On Friday, April 5, a law enacted in Ukraine increased the export duty on scrap metal from € 42 / t to € 58 / t. How will this regulation affect foreign trade in scrap metal, will domestic consumers benefit from new export restrictions, how many companies will remain on the scrap market. GMK Center correspondent talked about this and not only with Konstantin Bass, Chairman of the Supervisory Board of UKRMET, the country's largest scrap procurement group.
What are the implications of an increase in export duty of up to € 58 / t for your company and for the industry as a whole?
- First of all, I want to remind you that this is not the first increase in export duty over the past three years. In September 2016, it was raised from € 10 / t to € 30 / t, in June 2018, to € 42 / t. And now - up to € 58 / t.
This suggests that ferrous scrap, in fact, is behind the iron curtain. Today it is not possible for an exporter to purchase scrap metal on market conditions and sell it to foreign markets. This means that all the scrap metal collected in Ukraine will remain inside the country and be sold to the domestic consumer.
What is this confidence based on?
- When the export duty increased from € 10 / t to € 30 / t, we curtailed all our operations through seaports. They stopped selling scrap ferrous metals to Turkey, Greece, Poland. And a significant part of reoriented sales to the domestic market.
The current duty of € 58 / t is generally a 100% ban on the sale of scrap to foreign markets. Because of this decision, export deliveries have finally lost their economic feasibility.
But after all, can the domestic market grow as a result?
- With a duty of € 58 / t, the domestic consumer will get even more opportunities to reduce purchase prices.
Turkey is now the largest buyer of ferrous scrap in the world. Americans, Canadians, Dutch, French sell their scrap to the Turkish market. Today, Turkish steel makers buy scrap by large vessels at a price of $ 320 / t on CIF terms.
And Ukrainian consumers of ferrous scrap, for example, due to the presence of export duties, buy the same scrap metal from the Ukrainian market at a price of $ 260 / ton. The difference is about $ 60-70 per ton. This is the difference in cheaper raw materials due to export duties.
At the same time, the Turkish electric steel plants today have the same production technologies as the major Ukrainian metallurgical companies. For example, the Italian Danieli furnaces are installed at some Ukrainian steel mills, the same furnaces are used at Turkish steel mills. But raw materials for the Turkish processor is more expensive.
And under what conditions will your company be profitable to work on the domestic market?
- Our company now, as, incidentally, five, seven, ten years ago, is the largest supplier of raw materials to the domestic market. Today we are the general suppliers of ArcelorMittal Kryvyi Rih, Metinvest-Resource, Interpipe. We constantly work with such enterprises as Zaporizhstal, the Mariupol Metallurgical Plant named after them. Ilyich, Azovstal, Dneprovsky Iron and Steel Works, Interpipe, Elektrostal-Kurakhovo. In fact, we have contracts with all consumers of ferrous scrap in Ukraine.
Could you just name the share of export and domestic market in the structure of your company's sales?
- Today, the share of exports is zero. Now we do not export. We left the export market entirely, when a duty of € 42 / t was introduced. The only direction in which we worked with the foreign market from January to May 2018 is the Moldavian Metallurgical Works. There we shipped ferrous metal scrap by rail.
In 2010-2014, before entering the duty of € 30 / t, we worked in all ports of Ukraine: in Odessa, Berdyansk, Nikolaev, Kherson, Mariupol. But today there are no export deliveries.
If we talk about the domestic market, we estimate our share at the level of 30-35% of the total market capacity.
Were there any complaints to the company from the state about the supply of scrap to the Moldavian Iron and Steel Works?
- There were a lot of rumors about the fact that our company supplied scrap during the period of sanctions to the Moldavian Metallurgical Plant. I officially stated that we did not do this. Our company did not sell metal to the Moldavian Metallurgical Works. We did not carry out any illegal actions, and we didn’t have any issues with the government bodies.
Will you supply scrap to Rybnitsa after the lifting of sanctions from the Moldavian Iron and Steel Works?
- We held talks with the Moldavian Metallurgical Plant after the lifting of sanctions on the feasibility and possibility of supply. Today, these negotiations continue. Perhaps we will ship some small volumes, despite such a high duty. If we will deliver, then from the regions closest to this enterprise - Odessa or Vinnytsia region. Maybe some small streams will start next month.
Can you predict how the scrap production structure will change after the introduction of a duty of € 58 / t?
