Cheap energy, namely gas, has been
Ukraines strongest lure since the break-up of the Soviet
Union. Businesses and homeowners alike have enjoyed prices that
are a fraction of the cost paid by the rest of Europe.
The countrys close relationship with Russia has yielded
cut-price energy in return for a route into the European market
with some 80% of exported gas passing through Ukraine. It is a
basis on which the countrys economy is built.
Ukraine has been the envy of its
closest neighbours for years: domestic gas is 13% the cost of
Polands and 11% the cost of Slovenias.
Many energy intensive mineral
industries have benefited from this haven such as titanium
dioxide (TiO2), silicon carbide, and soda ash, but
with cracks beginning to show, such as last years
face-off with Russia over a $2.4bn unpaid bill, many are
concerned about the long term stability of the country.
Gas prices are unstably
low, said Sergei Voloboev, director of emerging markets
at Credit Suisse.
Many problems in Ukraine are
man-made. The gas dispute with Russia could have easily been
avoided but it wasnt.
Low cost energy and rich mineral
resources have been major assets on an attractive portfolio for
foreign investors into Ukraine. The country has a wide spectrum
of active producers from ball clay to silicon carbide to
feldspar and is host to some of the biggest names in the
industry such as SCR-Sibelco NV and Imerys SA.
Strategically positioned to serve
both growing east European, Russia and west Asian markets,
Ukraine has become an important raw material supplier to
ceramics, glass, paint and steel industries.
Gas pipelines sweep accross Ukraine and into
the European markets; Russias Gazprom is the
Major active players
Sibelco, the worlds second largest diversified industrial
minerals group, has four operations in Ukraine mining a total
of 1.5-2m. tonnes of minerals.
Its biggest operation is Donbas
Clays which has a capacity of 1m. tpa of ball clay and is
located in the Dobropolye district of Donetsk oblast. Industry
estimates put production at Donbas down by around 20% last
year. The company also makes composite materials for the tile
The silica sand and flour j-v with
NovoGOK is its second biggest mine with a 500,000 tpa
Sibelco also produces 30-50,000 tpa
of raw kaolin from Zhezhelev, while Donbas Prepared
Bodies a ceramic raw material processing plant has a
capacity of 25,000 tpa.
Ball clay consumption has
significantly improved recently, according to the company, with
domestic consumption on the rise again.
Demand from export markets in the
areas that Sibelco sells into were believed to be down up to
50% in 2009. Major consumers such as Spain and Italys
ceramics industries had and are still struggling in the face of
cheaper eastern European and Asian products entering the
Italy, despite this, remains a key
consumer of Ukrainian minerals and while demand from Spain has
fallen, the market still remains significant.
The Middle East-North Africa
region, which is seeing a boom in mineral consuming
industries particularly in construction materials and
basic ceramics is also thought to be a significant future
prospect for Sibelco.
While Sibelco has enjoyed success
in Ukraine, it believes that present mining legislation could
be more investor-friendly.
Denis Gordienko, manager of Donbas
Clays, told IM: Industry leaders such as
Sibelco, Imerys, AKW, Knauf, and Lafarge are successfully
operating in the country, however mining permit regulations and
land code remain very complicated for international
Positive changes in the
countrys mining and land legislation would certainly
attract more investment into the sector serving industries such
as steel, construction, agriculture, glass and ceramics that
are essential for the Ukrainian economy, he added.
Processing ball clay at Octyabrskoe in the Donetsk
region produced by Sibelco-owned Donbas Clays
Ukraine Minerals Ltd (Umin) is involved with a wide variety of
minerals in the country that include kaolin, ilmenite, rutile,
kyanite, silimanite minerals, zircon and foundry and glass
Its assets have been inherited from
when it was part of mineral and chemical trader DVS Co. Ltd
which was heavily involved in Vilnohirsk Mining &
Metallurgical Plant (VMMP). The company is one of the
countrys biggest mining operations producing a raft of
minerals, predominately ilmenite and rutile.
Umin has also taken the Prosyana
kaolin mine under its control and plans to exploit another
deposit with a higher kyanite content.
Soda ash demand in Ukraine fell by 35% last year following a
collapse in European demand as the glass industry curtailed
production. Some of the countrys major
producers Crimsoda and JSC Lisichansk Soda saw demand
from Russian, its biggest customer, demand drop by 14%.
This was the biggest hit for
domestic producers of the glass and detergent mineral because
Russia accounted for 40% of its exports in 2008. Looking at
this in figures, 40% or 200,000 tonnes of Ukrainian soda ash
was consumed in Russia out of a total export figure of 500,000
Other significant export markets
for Ukraine are Italy and Belarus.
It is important to note that
Ukraine export figures for 2009 are yet to be released but
output is expected to be more in the region of 300,000 tpa.
Crimsoda, owned by The Ostchem
Group (see TiO2 uncertainty) the same
company which owns titanium mining operations, is located in
the north of the Crimea peninsula at Krasnoperekopsk, while its
counterpart JSC Lisichansk is close to the town of the same
name in the Luhanska oblast.
