Evaluation of Ukrainian domestic scrap market in 2007
In 2007, Ukraine produced 43.45 million mt of steel, including 42.8 million mt produced at metallurgical enterprises.
The volume of scrap purchases by metallurgical enterprises in the local market increased by 0.9 percent to 7.04 million mt; the volume of scrap collection amounted to 6.32 million mt - up 1.1 percent year on year. The ratio of scrap per crude steel production was 311.5 kg per mt - down 3.7 percent year on year. In addition, the usage in crude steel production of scrap supplied from the market (not from producers' own sources) decreased in 2007 by 3.9 percent to 164.1 kg per mt.
According to the estimates of certain steel producers, it has been forecasted that the volume of crude steel production in Ukraine will increase by 6.4 percent in 2008 to 43.5 million mt. Meanwhile, the volume of scrap purchases is expected to reach the level of 8.77 million mt, thus pushing the consumption of scrap (purchased from market sources) per mt of crude steel production up to the level of 201.6 kg.
In 2007, the tendency of decreasing scrap exports, which started in 2001, was maintained. Exports of scrap last year decreased by 7.8 percent to 690,000 mt compared to the 2006 data. Meanwhile, during last year an increase in scrap imports to Ukraine was observed for the first time in many years, reaching a total of 21,000 mt.
During last year, the laws regulating the scrap market underwent some changes, including cancellation of VAT on scrap for a period of one year, and the lifting of the export ban on non-ferrous and alloyed scrap. In addition, a new duty system for exports of ferrous scrap was introduced, effective from the date of Ukraine's accession to the World Trade Organization.
Evaluation of Ukrainian domestic scrap market in the January-May 2008 period
According to the data released by Ukraine's Ministry of Industrial Policy, in May 2008 the Ukrainian metallurgical industry continued to work dynamically, showing growth in output for major types of products - i.e. pig iron production increased eight percent, crude steel production went up seven percent and metcoke output rose 14 percent year on year.
According to the national production plan for 2008, Ukraine expects to produce 38.307 million mt of pig iron, 45.945 million mt of crude steel and to purchase eight million mt of scrap.
Judging from the real figures for May 2008, the crude steel output in 2008 is estimated to reach 44.789 million mt, close to the UAMB prediction of 44.5 million mt, which estimates the volume of supplied scrap at the level of 7.29 million mt. Accordingly, scrap consumption per one mt of crude steel production is estimated at the level of 317 kg in 2008. Exports of scrap in 2008 are estimated at the level of 680,000 mt.
Average daily scrap consumption in May was 18,400 mt; the same index for the first five months was 19,100 mt and for 2008 it has been forecast at 21,900 mt. In the January-May 2008 period, the Ukrainian steel producers purchased 2.909 million mt of domestically processed scrap. Including import deliveries, the figure rises to 2.985 million mt.
In the first five months of 2008, the total inventory of scrap at the 12 leading Ukrainian steel producers stood at the level of 261,400 mt, showing a 17 percent year on year decrease.
Evaluation of Ukrainian domestic scrap market in the January-May 2008 period in the context of particular steel mills
According to the 2007 results, the largest scrap consumer in Ukraine was Istil with purchases of 1.11 million mt, followed by ArcelorMittal Kriviy Rih with 894,000 mt and Zaporizhstal with 774,000 mt.
According to submitted plans, in 2008 the largest scrap consumer in the country will be Alchevsk, followed by Istil and ArcelorMittal Kriviy Rih.
Based on the data collected by Metallurgprom concerning the needs of the 12 largest steel producers in the January-May 2008 period, it may be estimated that for the current year supplies of scrap to the domestic steelmakers will total 7.33 million mt. Meanwhile, according to their plans, steelmakers will need eight million mt of scrap in 2008, thus giving a scrap deficit of 12 percent. Taking into consideration possible scrap imports to Ukraine of up to 150,000 mt and also the level of domestic scrap purchases by steel mills in the first five months of 2008, the possible volume of scrap supplies to domestic steelmakers may reach 7.132 million mt - that is 97.3 percent of all requirements.
Features of the scrap procurement policies of Ukrainian steel producers
The growth in scrap requirements of steelmakers, the increase in crude steel output by four percent, the reduction in scrap inventories by 17 percent and the overall increase in prices for scrap in the international market, all these factors have provoked the price rise in scrap in the Ukrainian domestic market in the current year. During the first quarter of 2008, the average procurement price increased from $288/mt to $366/mt, followed by relative stability in April-beginning of May, and then by another increase to an average level of $400/mt during the second half of May-beginning of June. The price rise was also supported by the depreciation of the US$ against the UAH.
