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Modern economic POTENTIAL OF UKRAINE |
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Coal CokeComparative valuationUkrainian coke producers have a lot of potential for growth. The financial performance of Ukrainian coke plants improved substantially due to the dropping of price transferring schemes by most producers and high coke prices in 2005. The Ukrainian coke price increased from USD 120 per ton in 2004 to USD 150 in 2005. It allowed jump of net income margins from 9% in 2004 to 14% in 2005. In 2004-2005 the highest net income margin was posted by Donetskkoks. In 2005 most Ukrainian enterprises reduced their output due to corrections in domestic metallurgy and an 80% drop in export deliveries. This was seen as fallout from the 40% jump in international coal prices. Nevertheless, the Ukraine coke industry has a good opportunity in 2005-2006 as raw materials prices remains on a high level. Coke consumption driven by pig iron production. The Ukrainian coke industry is not independent because coke is a raw material for pig iron producers. Use of coke is limited by metallurgy and is usually tied to local steel mills. For many years Ukrainian coke output has been increasing in line with pig iron production. Pig iron output increased by 21% in 2000-2004 years, while coke production increased by 25% in the same period of time. In 2004 twelve Ukrainian coke plants produced 22 mn tons of coke to meet the needs of ten domestic steel producers. The biggest producer in Ukraine is Avdeevskiy coke plant, which creates 22% of total production. Because of the uneven distribution of steel mills and coke plants between financial industrial groups in Ukraine, some coke is exported and some coke is imported. Import of coke in 2004 counted 0.8 mn tons or 4% of consumption, and total export of coke was 3 mn tons or 15% of consumption. The booming steel market in 2003-2004 caused a jump in coke prices that made coke exports a very lucrative business. The export of coke from Ukraine increased from 1 mn tons in 2002 to 3 mn tons in 2004. This evoked growth of coke import from 0.3 mn ton in 2001 up to 1.8 mn tons 2004. In 2005 Ukrainian export of coke sank to 1.3 mn tons due to large supplies on the global coke market and price relief. We believe that by definition coke production is intended for provisioning the needs of local steel plants and in the medium term perspective, the coke business, in contrast to coal or iron ore, cannot be really global. As a result, the future of the coke industry completely depends on the financial development of local steel producers. Coal and coke industriesWhile coke assets remain relatively cheap, the acquisition of a coke plant does not solve all of the problems with coke supply for steel producers. The main challenge for coke producers is connected with coking coal supply. Although Ukraine is all-sufficient in terms of coking coal, some producers cannot secure their production without imports. About 98% of coking coal production is located in Donetsk and Lugansk regions. The lack of coking coal for Privatbank and Industrial Union of Donbass forced them to import coal from Russia or buy from SCM-controlled mines. Imports play important role, as about 25% of domestic coal consumption is imported. The quality of the coal available can be as important a factor as other reasons. In these cases, the proper coal is usually imported from Russia. Most coke producers import to a degree and volumes of coal import for this reason are proportionate to the volume of output. Bagleykoks, Dneprodzerzhinskiy and Zaporozhkoks depend on imports more than other producers because imports supply 38%, 38%, and 39% of plant consumption, respectively. Among the importers of coke itself are Zaporozhstal (11%), Ilyich Iron and Steel Works (62%), and Kryvorozhstal (20%). These enterprises don’t control any coke production and must compensate for the deficiency by import. Coal and coke prices and margin. Over the last years, Ukrainian coke prices have increased by several times due to the general boom on the global steel market. For a long time very small volumes of coke in Ukraine were traded on the open market but the vast majority of coke was delivered between producers and users affiliated with each other. Ukrainian coke export prices and prices between domestic independent coke producers and steel users were attached to global prices. Coke pricing in Ukraine now is determined by three obvious factors:
Coking coal prices in Ukraine increased substantially in recent years from USD 35 in 2000 up to USD 185 in 2005 per ton. Analysts believe that the current high coal price does not reflect the cost of coal extraction but rather rocketing coke prices. Nevertheless, in recent months some forecasts have appeared about further increases in raw material prices, including coal. It is possible due to high profits of coke producers and the small volume of the global coke trade. Alchevskiy Coke (ALKZ)Alchevskiy Coke Plant (ALKZ) is a third biggest coke producer in Ukraine, with an output of 2.7 mn or 13% of Ukrainian output in 2004. Alchevskiy Coke Plant started building a new coke battery in 2005. Completion of new batteries will add 1 mn to current capacities, up to 3.5 mn. Alchevskiy Coke was built to meet need Alchevskiy Steel Plant in coke that is why 67% of ALKZ output delivered to Alchevskiy and 25% to another of IUD steel plant Dzerzhinsky. Industrial Union of Donbass (IUD) controls 95% of Alchevskiy Coke. As IUD planned to