of unspoken, yet massive, support for the shadow market and the "gray" economy, implemented throughout the entire vertical of government in Ukraine.
Olga Yudina, "Phrase"
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