The main factors determining domestic scrap prices:
- the state of Ukraine's domestic and export steel markets and its correspondence with domestic steel producers' needs in scrap
- zero level VAT on all scrap operations
- the level of scrap inventories
- the relationship between sellers and buyers of scrap, depending upon which scrap prices may vary by UAH 15-40/mt.
The following data illustrates the available room for growth in scrap procurement prices:
- in Jan-May 2008 export prices for Ukrainian pig iron went up from $410/mt FOB to $880/mt FOB, and export prices for Ukrainian billet rose from $550/mt FOB to $1,100/mt FOB;
- the ex-CIS scrap price for Turkey increased from $450/mt FOB to $880/mt FOB;
- the leading Russian metallurgical companies increased their procurement scrap prices (European regions) in the first five months of 2008 from $285/mt to $450/mt.
The analysis of scrap price dynamics shows that while in 2005 the gap between the average procurement price in Ukraine (CPT) and in Turkey (CIF) was $52/mt, in 2006 it equaled $49/mt, and in 2007 it reached $80/mt; then in the first six months of 2008 alone the gap reached $220/mt. Meanwhile, the price level for scrap in the Ukrainian market was $80-90mt less than in the Russian domestic market in the first six months of 2008.
Taking into consideration the continuous rise in prices for finished steel, raw materials, freight and energy resources in the international market, a further rise in procurement scrap prices in Ukraine, with some phases of stabilization, may be forecast.
Scrap exports-imports
During the first four months of 2008, Ukraine exported 174,000 mt of scrap - down 21 percent compared to the corresponding period of last year.
The main consumers of Ukrainian scrap during the period in question were Turkey (46 percent), Egypt (42 percent) and Moldova (14 percent).
In May 2008, Ukraine exported 106,000 mt of scrap, while in the first five months of 2008 Ukraine exported 287,000 mt of scrap - down four percent year on year. The average price of exported scrap increased from $395/mt to $546/mt (including prices for metallurgical charge ingot from alloyed steel) during the first five months of 2008.
Meanwhile, this year Ukraine is seeing growth in scrap imports. During the first five months of 2008, Ukraine saw a 13-fold year on year increase in scrap imports to 76,000 mt. The average price for imported scrap has increased year on year from $237/mt to $397/mt in the first five months of 2008. The imported scrap is generally supplied from Kazakhstan and Russia.
During the January-June 2008 period export prices for Russian and Ukrainian origin scrap increased by 1.8-fold on average. Import prices for Southeast Asia and Turkey increased by 55 and 65 percent respectively. The procurement prices for scrap of Russian steelmakers increased approximately by 85 percent. In Ukraine procurement scrap prices increased only by 35 percent. Regardless of this low increase in Ukraine (in comparison with the Russian market), neither export duty nor administrative barriers against scrap exports will save the domestic market from being impacted by global tendencies of rising demand and rising prices for steel and, consequently, for raw materials, in particular for scrap, during the coming months. It seems that a rising trend in export prices will continue during the summer months but will vary in nature.
Problems and trends of domestic scrap market development
During the last couple of years a tendency toward consolidation and globalization of enterprises in the Ukrainian scrap market has been one of the key issues in the development of this market. The tendency has been supported by several external and internal factors. The latter are as follows:
- innovations in scrap licensing law
- cancellation of VAT on scrap
- the developed system of administrative and non-tariff regulations in exports of scrap, prohibition of non-ferrous and alloy scrap exports (effective up to 16.05.2008), together with the export duty on ferrous scrap, all of which limit access of new players to the market
- the reduction of the number of scrap sources and the decline in the availability of easily accessible scrap have created a situation in which small companies are obliged to decide whether to be consolidated into a larger company or else to close down
It also seems that the domestic steel producers in Ukraine do not have a united strategy, in particular as regards scrap market development. This may be due to the diversity of the scrap market or because of the special features of the domestic steel market. Nevertheless, as a result of the lack of a combined strategy, domestic steel producers are trying to structure their scrap procurement policies on an individual basis, which is usually used very effectively by suppliers of scrap for their own advantage. However, one cannot disregard a new trend - the development of the united ‘agreed' price line by domestic steel producers. However, the terms of this price line are unilaterally determined by each scrap consumer.
Regardless of the fact that VAT cancellation has solved some problems as regards scrap theft, such problems have not been resolved completely.
Starting from the middle of May 2008, due to Ukraine's WTO accession, the following measures directed at the liberalization of the domestic scrap market have come into effect:
- abolishment of the ban on scrap of non-ferrous metals and on scrap from alloy steel;
- beginning of reduction of export duty on ferrous scrap, which will be carried out in several phases
Regardless of the generally positive development registered in the process of improving the legal base governing all scrap operations, several problems still exist and new ones have been created due to the continuous nature of the corrections made to the system. For instance, the zero rate of VAT on scrap still does not allow for temporary factors, thus creating confusion in the market at the beginning of every new year.