There has been much uncertainty over the future of titanium
minerals mining in Ukraine following last years
cancellation of licences to mine the Irshansk and Volnogorsk
deposits in the countrys north-east and centre,
The mines are one of Europes
leading sources of the TiO2 feedstock minerals
ilmenite and rutile. The two have an average annual output of
500,000 tpa of all minerals with the Irshansk mine accounting
for the vast majority of ilmenite and around 60-65% of
Ukraines total output.
The focus of the Volnogorsk mine is
on rutile and zircon which makes up the remaining 30-35% of
The Ostchem Group, owner of the
mining operations at these two locations, revealed to
IM that the reasons behind the dispute were
personal between the then prime minister, Yulia Timoshenko and
an unnamed shareholder of the company.
Mining was halted immediately at
the onset of the crisis in 2009, but has since resumed with a
temporary licence granted. In the interim period traders and
users of the TiO2 feedstock minerals were scrambling
for other sources in Africa and Australia.
Oleksiy Fedorov of Ostchem told
IM: Discussions concerning legitimacy of
the rent had neither economical nor legal basis, but had
political character that was caused by the personal hostility
of the former prime minister Yulia Timoshenko to shareholders
of the Ostchem Group.
At the moment there are no
problems between Ostchem and state structures concerning the
Irshansky and Volnogorsky mines, said Fedorov.
The main [priority] for
Ostchem is that present dialogue with Nikolay Azarovs
government does not have any influence on working capacity and
development of the mines, he added.
The two parties are yet to come to
a resolution despite a new government being in place since
early 2010. In fact, according to industry experts, the new
regime has supported the stance of the previous government and
many believe the titanium minerals mining operations will come
under full state control soon.
It is important to note that while
Ostchem owns a 50% stake in these operations, the government
owns 50% plus one share and the overall majority critical in a
vote on its future (See IM August 2010, p.16: Former PM blamed for Ukraine
TiO2 doubts, for a further
Pigment production in Ukraine is
from Crimea Titan on the Crimea peninsular and JSC Sumykhimpor
in the north of the country.
Crimea Titan is the biggest
producer with a 90,000 tpa sulphate capacity while Sumykhimpor
has a 40,000 tpa capacity. Both companies are state-owned but
Sumykhimpor is looking at options which include
In 2009, Sumykhimpor only operated
at half of its capacity owing to ineffective manufacturing
There has been little international
interest in the producer so far with the only interested party
at the time of press thought to be domestic investor, Dmitry
Mining ball clay at Donbas Clays by Sibelco is
as simple as scooping it out of the ground such
is the quality.
Kaolin is one of Ukraines most widely produced industrial
Production is clustered in the
Dnipropetrovsk and Vinnytsia oblasts as well as JSC Mineral in
Zaporozhskaya and State Company Kirovogradskoye RU in
Ukraine exports the vast majority
of its production and in 2008, 712,000 tonnes passed through
its borders. Again, Russia was the biggest consumer with
260,000 tpa purchased while Turkey and Spain were second and
third respectively, sourcing a key raw material for its
France-based Societe Kaoliniere
Armoricaine (Soka) is a more recent entrant in to the Ukraine
kaolin industry. The company is mining the Plast kaolin deposit
which produces raw material for brick, tile and cement
Soka is looking to supply the
ceramic industries with Plast kaolin and has green lit a
refining plant to wash and refine the raw material to a
suitable ceramic grade.
Soka managing director, Philippe
Delaporte told IM: The reason why we
want to build a washing plant is to be able to supply refined
kaolin for the ceramic industry made at a European standard but
at a Ukrainian cost.
Our targets are the ceramics
industries in former Soviet Union countries and east Europe.
Many of these manufacturers are owned by European groups that
want to find a certain level of quality [of raw material close
by], he explained.
The plant is expected to have a
total output of 75,000 tpa ceramic grade kaolin and will be
constructed in 25,000 tpa steps.
Other mineral highlights
Zavalyevsky Graphite Complex is Ukraines sole producer of
natural graphite based near Kirovograd in the
centre of the country.
The company has capacity to mine
and process 60,000 tpa of 85-99.97% C natural flake graphite
but explained to IM that production is well
down owing to the drying up demand from Russias steel
industry which drives refractory raw material consumption.
Production in 2009 was estimated to
be 11,000 tonnes.
Export figures from 2008 show that
9,000 tonnes of graphite was sold abroad, 93% of which went to
Russia. The country imported a small amount, 1,260 tonnes, 65%
of which was from China, the worlds biggest low cost
Silicon carbide and brown
fused alumina production in Ukraine comes from Zaporozhsky
Abrazivny Kombinat. The company based in the centre of the
country has a combined production capacity in excess of 90,000
Czech Republic is the major market
for exported silicon carbide for abrasive and refractory
markets. In 2008 exports to its neighbour accounted for 30% of
the total around 8,000 tonnes from 23,0000 tonnes. Italy,
Germany and Russia were also major end users.
