Ukraine’s steel industry is being carved up between local business

groups, with foreign traders and north-American-based exiles grabbing

a little piece of the action. But don’t worry: it’s all a step towards

the market.

There are still only two Ukrainian steel companies – the Ilyich plant

at Mariupol and the Nizhnedneprovsky pipe works – whose shares trade

in noticeable quantities. And transparency is primitive: no-one has

ever seen a set of accounts for most of the big plants. But, whereas a

year ago industry observers simply couldn’t tell who owned what, this

year’s battles for control have brought out contours of ownership more

clearly.

This month’s spat is over Severny iron ore mine, a key raw material

supplier to the eastern Ukrainian steel belt. A 36% stake was sold at

auction on 13 September to the Ukraine Metallurgical Company (UMC),

part of the Ukrsibbank financial-industrial group (FIG), which also

manages the state’s majority holding in Severny. But other bidders

launched a legal challenge, because all except UMC and Ukrsibbank were

disqualified by a condition that they had to strike a deal with

Severny’s largest creditors … first of which is Ukrsibbank.

The justice ministry has held up the sale while the legal challenges –

which has been accompanied by accusations that friends in the right

places, rather than fair competition, determined the auction’s outcome

– are heard.

Apart from bargain-basement purchases of state assets, bankruptcy is a

commonly-used means of acquiring assets. A FIG (or FIGs?) based in

Ukraine’s steel-making capital, Donetsk, has been accused of

aggravating conditions at another ore mine, Komsomolskoe, with a

possible view to taking control of it.

The Ilyich works at Mariupol, which stands outside the FIGs and is

controlled by a holding company owned jointly by 38,000 employees, has

a five-year management contract for state-owned Komsomolskoe. Last

month Ilyich’s management publicly accused Danko, a Donetsk-based

holding company, of buying up Komsomolskoe’s debts with malicious

intent – either to take control of the mine or paralyse it.

Komsomolskoe owes Danko 20 million hryvny.

Danko is part of a group of companies in Donetsk, including the

Industrial Union of Donbass (IUD) and Kontsern Energo, which between

them control four of Ukraine’s eight largest steel makers (Azovstal,

Alchevsk, Yenakievsky and the Donetsk metal works), two of the five

largest steel pipe plants (Khartsyzsk and Dnepropetrovsk), and an

array of coal mines and coking works.

Danko, IUD and Kontsern Energo deny ownership links, but work closely

together and comprise a formidable political force. Their ownership

remains unclear: entrepreneur Rinat Akhmetov, reputed to head the IUD,

says that he works with the company but owns no part of it.

The Khartsyzk and Donetsk FIGs are not the only ones who see value in

controlling raw materials supplies. Privat Bank group, a

Dnepropetrovsk-based FIG, in July bought out the Metallurgia group

headed by Konstantin Grigorishin, which had been its main competitor

in the production of ferro-alloys, important additives for some steel

products. The fact that Privat had already taken control of some

important magnesium ore mines, which are one step further up the

production chain, helped Grigorishin decide to sell up.

Upstream assets might be levers to gaining control of steel plants,

but it’s the downstream players that will survive and grow. Thus

Grigorishin is now concentrating on developing the Dnepropetrovsk

special steels plant he controls. Aleksandr Pecheritsyn, head of

research at Alfa Bank in Kyiv, says: “To compete with Asian producers,

the owners of Ukrainian steel works will have to modernise plant and,

above all, increase their capacity to produce value-added products

instead of exporting crude steel.”

This point hasn’t been lost on Viktor Pinchuk, the politician, media

magnate and son-in-law of president Leonid Kuchma, who heads

Interpipe, a Donetsk-based FIG that owns three pipe producers:

Nizhnedneprovsky (Ukraine’s largest), Nikopol stainless pipe works,

and Novomoskovsky.

Interpipe has increased sales in central Asia and the Middle East this

year. Its only serious rival in pipe production is the IUD, which is

targeting the Russian market with large-diameter pipes made at

Khartsyzk. IUD vice president Aleksandr Pilipienko says that upgrading

Khartsyzk is “our first priority”, and that $80 million will be

invested there in the mid term.

Pilipienko believes that the steel industry is “as transparent as it

needs to be”, since no foreign equity investment is in prospect. But

strategic foreign players now have a significant presence. The pioneer

was steel trader Mohammed Zahoor, whose Istil group now runs a

mini-mill in Donetsk that last year received a $25 million EBRD loan,

the bank’s first to the sector.

