Industry overview pdf download

Metals and mining
in Ukraine

  1. Executive summary
  2. Sector overview
  3. Trends and developments
  4. Leading players
  5. Organizations and associations
  6. Legislation
  7. List of references

1. Executive summary

Metals and mining sector in Ukraine is represented by ferrous and non-ferrous metallurgy which includes variety of processing stages starting from mining and raw materials enrichment and ending with production of metals and alloys.

Ferrous metallurgy produces iron ore and ferrous metals including steel, pig iron (with a carbon content of a few percent) and alloys of iron with other metals (such as stainless steel and other types of alloyed steel). Nonferrous metallurgy produces aluminum, copper, zinc, titanium, nickel, magnesium, platinum, gold, silver as well as other non-ferrous metals including their alloys.

At the same time the scale and degree of ferrous and non-ferrous metallurgies development in Ukraine is different. Specifically, the share of non-ferrous industry in the structure of Ukrainian GDP is relatively small (2010: less than 5%), which is due to relatively insufficient in industrial terms known reserves of respective mineral resources in Ukraine. In contrast, due to literally immense proven and probable reserves of iron ore, ferrous subindustry has strong potential and historically has played a key role in Ukrainian economy. In the recent years ferrous metallurgy contributed approximately 20-25% into GDP and generated approximately 30%-35% of Ukrainian export.

High export orientation of entities representing Ukrainian metals and mining sector (80% of the output would normally go to export), positions Ukraine among key global players. Based on the export statistics for 2011, Ukraine is the 5th largest iron ore exporting country and 6th largest steel exporting country in the world, exporting 34 m tons of iron ore and 26 m tons of steel respectively.

In spite of Ukraine’s currently strong ranking, metal and mining sector of Ukraine needs to invest approximately USD 15-20 bn within a decade to overcome existing technological gap.

Without intensive modernization of heavily depreciated production facilities, minimization of negative environmental impact and long-awaited technology changeover, in the medium perspective Ukrainian metal and mining producers may loose their leadership due to inability to further challenge technological superiority of other global players.

2. Sector overview

General

Metals and mining sector of Ukraine is mainly represented by ferrous metallurgy.

According to the State Statistics Committee of Ukraine turnover of non-ferrous production in 2010 comprised only 6% of the total metallurgical production. As for ferrous metallurgy the highest percentage of the total metallurgical production comprised pig iron, steel and ferroalloys production – 82%, followed by pipes production and other kinds of primary steel processing, which constituted 8% and 3% respectively. The total turnover of metallurgical production in Ukraine in 2010 comprised UAH 182,251 m.

Metalurgical products turnover structure in 2011, UAH bn

Metalurgical products turnover structure in 2011
Currently ferrous metallurgy combines more than 200 entities, including 19 integrated steel mills and plants, 12 tube plants, 12 coke plants, 10 refractory plants, 12 mining and metals enterprises, a number of ferroalloy plants and more than 100 companies specializing in scrap and waste metals reprocessing. Metals and mining sector has a long history in Ukraine. It’s main advantages are:

  • Strong internal metal consumption (metal intensive machine building);
  • Rich and suitably located resource base (iron ore, coking coal, cheap electricity etc.);
  • Developed transport network and proximity to global markets;
  • High degree of vertical integration;
  • Skilled workforce.

Key production inputs

The mining and metals sector of Ukraine is comprised from enterprises performing the following activities:

  • Mining and preparation of key inputs for further processing (ore mining, production of ore concentrate and pellets);
  • Ferroalloys production;
  • Coke production;
  • Metal processing – key technological process resulting in production of pig iron, steel, semi-finished products from ferrous metals (slabs, rods, billets, tubes etc.) and alloys;
  • Scrap and by-products utilization.

The diagram below schematically demonstrates major production stages within mining and metal sector.
Major production stages within mining and metal sector

The key production input for ferrous metallurgy in Ukraine is the iron ore. For instance, combined iron ore and coke comprise around 50% of a steel billet cost. Apart from iron ore and coking coal, scrap and ferroalloys form around 17% of a steel billet cost.
Ukraine is fully self-sufficient in iron ore supply, somewhat reliant on coking coal and significantly reliant on non-ferrous ores supply being a net importer of non-ferrous ores required for production of ferroalloys.

Billet production cost, USD per ton, EXW (for non-integrated mills in Ukraine)

Billet production cost, USD per ton

Proven and probable iron ore reserves

According to US Geological Survey (2009) Ukraine has the largest deposits of crude iron ore reserves in the world of approximately 30 bn tons. Relatively low ferrum content (30%) in Ukrainian ore ranks it 3rd after Russian and Australian ores in terms of ferrum content in proven and probable ore reserves.