- We believe that, in fact, all the changes have already happened. They occurred back in 2016, when the duty rose from € 10 / t to € 30 / t. At that time, the market was actually reformatted. The biggest players left the ports. There are two players left, net exporters, who have tried to work in the past two years, but their exports have been a negligible share. And then - in periods when the conjuncture of foreign markets was most appropriate. That is, it is twice a year, when exports ranged from 10-12 thousand tons to 15 thousand tons on an annualized basis. It is very small.
However, increasing the duty to € 58 / t will not allow them, even in the spot markets, to work with an external consumer. And I suppose that these two exporters, who have never worked with the domestic market, today are reorienting their capacities. They leave ports, buy scrap processing equipment, open workshops in the south of the country, and will be focused exclusively on the domestic market.
How will this affect the supply of scrap to raw materials? Will they win in this situation?
- Unfortunately, the introduction of a protective tax of € 58 / t will not lead to an increase in scrap metal in the country. Because with each increase in duty, the Ukrainian metallurgist is trying to adjust the purchase price of scrap metal to the export parity by the amount of the increase. This leads to a decrease in scrap collection in the country. Thus, the Ukrainian metallurgist does not receive more raw materials, but only optimizes the cost of the raw materials entering the plant.
There is a good example. Kazakhstan in 2008-2012 was the largest exporter of ferrous scrap. The total capacity of scrap collection in the country reached 6 million tons per year. Since 2012, if I am not mistaken, or since 2011, President Nursultan Nazarbayev of Kazakhstan has banned the export of scrap from the country. And 100% of scrap metal began to flow only to the domestic market. Now in the republic the capacity of the market for collecting scrap of ferrous metals is 3 million tons. This is half that in the period of open export.
The same thing is happening today with Ukraine. When in 2015-2016 export duty was € 10 / ton, scrap collection in Ukraine was about 5 million tons per year. This was enough to provide all the metallurgical enterprises of the country and export volumes at the level of 1 million tons per year. With the introduction of a duty of € 30 / t, and then - € 42 / t, and finally, € 58 / t, we see that the country's scrap collection market last year fell to 3.2 million tons from 5 million tons.
If we analyze the first two months of the current year, we will see that, with a declared demand of metallurgists in January of 300 thousand tons, Ukraine collected 68-70 thousand tons of scrap metal. The deficit amounted to 200 thousand tons. February - the same: the need was 300 thousand tons, the collection - 100 thousand tons. 200 thousand tons is not enough.
Why it happens?
- Because of the export duty, the price level in the country is not enough to increase scrap collection. To date, significantly increased the cost part associated with scrap metal harvesting activities. There is a gradual increase in wages, rising logistics costs, rising prices for energy, oxygen, consumables. and, accordingly, dismantling. The cost of obtaining scrap metal has increased significantly over the past 1.5-2 years.
So it turns out that with the change in pricing in the smaller side decreases the feasibility of this business. Every year we see large, medium, small companies leaving the market. Today, in our opinion, the number of companies involved in scrap metal has decreased at least three times in the last 3-4 years.
But after all, someone enters the market. For example, "Interpipe" develops the downstream blank. Do you feel competition from their side?
- Our company is the largest supplier to the Dnieper plant "Interpipe", and over the past two years we have been a strategic partner of this company. Despite this, we compete with Interpipe in the most metal-consuming regions of Ukraine: in Kharkov, Kiev, Vinnitsa, Zhytomyr, Odessa and Poltava. Here are 6 areas where we intersect with Interpipe in the scrap procurement industry. Yes, we feel the outflow of scrap metal to Interpipe, but this is healthy competition, which leads to increased business efficiency and price parity, which allows us to operate with minimal profitability.
Does your company plan to remain on the market? What do you intend to develop this year? What do you want to invest in?
- Yes, we continue to develop. We invest in scrap processing equipment, buy German material handlers from Fuchs.
Today, the company has 56 scrap processing sites. In the near future we plan to open an additional large area in Lviv. Perhaps another - in Kiev.
Our company, like any large European scrap collector, is trying to build up a fleet of specialized road transport that is designed to move scrap metal around Europe. These are container ships equipped with specialized containers and multi-lifts. Such equipment is the safest and most effective means of moving scrap metal.
Unfortunately, the strategic development plans are limited by the possibilities of the domestic market and the inefficiency of exports under the conditions of such customs duties. We have to rebuild under changing conditions, optimize business processes and increase productivity.
First of all, we strive to save jobs and make plans for the next 3-5 years, with the hope that, nevertheless, our arguments about the reduction of duties will be taken into account, and we will be able to work in market conditions and on equal terms to compete with world scrap collectors.
