Austria's leading metallurgical company, Voestalpine, is considering Ukraine as the site for its upcoming project to build one of Europe's biggest steel-producing mills.
Voestalpine intends for the mill to produce more than 5m tonnes of steel annually. If built in Ukraine, it would account for 12% to 15% of domestic production, according to Andriy Gerus, an analyst at Kyiv investment bank Concorde. At that capacity it would rival the largest steel mills in the country. Currently, the leading Ukrainian steel producers are Arcelor Mittal, Azovstal and Illich Metallurgical Plant.
Claus Geiger, a spokesperson at Voestalpine's headquarters in Austria, said the company would make its final decision by the end of the year. Currently, Voestalpine is considering a number of locations in the Black Sea region, including Romania, Bulgaria and Turkey.
If Ukraine is selected, the multi-billion-dollar proposal would be the nation's single-largest "greenfield" investment and would have to be built completely from scratch.
Ukraine is well-endowed with deposits of coal and ore, used in steel production, and is situated close to key markets such as Europe and the Middle East, enjoying good transport lines via railways and Black Sea ports. Industry experts agree that Ukraine is an ideal location for raw steel mill production.
"Neither Romania nor Bulgaria can offer such excellent conditions," Stepan Selyverstov, an analyst at the Kiev-based consultancy firm Prometal, told local media.
"It will be much more expensive to produce steel in Bulgaria or Romania. The prices for electricity, gas, and raw materials would be between one and half to twice as high," he added.
In early March, Ukraine's Deputy Industrial Policy Minister Serhiy Hryschenko confirmed that Voestalpine had expressed interest in purchasing land for the project near the Black Sea port city of Odessa.
"No decisions whatsoever have been made," Voestalpine's Geiger emphasised to local media. "We want to gain a complete view, particularly on the investment costs and profitability of such a project."
Ukraine was the eighth-largest steel producing country in the world 2007, according to statistics provided by the International Iron and Steel Institute. Its ranking could soon see a boost as its recent accession to the WTO will likely have a positive impact on the industry.
"In principle, the balance of gains is rather positive for the country and the economy as such," Igor Burakovsky, director of the Kiev-based Institute for Economic Research and Political Consulting, explained to local media. "But at the same time, WTO membership means the liberalisation of the Ukrainian trade regime, the suspension of import duties, and an increase in foreign competition for a number of sectors."
Currently, Ukraine is the third-largest exporter of steel in the world, even though the country is faced with strict quotas in terms of the amount of steel that can be sent to the EU countries. Analysts expect the steel industry to benefit in particular by the lifting of export quotas as part of WTO membership.
However, in order to maintain its global competitiveness, steel producers in Ukraine will need to implement modernisation programmes aimed at lowering costs. Ukrainian companies lag far behind their Russian counterparts in terms of methodologies, equipment and technical capability, and serious investment is needed. More specifically, with rising natural gas prices, businesses will be forced to introduce energy-efficient technologies.
Steel producers will be actively looking for partners as they raise funds for such projects, though this will not be an easy task, as many organisations have already borrowed heavily in securing their supply chains through mergers and acquisitions activities. Ukraine's Industrial Union of Donbass, however, one of the country's leading steel producers, was able to secure a $350m long-term financing package from the International Finance Corporation (IFC), a private-sector arm of the World Bank, in February of this year.
Overall, the global demand for steel is likely to grow in 2008. Despite the US housing slump, construction sector is high, especially in rapidly developing regions such as the Gulf. In January there was a 4.9% increase in global crude steel production as compared to the same period last year, according to the International Iron and Steel Institute.