North-American-based Ukrainians are moving in too. Midland Resources,

a metals trader headed by the Canadian-Ukrainian Alex Schneider,

indirectly controls the Zaporozhye works, Ukraine’s fourth-largest

steel maker. Texas-based Michael Bleyzer’s venture capital group has

snapped up a small pipe plant at Makeevka.

Ultimately the pressure for greater transparency and corporate

governance standards will be driven by the need for investment in

mostly aging capital assets. The commercial banks will be the first to

demand higher standards, says Christopher Bachofen, who buys Ukrainian

steel for Stemcor, a major European trader. “A year ago, the idea of

trade finance deals for many Ukrainian producers would have been

laughed at. Now several banks are considering them seriously. This

time next year, this could be an active market.”

Dutch and Austrian banks have tested the water. ING has worked with

Ilyich, Fortis with Zaporozhye and Raiffeisen with Kontsern Energo’s

Donetsk metal works. Bachofen says: “It’s only going to be short-term

export-related deals to start with. Before there is any money for

investment, there will have to be a sea change on transparency and

corporate governance.”

But it’s a question of when, rather than whether. Schneider of

Midland Resources says: “In the long run, all the owners have

everything to gain by transparency. It’s an essential step towards

accessing finance and developing the industry.”

Ownership in Ukraine’s steel industry

Production of steel in tonnes

STEEL WORKS

Linked to the Industrial Union of Donbass and its partners

Azovstal – 25% owned directly by IUD

(2002 proj’d) 4.4 m t

Alchevsk – 18% owned directly by IUD. (Sokrat-info news agency reports

ownership of 32.5% IUD, 32.5% Interpipe, 25% + one share Lugansk

regional administration, 10% others.)

(2001) 2.89m t

Energomashspetstal – a business partner of IUD

n/a

Kramatorskii – a business partner of IUD

(Capacity) 173,000 tpy steel, 496,500 tpy pig iron

Yenakievsky steel works – controlling stake owned by Danko

(2002 proj’d) 1.2 t

Donetsk metal works – 62% stake owned by Kontsern Energo

(2001) 840,000 t

Linked to Privat Bank group

Dnepropetrovsk (Petrovsky) metallurgical combine – de facto controlled

by Privat Bank group, according to TACIS and press reports

(Capacity) 1.23 million tpy

Zaporozhsky steel rolling mill – controlled by Privat Bank group,

according to press

n/a

Konstantinovsky – controlled by Privat Bank group, according to press

n/a

Controlled by other Ukrainian owners

Ilyich (Mariupolsky metallurgical combine) – 87% owned by Ilyichstal,

an employee-owned company headed by general director Vladimir Boiko;

6% portfolio investors; 4-5% free float

(2001) 1.3 m t

Dneprospetsstal – controlling stake owned by Metallurgia group

(2001) 50,000 t stainless steel, 260,000 t alloy steel (excluding

stainless), other alloys

Donetsk metal rolling works – controlling stake owned by trading

companies headed by Igor Andreev

(2001) 156,000 tpy

Foreign-controlled

Zaporozhstal – controlled indirectly by Midland Resources of Canada

(2002 proj’d) 3.75m t

Istil Donetsk – owned 99.9% by Istil Group of the US, 0.1% by Metals

Ukraine

(2001) 749,000 t

State-controlled

Krivorozhstal – 100% state-owned

(2001) 6m t

Makeevka works – 60.89% state-owned

Capacity 1.2m tpy

Dnepropetrovsky Komintern– 60% state-owned

n/a

Dneprovsky (Dzerzhinsky) – state controlled, state stake managed by

Ukrsibbank

(2001) 3.85m t

PIPE PRODUCERS

Linked to the Industrial Union of Donbass and its partners

Khartsyzsky – 76% owned directly by IUD

(2001) 300,000 t, including 135,000 t of large diameter pipes;

(capacity) 1.6 m t

Dnepropetrovsk – 21% owned directly by IUD

(Capacity) 700,000 t

Controlled by the Interpipe group

Novomoskovsky – controlled by Interpipe

(2001) 140,000 t

Nikopol pivdennotrubny (including subsidiaries Niko tube, Nikopol

stainless tube, Yuvist, Trubolit) – controlled by Interpipe

(2001) 300,000 t; capacity 1.6 m t

Nizhnedneprovsky – controlled by Interpipe and related entities

(2001) 600,000 t

Lugansk tube works – controlled by Interpipe

n/a

Foreign-controlled

Makeevsky tube casting works – owned 75%+ by Sigma-Bleyzer group

n/a

Source: companies, unless otherwise stated.