OREANDA-NEWS. In 2012 the performance results of the mining and metals sector were much worse than expected. For the first time over the last decade the aggregate losses of national metal companies made UAH 4.9bn. According to the Ministry of Industrial Policy in 2012 all metal companies of Ukraine demonstrated a serious decline in production and financial performance.

Experts say that the companies controlled by foreign investors were hit the most. According to Petr Burkovsky, an expert of School of Political Analysis at the National University Kyiv Mohyla Academy, ArselorMittal Kryvyi Rih finished the year with a loss of UAH 2.9bn. "This can be regarded as a twofold drop as in 2011 the plant generated a net profit of UAH 2.1bn. EVRAZ DMZ Petrovskogo, which is a part of Evraz Group, is the worst performer as it suffered the biggest loss per tonne of steel in the industry. The major reason behind the loss is an unjustified expectation of investors to get benefits and state aid as well as a lack of long-term investment programmes to modernise production."

The situation got worse as management mistakes were combined with unfavourable situation in external markets. During Q2 and Q4 prices for steel, iron ore and coal in the key markets were going down while the cost of distribution rose as a result of an increase in railway tariffs. At the same time the government failed to come to agreement with Russia to reduce the price for natural gas; and the plans and efforts to diversify and develop non-conventional gas remain on paper.

SCM, the largest industrial holding of Ukraine, has also encountered the problems. According to SCM's financial statements audited by PricewaterhouseCoopers, over the last year SCM's net profit has reduced from USD 3.2bn to USD 1.75bn. Senior managers of Rinat Akhmetov's holding explain that this was not only the result of the recession in key markets but is also connected with higher volume of investments in production upgrade. According to SCM CEO Oleg Popov, in 2012 the Group allocated over USD 2.2bn to upgrade production and USD 800m to implement social programmes and projects for communities where the Group's assets are present.

Experts believe that such an extensive rise in the long-term expenditures is risky as the demand in international markets is weak and credit resources are getting more and more expensive. At the same time, they say that the only way out in the situation is to place a stake on modernisation of production facilities inherited from the Soviet times. "The Soviet industry was wholly subsidized and could develop only amid the state-run management of labour and financial resources, cheap energy and guaranteed sales markets. Today we witness the dismantling of the last elements of this system, in particular, reduction of all forms of support from the government, including tax benefits. Thus, the recession will make large owners either modernise their businesses, which is risky, or shut them down, which is more profitable in terms of cost minimisation," believes Petr Burkovsky.

Based on 2012 performance, SCM is the only large financial and industrial group that can take the modernisation risks amid the ongoing economic downturn. Thus, last year the holding started constructing an industrial gas production facility at Yenakiyevo Steel Plant in partnership with the French company. It is expected to help reduce energy costs by 30% and cut polluting emissions. Zaporozhstal commissioned a new sintering machine that cuts harmful emissions released by the plant by 10%. Azovstal and Ilyich Steel plants started reconstructing their sinter facilities. Following the upgrade of electric filters at Zuyevskaya TPP run by DTEK dust emissions were reduced sevenfold, and now the level of allowable air contamination meets the European standards.

"Reinvesting profit in development of assets is a reasonable step today as it suggests that the Group understands global trends of business development," says Honoured Economist of Ukraine Viktor Lisitsky. "The company is reinforcing its production facilities when the global markets remain unsteady. But the recession will be over sooner or later, and the businesses that are better prepared for operating in new conditions will dominate the market. Today's investments in modernisation will have an economic effect in the next 5-10 years."

Despite the pessimistic projections in international markets, many SCM's mining and metals businesses directed their profits earned in 2012 to modernisation projects, which will help SCM to continue running their environmental activities.

It is pertinent to remember that investments in production upgrade underlay the policy of the European Union in 1950-1960s. They created the basis for stable economic growth and welfare of the EU countries. Despite the downturn, today Europeans continue to actively invest in science and development of cutting-edge technologies and production facilities. Hopefully, the Ukrainian businesses following the path of modernisation will be able to provide European lifestyle for their employees…