World iron ore reserves in 2009

World iron ore reserves in 2009

Ukrainian mining and beneficiation companies (also referred to as GOKs) extract iron ore via both underground and open pit mining. Ore mined from underground has ferrum content of 50-60%, while ferrum content of crude ore mined from open pits is only around 26-33%.

Metals and mining sector output and structure

The diagram below demonstrates Ukraine’s metals and mining sector output and structure in dynamics.

Ukraine’s mining and metals sector output, m tons

Ukraine’s mining and metals sector output
As can be seen from the diagram above on the whole output of metals and mining sector in Ukraine tends to grow, except for 2008 when global metal markets collapsed due to the world financial crisis.

The impact of the crisis can be felt even now: in 2011 Ukraine produced 35.5 m tons of steel which is significantly lower than in the pre-crisis 2007 and hardly matches the level reached in 2002. At the same time the output of non-agglomerated iron ore (the key input of steel production) in 2010 and 2011 surpassed the pre-crisis level. The latter was in line with the global tendency of raw materials prices appreciation and more fierce competition between steel producers on the global arena in the post crisis period due to existence of unutilized production capacities. As a result of the mentioned trends since 2008 profit margins have been improving for Ukrainian exporters of iron ore as well as of other raw materials (coke, coal) and deteriorating for exporters of steel and semifinished products.

Global ranking

Currently Ukraine is a serious global player. In 2011 it ranked No. 8 in terms of global crude steel production, No. 5 among top steel and iron ore exporting nations and No. 3 in terms of proven and probable deposits of iron ore.

TOP steel exporters , m tons
TOP steel exporters
Exports of iron ore, m tons
Exports of iron ore
TOP-15 crude steel producers, m tons
TOP-15 crude steel producers


The further development and growth of the mining and metals industry in Ukraine is highly dependent on the global and domestic demand, timelines of technological changeover, and ability to produce new marketable metal products that would be a descent substitute to the imported metals and alloys.

Metals production capacity

In 2011 crude steel production capacity of Ukraine comprised 46.6 m tons. During the year these capacities were utilized at a rate of 75.8% (2007: 95.4%).

Crude steel capacity utilisation in Ukraine
Crude steel capacity utilisation in Ukraine
Steel making capacity utilization, %
Steel making capacity utilization

Although the level of unutilized steel production capacity was in high correlation with the global average it declined significantly during the post-crisis period.

Together with the overall decline of the global demand for steel this trend also indicates Ukraine in the post crisis period has experienced more severe competition from other more technologically advanced global steelmaking players.

Technology

Ukraine’s steelmaking technology, in general, is decades behind that of most other major steel producing countries. As a result, steel companies have not been able to reap maximum cost benefit from the country’s strong raw material sector.

According to the World Steel Association in 2011 Ukraine was the country with the highest percentage of outdated open hearth furnace (“OHF”) technology used in production of crude steel among 10 major steel producing countries.

TOP-10, crude steel producers by technology used in 2011, %

TOP-10, crude steel producers by technology used in 2011

As can be seen from the table above, “OBC” technology was the most popular among the major steel producing countries such as China (89.6%) and Japan (76.9%) in 2011.

According to the State Statistics Service of Ukraine, the technological structure of steel making capacity in Ukraine in 2005-2011 was as follows.

Ukrainian steel capacities by process, m tons

Ukrainian steel capacities by process
During 2011 4.0 m tons of OHF capacities in Ukraine were decommissioned, whereas 4.0 m tons of OBC and 1.3 m tons of EAF capacities were put in use. Further replacement of open hearth furnaces by more productive, more energy efficient and less polluting EAF furnaces and converter units will remain a priority for Ukrainian metallurgy in the coming years. Complete replacement of OHF in Ukraine is planned to be completed by 2018.
Evidently the lack of modern equipment constrains Ukraine steel industry’s ability to produce and sell higher value added products, including carbon plate and hotand cold-rolled steel, instead concentrating on semi-finished products.


Continuously-cast steel output by country in percentage to the crude steel output in 2011

Continuously-cast steel output by country in percentage to the crude steel output in 2011

The graph shows, that only 53.9% of crude steel output in Ukraine is processed further, while in other major steel production countries like China, Japan and United States almost 100% of crude steel is continuously-cast before going to the finishing mill.
Furthermore, in first half of 2012 most Ukrainian steel producers reduced finished roll production by 7% y-o- y, produced 14.962 m tons of finished roll. During the same period crude steel production fell by 3% to 16.939 m tons, but pig iron production rose by 2% to 14.521 m tons.

