Akhmetov's New "Irons in the Fire"

Metinvest is switching to a new price-setting formula for iron ore with its Ukrainian contractors.

At the beginning of the year, the Ukrainian mining and smelting industry sadly marked its third year of domestic prices of iron ore raw materials being pegged to world prices. As a reminder, in 2008 the country’s largest mining and smelting company Metinvest announced the signing of 3-year agreements with its contractors that do not produce their own ore: Illich Steelworks, Zapor-izhStal and the Donbas Industrial Union corporation. Ukrainian companies thus followed in the footsteps of the foreign colleagues and agreed to fix long-term contracts

Moreover, it was expected that the prices would be adjusted based on an agreement between Asian steel producers and the Big Three iron ore producers in the world - Rio Tinto, Vale and ВНР Billiton. The decision looks like crucial for Ukraine’s domestic metallurgy.

Six months later the world economy plunged into chaos and the metallurgy market went through a global recession. Metallurgical companies were forced to continue to purchasing raw materials without selling any end products. A year after concluding the agreements, the parties thereto approved supplementary agreements and temporarily returned to the initial monthly price adjustments.

But it was too late as not a single partner of Ukraine’s richest iron ore producer managed to pull out of the crisis with the previous this price and the US $8-10 per tonne premium of Metinvest will be tacked on to the price. The plans call for price adjustments on a quarterly basis. DIU and DonetskStal have allegedly agreed to the new price setting policy. "A new long-term contract was resigned envisaging the consumption of fixed volcomposite of shareholders. According to «k:» sources, starting from the beginning of the year relations between Ukrainian steelworks and Metinvest entered a new stage.

To a certain extent, the talk is about a variation of the initial agreement. The cost of a tonne of iron ore concentrate on the domestic market will be equated to the average price at which Chinese metallurgists receive ore from Australian and Brazilian deposits in their ports. The cost of transportation will be deducted from umes and setting a fixed price pegged to the production cost of iron ore raw materials for the largest producers ," the press service of DIU informed, not specifying, however, when the new contract was signed.

Representatives of DonetskStal did not specify their relations with suppliers, noting only that the company currently receives iron ore raw materials on spot contracts. Meanwhile, experts believe that such a form of cooperation will make non-integrated steelworks less competitive. If the price of steel production increases, Ukrainian steelworks (with the exception of companies owned by Metinvest) will be forced to supply to certain markets only semi-finished products, because Asian metallurgists will offer more attractive prices in the segment of finished products.

"Potentially, supplies to Southeast Asia could become unprofitable. However, there are also similar attempts to link to the Chinese price on the Russian market and it is totally possible that the CIS will be switching to a similar principle of price setting. In addition to that, world metallurgical companies are already trying to switch to monthly prices depending on the import price of Chinese products. This could substantially influence the positions of Korean, Japanese and European companies. This is why at the moment it is virtually impossible to calculate the balance of the strength of metallurgists on the market in the long run," believes Oleksandr Makarov, an analyst at Dragon Capital.According to his assessments, if the information about the new price-setting policy is correct, the price of iron ore concentrate for Ukrainian companies could grow to US $120 per tonne.

Meanwhile, Vice President of RCG AG Oleksandr Syryk points out that any transparent rules of the game are in principle good for the market. "The key benefit of such contracts is that with a transparent formula, consumers and suppliers of metallurgy products can calculate their economy and plan their capacity loads," says the expert. At the same time, there are too many unplanned factors such as conflicts in Africa and the Middle East and the natural disasters in Japan that dealt a serious blow to the global metallurgy market. For this reason, one can only say with a certain degree of certainty that the profit margins of metallurgical companies will be lower than the output indicators of mining and vertically integrated companies. And this means the latter will continue accumulating funds for subsequent acquisitions of less successful competitors.