Opinions Industry protectionism 16 January 2020
In 2019, Ukraine’s mining & metals sector lost profits worth $2.8 billion due to negative factors
In November 2019, the Ukrainian steel industry produced the lowest volume of steel throughout the history of the country’s independence. This anti-record will be updated already in December.
In its recent statement, Ukrmetallurgprom projected that in 2020, steel production in Ukraine will decline from 21.1 million tons to 20.5 million tons, or by some 3%. This is a serious recession.
In this regard, the media representatives have repeatedly asked us an interesting question, “Is everything really so bad in the sector, or is it an artificial fervor?”
I would like to get the facts straight and draw the attention of both the public and decision-makers to what is actually going on in Ukraine’s steel industry. After all, Ukrainian manufacturers have always been among the most efficient in the world in terms of spending. How could they be down on their luck?
To answer this question, we carried out a survey that identified 10 factors that had eroded the competitiveness of Ukrainian steelmaking companies in 2019. We estimate the cumulative impacts of all the 10 factors at $2.8 billion, manifested in either lower incomes or higher spending.
The main one is a decline in steel consumption and prices in Ukraine’s key markets, which caused losses of some $1.8 billion. This is a market factor. It is understandable. The sector is cyclical and market recessions occur every 5–7 years. Companies are ready for this. Though, when market recessions coincide with an increase in tax pressure, a rise in tariffs for services of natural monopolies and so on, the domestic industry suffers much more than our main competitors.
Say, according to the World Steel Association, global steel production fell by an average of 1% in November. This is the impact of market factors. In Ukraine however the fall was much deeper, minus 20%. This is the impact of both external and internal market factors.
Here one may argue that domestic steelmakers were initially competitively weaker compared to their foreign rivals, but in H1 2019, despite numerous negative trends, positive dynamics were observed in our country. Ukrainian companies were among the fastest-growing global steel producers after China and Egypt on the list of top 20 manufacturers. China’s growth was due to powerful incentive programs and Egypt progressed due to tough protective measures, whereas Ukraine succeeded due to competition in export markets. The impacts of some negative factors, including internal ones, became obvious in H2. In actual fact, the sector’s competitiveness was artificially restricted. The point here is not so much about short-term losses, but limited investment opportunities and the likely loss of positions in the strategic race for competitiveness.
To understand the extent of the impacts of internal factors, it is enough to take a look at the problem of protectionism. The amount that Ukraine lost this year because of this problem is $100 million. This amount is the same as that lost due to a rise in railway freight rates. In other words, only one of the internal factors has the same extent of impact as the global problem. In fairness in must be said that losses from protective measures will have more serious implications next year, estimated at least at $350 million.
Perhaps not everyone understands the seriousness of the situation, but the industry also suffered a $390 million damage because of the revaluation of the hryvnia — in the form of an increase in spending denominated in U.S. dollars. This is without regard to a decrease in sales and production that we lost due to an increase in the cost of our products. Of special importance is the fact that all this happens amid a smooth depreciation in national currencies of our main competitors against the dollar. If Ukraine loses markets, others will definitely use its problems for their own benefit.
Another interesting fact is that the unstable political situation and an anticipated escalation of political struggle in the year of election (presidential and parliamentary) made the business ‘hold off’ investment. As a result, the domestic market for metal products contracted, from 0.5% to 10% according to different estimations and by different products. Hence, we estimate the ‘monetary’ damage to the industry because of the above reasons at $70 million. This is the price we paid for escalating the political situation. This is probably a minor example, but in terms of the entire economy, the consequences are much more serious for both the business and people.
As seen from the above examples, a number of challenges are associated with market factors that Ukraine cannot influence. Nevertheless, there are also negative trends, directly linked to the state policy. What is meant are the growing tax burden, political instability, tariff hike, hryvnia revaluation, and the like. There were also geopolitical risks, which one way or another depend on the leadership of our country. According to our estimates, internal factors inflicted damage on the sector worth $635 million. This could have been avoided.
Is it worth testing the sector to destruction? I am not sure.
Initially published on Liga.Net