Output and consumption trends

The volume of steel consumption in Ukraine is growing, but is still far below pre-crisis levels.

Steel products consumption, m tons

Steel products consumption

The expected growth rate of apparent steel consumption in Ukraine in 2012 is 10% vs. 26% in 2011. In 2012 steel import to Ukraine is expected to be nearly 2.1 m tons.

Prices for metals and key raw materials in Ukraine

Prices for metals and key raw materials in Ukraine

Prices for iron ore and coking coal in Ukraine in 2012 are expected to decline by 13% and 5% respectively in response to declining prices at the global steel markets. At the same time shortage of scrap will support growing price trend (+8.6% to 2011).

Tear-and-wear of metal making facilities

Today, the pace of renovation and modernization of iron and steel enterprises outperforms estimated figures outlined by the State Program for development and reformation of mining and metallurgical companies till 2012 (approved in 2004). In 2006-2007, capital investment in the modernization of iron and steel enterprises have reached the average European levels (USD 28.3 and USD 48.5 per ton, respectively).

At the same time tear-and-wear level of Ukrainian iron and steel production facilities (65% and more) is twice above the similar indicators in EU.

Vertical integration

Low profitability of Ukrainian iron and steel enterprises in 2009-2011 amid steel prices volatility and high raw material prices forced steel making enterprises to join companies controlling highly-profitable iron orereserves. As a result, Ukraine’s iron and steel industry consolidated into the vertically merged holdings.

Internal market perspectives
Internal consumption

Stronger domestic demand was recorded for rolled products in 2011 at almost 7.7 m tons, while the last year`s figure totaled only 5.3 m tons. Analysts attribute an upward dynamics to the revival of the domestic machine- building industry (especially, car-building sector) and partially to the recovery of the construction industry, including construction works related to Euro 2012. Still domestic market uses about 25% of the output. Increase in domestic consumption could be reached through implementation of complex program aimed at renovation of metal fund (content of metal in the countries production facilities). Currently 337 out of 571 m tons of Ukraine`s metal fund is depreciated and worn-out (60%). This fact shows existence of the powerful internal growth factor for metals and mining industry in Ukraine.

Opportunities: insights

The total power consumption of Ukrainian steel making enterprises required for the production of cast-iron and steel is about 30% higher than for modern production facilities based in EU-27, India and China. Energy-output ratio per ton of steel in Ukraine reaches 840 kg of equivalent fuel while in EU countries this indicator is 1.9 times lower (450 kg of equivalent fuel). The cost of fuel and energy resources accounts for 50% of rolled metal products cost, while in some countries this indicator equals 20%.

The production of one ton of steel in Ukraine requires 52.8 man-hours, whereas in Russia and Germany this figure totals 38.1 and 16.8 man-hours, respectively.
The whole world demonstrates tendency towards development of flexible electrometallurgy, thus replacing inefficient and outdated open-hearth furnaces. Though, open-hearth furnaces are still in operation in Ukraine, Russia and India.

Operating at full production capacity a Ukrainian entity doing primary steelmaking from ores, is able to demonstrate labor productivity close to 200-250 tons of steel per worker per year. In contrast labour productivity of a contemporary electrometallurgical mini mill would be 3000-4000 tons per annum.

4. Leading players

The following companies are considered to be the key players of Ukrainian mining and metals sector

Leading players

These companies control 100% of Ukrainian GOKs (mining and beneficiation companies) and significant share of metal production.

Leading players

Non-ferrous metallurgy

Non-ferrous metallurgy

Coke industry

Coke industry

5. Organizations and associations


Organizations and associations

6. Legislation

Licenses, permits, limitations As subsoil is the exclusive property of Ukrainian people it can only be used and not owned. Mining operations including those performed according to product sharing agreements (hereinafter referred to as the “PSA”) are in general treated as subsoil use.

Ukrainian legislation requires licensing for the following types of activities within metals and mining sector:

  • Extraction of precious metals and stones, precious stones of organigenic origin, semiprecious stones; The licensing body is the State Service of Geology and Subsoil of Ukraine (hereinafter referred to as the “SSGS”);

  • Storage, recycling, metallurgical processing of scrap base and ferrous metals. The licensing body is the Ministry of Economic Development and Trade of Ukraine;

  • Collection, primary operations with waste and scrap of precious metals and stones, precious stones of organigenic origin, semiprecious stones. The licensing body is the State Assay Office of Ukraine.

For use of subsoil it is necessary to obtain special permit.