French group, Imerys SA has owned
calcined clay producer, Vatutinsky Kombinat
Vognetryviv, gaining a controlling 86% stake in 2007.
Vatutinsky is a specialist in low
and medium alumina content chamottes (calcined clay), for
refractory sectors, and mainly serves the east European
markets, including Ukraine and Russia.
Bentonite JSC is responsible for
the bulk of Ukraine bentonite output and also
produces perlite and zeolite.
Over-reliant on cheap gas
Ukraine must learn lessons from Moldova: this was the warning
from Credit Suisses director of emerging markets, Sergei
Moldovas addiction to cheap
Russian energy after the fall of the Soviet Union in 1991
resulted in its economy failing dramatically Russia
essentially turned the tap off, closing or drastically
restricting supply lines.
Over the course of the next seven
years, energy availability plummeted, production all but ceased
and the wheels on the Moldovan economy stopped turning, yet the
country refused to cut its ties with Russian supply and seek
out other sources.
Today, Moldova is the poorest
country in Europe in GDP terms and the pre-decline similarities
between it and Ukraine are stark.
While Moldova is a beautiful
country with beautiful people and tasty wine, it is an economic
failure, said Voloboev.
Ukraine cannot afford to be a
Moldova and, unless something changes, it is presently on
course to be one.
Cheap energy underpins
Ukraines minerals industry. Companies are attracted to
the country for its low energy costs and high quality mineral
It is a risk every investor weighs
up before establishing significant operations in the
Because Moldova relied too heavily
on cheap imports for too long, it had no flexibility when
problems arose and ultimately failed as an economy. Today, it
was described by Voloboev as a disaster zone which no
investor will go near.
Businesses such as TiO2
and soda ash are the most energy intensive will be first in the
firing line should the prices of gas rise or supply
This was the case last year whereby
Crimea Titans TiO2 production was halted
during the Ukraines gas dispute with Russia.
Low energy costs have also hampered
plant modernisation in the country. There has not been a need
to upgrade plants and change to more efficient processes with
rock bottom gas on tap modernisation comes with a hefty
bill. (see: Steel and refractories panel).
Mining is less reliant on low cost
energy, exemplified by the fact that at the same time
TiO2 production was down, ilmenite and rutile mining
The coalition government lead by
Viktor Yanukovich has made the first steps in correcting this
after he put up household gas prices by 50% last month to
unlock a $14.9bn. loan from the International Monetary
Accepting the IMF conditions
hurts his popularity, but Vicktor Yanukovichs team has
little choice to do so in order to keep the country financially
stable, said Vadym Karasiov, a political analyst to
Londons Financial Times.
Corruption is also still a problem
in the country.
Ukraine is one of the most
corrupt places in the region, said Ukraine-born
[Corruption] is a cultural
thing. They do not understand the concept of conflict of
interest. Leading government figures do not understand the need
to separate personal affairs with business, he said.
On the positive side, Ukraine has
the fundamental natural resources for a solid future and a
location among the growing east European and central Asian
markets that is always attractive for those seeking new
However, Ukraines relationship with Russia will always
be a deciding factor. While Ukraine holds the resources, it
appears Russia holds the aces.
Steel and refractories
Ukraine is the second biggest steel producer in the CIS region
after Russia and the biggest in Europe after Germany. With an
industry that shipped 12.9m. tonnes between January and June
2010, the opportunities for refractory suppliers to what is the
worlds fifth largest steel producing country, is
The largest refractory
manufacturers in Ukraine are JSC Zaporozhieogne, JSC Chasnov
Yar and JSC Krasnogorovka which are all part of the Ukrogneupor
JSC Zaporozhieogne, the leading
producer of magnesia based refractories, was the primary
customer of the 408,570 tonnes of magnesia imported into the
country in 2008. The bulk of this came from Slovakia and Russia
whereas it used to source from China before exports became
restricted (see accompanying map).
Other foreign raw material
suppliers are also looking to take advantage of this void left
by China such as Turkeys Trabzon Mining and Metal Corp.
which is starting new production of dead burned magnesite.
The biggest competition to the
Ukrainian refractory industry used to be Russia, but in recent
years the country has increased its stake in domestic
refractory producers and exports to the neighbours steel
and chemicals sectors have consequently increased.
The rising number of finished
Chinese refractory products in the country has also increased
concern together with the problems the steel industry is
Steel making raw material price
hikes and shortages of supply have exposed a number of cracks
in the industry, 40% of which operates on dated manufacturing
methods such as using Martin open hearth furnaces.
Low cost input materials is where
many producers gets their profit margin from, with sharp
increases this is eroded.
The producers that decided to modernise their plants have
suffered because of the devaluation of the Ukrainian currency
and the drying up of finance. Industrial Union of Donbass (IUD)
is one such steelmaker which has to pay down $600m. this year
of its $3bn. upgrade.