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Ukraine: Donetsk Steel Mill Forges Ahead

Kyiv, 4 February 1998 (RFE/RL) -- Conventional wisdom has it that managers of Ukrainian enterprises must thoroughly re-educate themselves in capitalist ways, before foreign investors will come up with cash. But, the recently privatized Donetsk Iron and Steel Works (DISW) enterprise has found another way.

The steel it makes is in demand around the world. After coming through the Soviet collapse in better shape than most other steel mills, DISW now has a foreign backer helping it plan for the future.

The mill has been operating for more than 100 years. The present directors took over in 1994, when enterprise after enterprise in Ukraine's 'smokestack sector,' was going under. Immediately after independence, DISW not only kept afloat, but thrived by supplying enterprises throughout the CIS.

Geography helped DISW. The iron ore, coke, pellets, concentrates, and refractors needed to convert iron ore into pressed sheets and rolled pipe are available in abundance in surrounding regions of Ukraine. That meant that, when CIS borders went up and customs duties were imposed, DISW did not need to pay customs duties to import raw materials. Just about the only input that the Ukrainian steel industry in general, and DISW in particular, have lacked in recent years is power. The situation was stable until 1994, when the state began phasing out electricity subsidies. About the same time, hyper-inflation hit. That meant that, not only did the company have to draw down its financial resources to maintain production, but the economy in which it operated was thrown into chaos.

Imposition of new tariffs and VAT in CIS countries cut into earnings as well. Worse still, smaller operators in the West began to complain about the volume of cheap Ukrainian steel pouring into their home markets. European and American politicians began talking about 'level playing fields,' and 'dumping.'

The approved business school solution in 1996 would have probably been to sell the lot, downsize 80 percent of the employees, and either open a smaller, more efficiently mill, or invest capital resources into government Treasury bills. But, since at the time, the government owned DISW, liquidation was not an option for top managers.

Ukraine's State Property Fund (SPF) has applied several approaches toward converting a government company into a private one. Usually, the bigger the company and the more likely its product could have a military application, the larger the stake the SPF orders the government to maintain. DISW qualified on both counts for a large government stake.

In 1996, the SPF handed down a privatization decision for the plant, under which ordinary citizens got 40 percent of shares and the government 20 percent. The remaining 40 percent went onto the market as a single-share bloc. And, the competition winner was Autoaliance-Doverie, whose majority shareholder is British MetalsRussia Ltd. For 50-million dollars, the Hong-Kong-based steel manufacturer and trader got 40 percent of the Donetsk works. Already a provider of investment money for Russian steel plants, MetalsRussia has, so far, pumped nine-million dollars in equipment and 17-million dollars in operating capital into DISW.

The task for both DISW and MetalsRussia management has been to find an international market niche for a large-capacity steel factory, relatively inefficient in energy and raw materials usage. The restructured enterprise altered its approach to foreign markets, with a focus on export to Southeast Asia. Manufacturers in places like Singapore and Bangkok, who have no domestic steel industries to protect, want cheap steel.

One portion of the MetalsRussia cash investment is going into machines to make Donetsk steel more marketable. But besides making better steel, DISW must make its product cheaper, which, above all, means reducing the energy cost per ton of steel. Smaller Western mills make competitive steel largely because their energy costs are relatively low. Such an operation in Ukraine would not only throw a lot of workers onto the unemployment line, but would also put miners of raw materials out of work.

So, part of MetalRussia's investment has gone into energy-saving projects, like overhauling and upgrading DISW's Electric Furnaces. The leaves the problem of finding markets for DISW's cheaper, better-quality product.

A global company, with steel interests worldwide, MetalsRussia, through its parent company Sakhavria Group Thailand, has opened up an existing market for DISW products. Owning factory shares in sites like Pakistan, Russia, India, and Ukraine, the foreign interest links DISW's products into the international market for steel. In theory, the future for DISW, and firms like it, looks rosy. The product is competitive. Foreign capital has been tied into domestic manufacturing. Salaries are paid on time. The Ukrainian government is interested in the company's success.