Ukraine might lose its export duty on scrap metal, which is the main raw material for the metallurgical enterprises. February 28, the law, which provides for an economically justified increase in the duty from the current 42 to 58 euro per ton and an extension of its validity until September 2021, was voted by the parliament. However, a draft decree on the abolition of this decision appeared. If this happens, the consequences for the Ukrainian economy can be very sad. Taking into account the rise in world prices for scrap, the volume of export from the country will continue to grow, and this will lead to a decrease in production at Ukrainian enterprises, a decrease in export volumes, a decrease in foreign exchange earnings into the country and destabilization of the hryvnia exchange rate, experts say. According to them, the metallurgical enterprises will lose an opportunity to invest in development, increase salaries of employees, which will provoke a new outflow of personnel abroad. Ukraine will eventually lose one of its few high-tech industries and finally turn into a resource colony of the developed countries
Ukraine’s Verkhovna Rada might revise the decision adopted on February 28 to increase the export duty on ferrous scrap from the current 42 to 58 euro per ton and to extend it until September 2021. MP Oleksandr Opanasenko has registered a draft decree on its abolition since the bill allegedly "violates the rights and interests of citizens by providing unlawful economic preferences to large steel producers." In addition, Opanasenko wrote a statement to Andriy Parubiy, the head of the Verkhovna Rada, requesting to eliminate violations of the requirements of the regulations. On March 12, the Regulatory Committee considered the issue at its meeting, but did not find any irregularities.
Why did the MPs raise the fee for scrap?
The economic rationale for such a decision could be found in the explanatory note. A rapid rise in prices for scrap is observed. The average annual price of ferrous scrap for export in January-October 2018 increased to $ 324.1 per ton, which is 30% higher than the 2017 price and 81.6% higher than the 2016 price. Against this background, the abolition of duties on it (if the new document does not enter into force, the duty will be only 8.5 euro per ton in September 2019) will lead to the uncontrolled export of this strategic raw material abroad and its acute shortage in Ukraine. The scrap metal market in Ukraine is mainly shadow. At least 70% of the market is in the shadow. The capacity of the scrap metal harvesting market is estimated at about $ 1 billion a year.
Market participants emphasize that before adopting of the law, according to which the export duty for scrap metal was 30 euro per ton, Ukrainian enterprises experienced an acute shortage, which led to a decrease in production volumes and production capacity shutdowns. Ukraine was losing jobs, taxes, and foreign exchange earnings, which directly adversely affected the Ukrainian currency. Now this situation can repeat.
In the case of the worst scenario, the competitiveness of Ukrainian enterprises would sharply decline, market participants say. Cancellation of duties on the export of scrap metal from Ukraine might lead to the loss of 30 thousand jobs, mainly in the metallurgical industry.
"If Ukraine stimulates the export of raw materials (and not finished products), this will mean that the country has chosen the path a resource colony. If Ukraine stimulates the processing of raw materials in the country, this will mean that it has a future," Dmytro Kiselevsky, Director of Corporate Relations of the Interpipe Industrial Company, notes. Serhiy Belenky, Chairman of the Federation of Metallurgists, agrees: "The country has already lost its engineering industry, which used to be a very developed sphere. Now we can lose the metallurgical industry, which is quite high-tech and can compete with the metallurgical industry from other countries. We should not become a raw appendage of Europe and should preserve high-tech production, which allows receiving goods with a high added value in Ukraine."
The abolition of the decision to raise duties will play into the hands of the main hunter of Ukrainian scrap metal, that is, unrecognized Transnistria, a Russian enclave in Moldavia, where the Moldavian Metallurgical Factory is located. By the way, this company uses energy resources supplied from Russia. Experts do not exclude that some MPs who are opponents of the duty might be lobbyists of both Ukrainian scrap producers and the business of the Russian Federation and Transnistria.
In January - October 2018, the share of Moldova in domestic exports of scrap reached 59.8% against 44% in the previous year. "Taking into account the fact that in 2016 the export of scrap metal to Moldova did not exceed 0,6 thousand tons, the rapid growth in deliveries in 2017-2018 demonstrates the use of the unrecognized part of the territory of Moldova as a convenient “harbor” to local metallurgical enterprises, all associated expenses are fully compensated by direct subsidies. This is unfair competition, which weakens the effect of the export duty on scrap metal operating in Ukraine," as said in the note to bill # 9474.