Special permits are issued by SSGS (through auction with some exceptions) after agreement of the land plot issue (if required) with local councils. The issue to be noted is that the owner of special permit cannot alienate his rights on subsoil use granted by the relevant special permit and cannot contribute such right to authorized share capital. There is an exception when the rights may be transferred to the third parties simultaneously with transfer of rights and obligations under PSA with mandatory reissuance of respective special permit.

There are three main types of permits:

  • For the purposes of mining operations special permits are granted for 20 years (30 years for gas and oil within offshore sea and exclusive economic (sea) zone). The term can be prolonged;

  • For the purposes of geological survey of mineral deposits of state importance, for extraction of fresh groundwater, development of peat deposits another special permit is required. There are additional approval procedures with regard to these types of activities (with Ministry of Ecology and Natural Resources of Ukraine (hereinafter referred to as “MENR”), State Committee of Ukraine for Supervision on Labor Safety, Ministry of Health of Ukraine). Special permits of this type are granted for 5 years (10 years for gas and oil subsoil). For some cases terms are 20 (30) years;

  • The third type of special permit is permit for some mining and construction related operations. Such permits may be granted for 20(50) years.

After obtaining special permit the company should start mining within two years (180 day for gas and oil) otherwise such permit will no longer be valid (this rule is not applicable for PSA).

There are also special requirements for storage, recycling, metallurgical processing of scrap (i.e. companies which perform such activities should have qualified staff and relevant equipment, ensure ecological safety, possess equipped land plot and to be compliant with other requirements).
Controlling authorities

The central executive bodies in the sphere of metals and mining are Ministry of Economic Development and Trade of Ukraine and MENR. Other authorities involved in management of this field are: SSGS, State Assay Office of Ukraine etc.

Special regulations

The main legislative act governing the industry is the Code of Ukraine on Subsoil dated 27 July 1994. Additionally, there is a significant number of other regulatory acts, including those of the Cabinet of Ministers of Ukraine.

Taxation

Metals and mining enterprises as a general rule are obliged to pay corporate income tax (hereinafter referred to as “CIT”), Value added tax (hereinafter referred to as “VAT”).

The CIT is currently calculated at a flat rate of 19% until 31 December 2013 and 16% from 1 January 2014 onwards.

VAT is currently levied at a rate of 20% of the taxable value of domestic supplies, imported goods and auxiliary services. The VAT rate will be reduced to 17% from 1 January 2014.

Additionally to CIT and VAT enterprises of metals and mining sector are taxable with special taxes/duties below:

  • Duty for subsoil use
Business entities using subsoil for the extraction of mineral resources (including extraction of mineral resources during geological surveys), on the basis of abovemen tioned special permits, must pay subsoil usage duties. For tax purposes, duty payers should maintain separate (from other types of activities) financial and tax accounting of incomes and expenses for extraction of each type of mineral resource for each type of subsoil, for which a special permit is provided. The duty rate depends on the type of resource extracted and the volume of mineral resources extracted during a reporting period. For example, use of land to perform oil and gas extraction is charged at UAH 147.63 (app.EUR 13.8) per ton of oil and at UAH 42.05 (app. EUR 4) per 1000 cubic meters of gas.

  • Rent duty for extraction of oil, gas and gas condensate in Ukraine
Rent duty rates for extraction of oil, gas and gas condensate depend on the volumes of natural gas, oil and gas condensate extracted in relation to the depth (i.e., above or below 5,000 meters) of the subsoil plots, from which these resources are mined. Rent duty for oil and natural gas extraction is currently charged at UAH 2,141.86 (app. 200) per ton of oil and at UAH 237 (app. EUR 22) per 1000 cubic meters of gas for wells that are less than 5km deep; and at UAH 792.54 (app. EUR 74) and UAH 118.5 (app. EUR 11) for oil and gas respectively for wells that are more than 5km deep.

  • Environmental tax
Environmental tax is levied on pollution of air and water and relates specifically to a number of environmental problems caused by shale gas and oil extraction technology. The environmental tax is a complex and subjective area of taxation that is linked to the type of pollution, storage and waste. The tax depends largely on the method of extraction and permit held by the PSA/Joint Venture Agreements and is paid by legal entities engaged in shale gas and oil extraction.

7. List of references:

  1. Billet production cost // Ukr Prom Zovnish Expertyza
  2. Yearbook // State Statistics Service of Ukraine , Kyiv 2010 - ukrstat.gov.ua
  3. Global ranking // ISSB, - http://www.issb.co.uk
  4. Statistics // The World Steel Association, - worldsteel.org
  5. Market Statistics // OECD, - oecd.org
  6. Market Statistics // UPE Co


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