Creditors grant landmark loans to steel industry

Two of Ukraine's largest steel producers, Mittal Steel Kryviy Rih and Donbass Industrial Union, are drawing landmark-sized loans to fuel their growth and expand their presence on the global steel market.

The European Bank for Reconstruction and Development announced April 21 that it is lending Mittal Steel Kryviy Rih $200 million "to upgrade technology, boost productivity and help the plant become more energy efficient."

Mittal Steel Kryviy Rih is Ukraine's largest steel producer, with a 20 percent share of the Ukrainian steel market. Last year, the plant produced 10 million metric tons of agglomerate (sinter), 6.2 million metric tons of cast iron, 7 million metric tons of steel and 6.1 million metric tons of rolled iron, approximately the same production volumes as in 2004.

The EBRD said it was making the seven-year loan to Mittal Steel Company, which last fall bought a 93 percent stake in the Ukrainian company, then known as Kryvorizhstal. The EBRD said the "entire sum would be on-lent to the Ukrainian subsidiary,"meaning that Mittal Steel will be borrowing the loan in its Ukrainian acquisition's name.

"By participating in this project, the EBRD is demonstrating its support for a transparent and successful privatization and the introduction of international business management practices in Ukrainian companies," EBRD Business Group Director for Southern and Eastern Europe Olivier Descamps said.

When London-headquartered Mittal Steel bid $4.8 billion for Kryvorizhstal late last year in a repeat privatization tender, it not only paid more than any investor had ever paid for a single Ukrainian asset, it also made Kryvorizhstal’s first privatization, conducted under the presidency of Leonid Kuchma, look like an opaque, backroom deal. During the plant's first privatization in the summer of 2004, business interests belonging to tycoons Viktor Pinchuk and Rinat Akhmetov paid $800 million for the Kryvorizhstal plant. Bids by foreign steel interests were shunned under controversial tender conditions.

Descamps said that the EBRD's $200 million loan would also help strengthen the local economy, increase steel production, improve competitiveness and standards within the country's steel sector, and significantly boost energy savings.

"The latter [energy savings] is especially important, given that Ukraine remains one of the most energy-intensive countries in the industrialized world, and its steel sector needs significant investment to comply with modern requirements of energy efficiency," the EBRD's Descamps said, adding that the loan would additionally reduce the use of natural gas at the Kryviy Rih facility, thus contributing to the energy diversification strategy of Ukraine.

Ukraine ranks as the seventh largest steel-producing country in the world.

The Bank said the loan builds on previous cooperation between itself and Mittal Steel Company, with earlier loans helping the company turn around aging and financially weak plants in Kazakhstan, Romania, Bosnia and Herzegovina, and the Former Yugoslav Republic of Macedonia.

Mittal Steel Kryviy Rih reported net profits of Hr 1.6 billion ($320 million) in 2005, 20.3 percent less than in 2004, against net revenues in 2005 of Hr 11 billion ($2.2 billion), 9.4 percent more than net revenues the year before.

Meanwhile, Donetsk-based Donbass Industrial Union on April 20 signed a credit agreement for $275 million with a consortium of three Polish banks (PAKAO S.A., BRE Bank and PKO BP. S.A.). The loan will be given in two parts - a long-term credit of $200 million and a short-term loan of $75 million - to finance working capital.

A major portion of the long-term credit will be used to fulfill DIU's investment program at Huta Czestochowa, which will allow DIU's Polish steel acquisition to increase production capacity to over 1.2 billion metric tons of flat steel and pipe strip for large-diameter pipes in the oil and gas industry.

"Part of the investment project for the modernization of Huta Czestochowa will be used during the first six months of the current year, when the enterprise puts out sample batches of broad strip. It is planned to use the second part of the project before the start of the construction of the Odessa-Brody oil pipeline extension to Plock, [in Poland]," DIU's press service said at the end of April.

DIU will direct the remaining portion of the long-term loan to finance the purchase of a second slab machine for Alchevsk Metallurgical Plant, based in Luhansk region.

Kyiv-based investment bank Concorde Capital said in its April 25 newsletter that slabs, or semi-finished flat steel products, produced at the Alchevsk plant will be supplied to Huta Czestochowa and further rolled into flat steel and strip and sold on the European market.

The investment firm said that pipe billets produced by another steel mill owned by DIU, Dzerzhynsky Dniprovsky Metallurgical Plant, will also be supplied to Huta Czestochowa to be rolled into pipe.

"This will allow DIU to circumvent quotas set by the EU on Ukrainian value-added steel products and increase production at its Ukrainian steel mills," Concorde Capital said.

In addition to the Polish Huta Czestochowa, the Alchevsk and Dzerzhynsky plants, DIU also controls the Kramatorsk-based Kuibyshev Metallurgical Plant, the Dnipropetrovsk Pipe Plant, the Alchevsk Coke Plant, the Panteleimonivka Refractory Plant, as well as the Dunaferr metallurgical plant in Hungary.

The company Azovinteks, based in Mariupol, and the Donetsk-based company Vizavi each own a 49.99 percent share in DIU. Another Donetsk-based company, Oniks Don, owns the remaining 0.02 percent.

DIU Chairman Serhiy Taruta controls Azovinteks, while former deputy prime minister Vitaliy Haiduk controls Vizavi.

Stephan Ladanaj, Kyiv Post Staff Writer
Apr 26 2006