Steel and mining

No sector has played such an important role in both industry and
stock market as steel and mining. 70-80% hike in steel prices during
1H08 contributed largely to the exports while output volumes have
been up by only 4% in the reported period. Despite lagging behind the
leading producers such as China, Ukraine remained 8th largest steel
producer in the world. Insufficient production inputs in particular
coking coal shortage was one of the core problems for Ukrainian
steel-makers in 2008. As a result, they were forced to increase its
imports and domestic coking coal producers have benefited largely
from demand shock. Iron ore producers and steel plants possessing
large iron ore resource bases have also benefited the most from
immense price hike by 70-85% YTD.

Starting from July 2008 global steel prices began reverting, which has
affected orders of the leading producers. 25-30% drop has been
registered in the most sorts of steel over the last three months.
Shortening in demand has, however, not been significant to affect
domestic plants to decrease their output markedly, or to result in
inventories accumulation. Earnings in the sector grew by 45.1% y-o-y
in 8M08, reaffirming strong positions of Ukrainian steel-makers
despite increase in their production inputs and steel prices reversal.

The following developments are expected to dominate in the steel
sector in 2009:
• Prices are to decline from their peak of June 2008 but will
definitely stay above the last year’s low, thus strong margins of
at least 10% will be supported
• Further modernization of production facilities. In Ukraine, most
facilities in the steel sector are regarded as obsolete. Widescale
modernization has been launched in 2007 by leading
groups as SCM, IUD. As much as 33% of all steel in Ukraine is
made by the open-hearth method, whereas this figure makes
just 2.4% worldwide. Oxygen-convertor steelmaking comprises
56.4%, while electric furnace steelmaking accounts for 9.8% of
production. The reinvested profits of Ukrainian steelmakers are
sufficient to fulfill the needs in modernization for the
subsequent years.
• Domestic demand will gain even a higher importance as
machine-building industry will keep its growth pace in 2009,
construction sector will grow at the cost of infrastructure
renovation within Euro-2012 framework and pipe industry will
rebound from negative output dynamics of 2008. In fact, steel
sector’s reliance on exports is diminishing as the overall
proportion of exports in GDP.