Steel groups extend grip into Europe

Faced with import tariffs and quotas from major markets, such as the United States and European Union, Ukraine’s lucrative steel industry has increasingly been expanding abroad with acquisitions of factories in countries where its products are sold.

The trend has been raw or semi-finished steel products coming from the east – where labor is cheaper, regulations are softer and materials like ore and coal are in abundance – and arriving in Europe to be rolled and sold.

But Ukraine is now rolling some of its own steel in Europe, which will be sold and distributed as European-made.

“Europe will eventually lose its liquid steel production,” said Dr. Farooq Siddiqui, first deputy chairman of ISTIL, a company which operates a mini-metallurgical plant in Donetsk.

“Personally, I think that the supply of slabs and billets will keep coming from Eastern Europe,” he added.

Slabs and billets are raw steel products which are further processed into finished steel goods.

Ukrainian-owned mills look set to help make increasingly more of these slabs into finished steel products.

The Donbass Industrial Union, one of Ukraine’s largest metallurgical holdings, announced last month that it was close to buying a 50 percent stake in a little known Italian mill owned by a Swiss-registered international steel trader called Duferco.

The Giammoro mill, located in Sicily, would receive slabs from DIU’s Dniprodzerzhinsky Metallurgical Plant in Dnipropetrovsk.

“That mill has a natural synergy with our Dniprodzerzhinsky Metallurgical Plant,” DIU Vice President Volodymyr Kravets told a Ukrainian investment conference held in February.

The deal, expected to be completed by the middle of this year, is based on a memorandum signed last July, which also gives DIU the option of buying half of Duferco International Trading Holding, a branch of the Duferco group that has handled DIU exports since 1998.

According to the July 2005 memorandum, Duferco and DIU would create a joint venture and invest in renovations of the Dniprodzerzhinsky plant that would allow it to provide Giammoro with 700,000 metric tons of steel product per year.

DIU bought Poland’s Huta Czestochowa steel mill last year, following a long struggle with other international steel players; and in 2004 it bought Hungary’s biggest metallurgical facility, Dunaferr. DIU is one of Ukraine’s largest business groups. It reported consolidated 2005 sales of $4.5 billion up 66 percent year-on-year, and a gross income of $590 million, up 72 percent during the period.

DIU is reportedly co-owned by former Deputy Prime Minister Vitaly Hadyuk, and group chairman Serhiy Taruta.

Duferco is one of the world's largest metal traders, with metal sales through its networks totaling almost $5.5 billion in 2004.

In October 2005, System Capital Management (SCM), another large Ukrainian holding company with significant metallurgical assets, took charge of northern Italy’s Ferriera Valsider steel company.

SCM, controlled by Donetsk tycoon Rinat Akhmetov, had bought a 49 percent stake in the Italian company in late 2004, increasing the stake to 70 percent in 2005. Ferriera Valsider produces hot-rolled plates and coils at two different mills.

Ferriera Valsider receives raw slabs from the SCM-controlled Azovstal steel works. The products are sold mostly in Italy, with some exports going to other EU countries.

”Ferriera Valsider is an efficient asset which perfectly fits into the vertically integrated production chain of the SCM Group in the metal and mining sector,” said Igor Syry, Senior Manager of SCM. “Obtaining full control of the mill is in line with SCM’s strategy in the metallurgical industry.”

In recent years, SCM unsuccessfully bid for steel mills in other countries, including Pakistan and Turkey.

Like DIU, SCM has not only secured itself a European rolling plant, but isn’t neglecting the sales and distribution side of the business either.

Leman Commodities SA, also registered in Switzerland, has been selling Akhmetov’s metallurgical exports for years, but was only purchased by SCM in 2005.

Leman has established offices in China, the Dominican Republic, Russia, Yugoslavia, Singapore and Turkey. In January 2005, Leman President Andriy Momot visited Nigeria, where he discussed investment opportunities in the African country’s steel industry with Nigerian President Olusegun Obasanjo.

Ukraine ranks seventh in global steel production, producing almost 39 million tons of crude steel in 2004. Leman’s is the largest exporter of Ukrainian steel. Since its establishment in 1997, the company has pushed annual turnover figures close to the $2 billion mark.

A third Ukrainian holding with major metallurgical interests is Ukraine’s Dnipropetrovsk-based Privat group, which recently acquired the Highlanders Alloys silico-manganese plant in the United States.

According to industry experts, the most obvious advantage of this purchase is that Privat can provide raw materials from the ore and mining interests it owns in Ukraine to Highland Alloys at prices lower than in the U.S.

Along with partners, Privat controls two of Ukraine’s three ferroalloy plants: Zaporizhia Ferroalloy Plant and Stakhanovsky Ferroalloy Plant. Privat, which also has a 25 percent stake in Ukraine’s disputed Nikopol Ferroalloy, also claims to have interests in ferroalloy plants in Romania, Russia and Poland.

The Privat group’s two principle owners are Dnipropetrovsk-based tycoons Ihor Kolomojsky and Hennady Bogolubov.

Foreign acquisitions by Ukrainian steel groups make sense for several reasons, according to Stepan Seliverstov, an analyst at the Kyiv-based steel-industry consultancy Prometal. European and American markets are more developed and stable than Ukraine’s, and Ukrainian producers can now get around quotas and tariffs, he said.

In the U.S., for example, Ukrainian metal exports have suffered along with other goods due to Kyiv’s poor record on intellectual property rights; however, Ukraine expects some relief from the market-economy status that it was granted by Washington late last month.

The EU, for its part, has been slow in raising quotas on Ukrainian rolled steel exports, demanding that Kyiv first drop its export tariffs on scrap metal, which Ukraine wants to keep at home for its own steel industry.

But by exporting their steel to Europe for rolling at plants that they control, Ukrainian metallurgical giants can sell a finished product as European made.

According to ISTIL’s Farooq Siddiqui, “in Ukraine they don’t have good rolling facilities … and the end product is second class.”