Ukraine’s gift and curse

By Simon Moores
Published: Monday, 23 August 2010

Some of Europe’s richest mineral resources lie in the middle of an energy resources super-highway from Russia into Europe. This route has given Ukraine an abundance of cheap gas that has underpinned its economy. It is an asset that has attracted many, and one that could be its undoing

Cheap energy, namely gas, has been Ukraine’s 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 country’s 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 country’s economy is built.

Ukraine has been the envy of its closest neighbours for years: domestic gas is 13% the cost of Poland’s and 11% the cost of Slovenia’s.

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 year’s 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 wasn’t.”

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; Russia’s Gazprom is the supplier.

Major active players


Sibelco, the world’s 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 industry.

The silica sand and flour j-v with NovoGOK is its second biggest mine with a 500,000 tpa capacity.

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 Italy’s ceramics industries had and are still struggling in the face of cheaper eastern European and Asian products entering the marketplace.

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 investors.”

“Positive changes in the country’s 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 silica sand.

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 country’s 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

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 country’s 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 tonnes.

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.

TiO2 uncertainty

There has been much uncertainty over the future of titanium minerals mining in Ukraine following last year’s cancellation of licences to mine the Irshansk and Volnogorsk deposits in the country’s north-east and centre, respectively.

The mines are one of Europe’s 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 Ukraine’s total output.

The focus of the Volnogorsk mine is on rutile and zircon which makes up the remaining 30-35% of output.

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 Azarov’s 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 detail).

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 privatisation.

In 2009, Sumykhimpor only operated at half of its capacity owing to ineffective manufacturing procedures.

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 Firtash.

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 Ukraine’s most widely produced industrial minerals.

Production is clustered in the Dnipropetrovsk and Vinnytsia oblasts as well as JSC Mineral in Zaporozhskaya and State Company Kirovogradskoye RU in Kirovohrad.

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 ceramics industries.

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 industries.

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 Ukraine’s 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 Russia’s 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 world’s biggest low cost source.

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 tpa.

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 Suisse’s director of emerging markets, Sergei Voloboev.

Moldova’s 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 Ukraine’s minerals industry. Companies are attracted to the country for its low energy costs and high quality mineral reserves.

It is a risk every investor weighs up before establishing significant operations in the country.

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 restrictions occur.

This was the case last year whereby Crimea Titan’s TiO2 production was halted during the Ukraine’s 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 continued.

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 Fund.

“Accepting the IMF conditions hurts his popularity, but Vicktor Yanukovich’s team has little choice to do so in order to keep the country financially stable,” said Vadym Karasiov, a political analyst to London’s 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 Voloboev.

“[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 markets.

However, Ukraine’s 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 world’s fifth largest steel producing country, is substantial.

The largest refractory manufacturers in Ukraine are JSC Zaporozhieogne, JSC Chasnov Yar and JSC Krasnogorovka which are all part of the Ukrogneupor Association.

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 Turkey’s 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 neighbour’s 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 facing.

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.