Turkey, which is our competitor in the global metallurgical market, is also hunting for Ukrainian scrap metal. The country has recently been pursuing a protectionist policy, protecting its market from the supply of Ukrainian steel products. After the United States imposed a 25% import duty on metal products, Turkey took similar measures. The decision of the largest world economy provoked an escalation of protectionism in other countries of the world, traditionally serving as sales markets for metallurgical products produced in Ukraine.
Turkey is actively expanding and aggressively developing foreign markets. According to the Turkish Association of Steel Exporters, for ten months of last year, exports of Turkish steel products increased by 15.5%, compared to the same period of 2017, and exceeded 16,8 million ton. In monetary terms, it has increased by 35.2% up to 12,4 billion USD. Assessment of Turkey’s highest potential as a metal exporting country can be based on the fact that the United States, with a general level of duty above the tariff quota of 25%, applies a 50% duty against Turkish metal. Despite such measures, Turkey is actively increasing its exports both to the US and to the EU markets.
Against this background, our country has experienced rapid growth in imports of ferrous metals. The imports of ferrous metals products to Ukraine accounted for 20.7% during January - October 2018 (of the volumes of similar products of domestic production), whereas in 2015 this figure was only 13.4%. Imports grew at a faster pace, especially rapidly in January-October 2018, when imports of ferrous metals from Belarus increased by 56.1%, from Turkey – by 87.1%, and from China – by 60.4%.
At the same time, all countries protect their markets, especially those with the metallurgical industry, said Volodymyr Tkachenko, deputy general director of ArcelorMittal Kryviy Rih. According to him, for example, Egypt decided that only companies that produce rolled goods, can import semi-procurement. "Last year, the Russians have allowed the export of scrap metal only through certain ports. Previously, it was allowed to export scrap only through one port, located in Magadan. Finished products enter the Ukrainian market absolutely freely. Our domestic market is not protected, and in order to enter foreign markets, Ukrainian producers have to overcome trade barriers, and then compete with their manufacturers," said Tkachenko.
Moreover, the abolition of the decision to increase the export duty on scrap metal will nullify all the positive results, achieved during its operation, experts and market participants say. According to the Ukrmetallurgprom association (which includes leading metallurgical enterprises of Ukraine, mining and processing plants, research, design, educational institutions and commercial organizations, - ed.), for the time of the increased export duty on scrap (from October 2016 to September 2018) the effect was equivalent to almost 35 million USD of state budget revenues from exports. In particular, electrometallurgy showed an increase of 37%, the output of pipes increased by 26%, the production of metal structures increased by 34%. Against the background of the stabilization of scrap metal supplies to Ukrainian metallurgical enterprises (their volume increased by 24%), metal scrap enterprises increased wages to their employees by 66% over two years, saved about 35 thousand jobs, received 3,2 billion USD of foreign exchange earnings.
"Introduction of export duty for scrap had a huge positive effect. During the period of duty, the production of electrometallurgical enterprises increased by 34%, which is a very significant indicator. The average salary at metallurgical enterprises during the operating of the duty has also increased significantly: today, at enterprises that are part of the Ukrainian Federation of Metallurgists, it reaches 570 USD, which is almost 50% more than a few years ago. The enterprises of the full cycle did not feel any interruptions in the provision of raw materials, which took place several years ago. Neither the state, nor metallurgical enterprises, nor enterprises that collect scrap metal suffered from the introduction of the duty,” Belenky stated.
How does the increase in duties affect Ukraine’s obligations
The law on the extension of the duty does not violate Ukraine’s obligations to the WTO or EU-Ukraine Association Agreement. Ukraine’s Vice-Prime Minister Ivanna Klympush-Tsintsadze and representatives of the Ministry of Economy have repeatedly stated about the absence of any negative impact of increasing the duty on relations between countries in the framework of the EU-Ukraine cooperation.
"The implementation of the proposed measures (an increase of export duty for scrap) does not contradict Ukraine’s international obligations. They fully comply with the norms of international trade law within the WTO and other international obligations of Ukraine regarding the regulation of foreign trade. The current provisions within the framework of the WTO Agreements and the Association Agreement with the EU give Ukraine the right to impose any regulatory measures that it considers necessary to protect the essential interests of its security, in particular during the war," according to the explanatory note of the bill # 9474.
Thus, such accusations against the law point to the complete incompetence of their applicants, whose goal is to restore the schemes for the uncontrolled export of strategic raw materials abroad. Market participants and experts expressed the hope that the President of Ukraine will sign the draft law adopted by the Verkhovna Rada, and the MPs will have enough prudence not to vote for the decision to repeal the decision that is obviously lobbied by “gray” scrap procurement agents.