expand Ukrainian steel making facilities from 7.1 mn tons in 2005 to 14 mn tons in 2008, Alchevskiy Coke has secured sales for years. Regarding coal supply, Industial Union of Donbass worked with the Krasnoarmeyskugol, Makeevugol, Oktyabrugol mines, and Krasnolimanskaya Mine coal company, with a total capacity of 8 mn tons. But these mines belong to the state and in case of privatization these mines can cut their deliveries to Alchevskiy Coke. Avdeevskiy Coke Plant (AVDK)Avdeevskiy Coke plant is the biggest coke producer in Europe, and produces 22% of Ukraine’s coke output. In 2004 the plant produced 4.7 mn tons. AVDK is not tied to any particular steel mill, so its deliveries are highly diversified. The main customers of Avdeevskiy Coke Plant, Ilyich Iron and Steel Works, Enakievskiy Metallurgical Plant and Dzerzhinskiy Iron and Steel Works with purchases of 33%, 19% and 24% respectively. In 2005 AVDK constructed new coke batteries. System Capital Management controls an 82% stake AVDK, while the free float of AVDK estimated as 22% or USD 220 mn in current prices. Avdeevskiy Coke plant has a sufficient supply of coking coal because the coke plant controls several mining companies with total annual production of 5.6 mn tons. Bagleykoks (BKOK)Bagleykoks is small producer with a production volume of 1 mn tons. Bagleykoks has a utilization capacity rate at 66%, with total capacity at 1.5 mn tons. Bagleykoks is a key importer of Russian coal. The high quality of the Russian coal allows Bagleykoks to produce high-grade coke. About 65% Bagleykoks output was exported, while 15% was delivered to Zaporozhstal and 14% to Petrovskiy Metallurgical Plant in 2004. BKOK lacks total domestic coal supply so it is forced to import expensive Russian coal. In 2004 BKOK exported 38% of its own coke needs, which is 8% of Ukrainian import of coking coal in 2004. Privatbank controls at least 78% of Bagleykoks. We estimate BKOK’s free float as 7% or USD 6 mn. Privatbank has not been a paragon of transparent corporate governance in Ukraine, and is it not unusual for an enterprise that belongs to Privatbank to be listed as unprofitable in spite of the market situation. Bagleykoks used price transferring schemes more than any another Ukrainian coke producer. Bagleykoks sells coke at USD 60 per ton while other producers sell coke of lower grade at least at USD 150 per ton. Markokhim (MCHI)Markohim is a medium size coke producer that was built to meet the coke needs of the Azovstal steel mill. Domestically, Markokhim supplies coke only to Azovstal. In 2004, MCHI produced about 2.38 mn tons of coke, of which 2.15 mn tons (90%) were delivered to Azovstal. The remaining 0.23 tons (10%) of coke were exported. Markohim set in operation coke battery No.4 in 1H05 and modern equipment coke battery No.2 is under construction now. The annual capacity of Markohim is 3 mn tons, which implies a capacity utilization rate of 80%. In August 2004 System Capital Management, the holder of a 94% stake in Markohim, announced plans to merge Azovstal with Markohim. Azovstal intended to issue additional shares which would then be exchanged for shares in Markokhim. Azovstal planned to issue 483.3 mn shares for exchange with Markokhim’s 161.1 mn shares, implying a ratio of three shares of Azovstal for every share of Markokhim. Before the announcement of the emission, Azovstal’s share price was USD 0.7 while that of Markokhim was USD 1.08, which implied a target price of USD 1.97 for Markokhim shares and an upside of 82%. Once the news broke, the mid-market rate on Markokhim shares rose to USD 1.8. Yasynivskiy Coke Plant (YASK)Yasynivskiy Coke Plant (YASK) produced 1.6 mn tons of coke or 7% of total production in 2004. Bringing a new coke battery online brought total coke capacity at YASK up to 1.8 mn tons in 2004. Currently, the rate of utilization is close to 89%. The major customers in Ukraine of YASK are Donetskiy Metallurgical Plant and Ilyich Iron and Steel Works, and 61% of production was exported in 2004. Yasynivskiy Coke Plant, together with Makeevkoks, another coke producer for Energo, has the best coal supply among coke producers in Ukraine. Coal capacities of Energo group are 1.5 times higher than annual needs in coal of YASK and Makeevkoks Energo’s companies control about 89% of Yasynivskiy Coke Plant while the free float is 11% or USD 5 mn. Zaporozhkoks (ZACO)Zaporozhkoks produced 2 mn tons of coke or 10% of total production in 2004. About 93% of ZACO’s output was delivered to Zaporozhstal in 2004. The capacity utilization rate of ZACo is close to 100%. Due to the lack of its own coal reserves, ZZCO is forced to import about 38% of its own needs in coking coal. In 2001-2002, ZACO cut production due to a conflict between SCM and Zaporozhstal. After reaching peace with its major customer, ZACO enjoyed stable volumes of consumption from Zaporozhstal in 2003-2004. We believe that in future Zaporozhstal will seek an opportunity to purchase a controlling stake in Zaporozhkoks to secure its own coke supply. It makes ZACO a possible takeover target and strengthens ZACO’s share performance. System Capital Management controls 51% of Zaporozhkoks while 42% of the company belongs to Zaporozhstal. ZACO entered the stock market in May 2005 and immediately became popular among investors. Donetskkoks (DKOK)Donetskkoks is a medium size producer with production of 1.4 mn tons of coke in 2004. Donetskkoks uses 7 coke batteries with total gross capacity of 2 mn tons. System Capital Management is a key stockholder, and owns about 78% of the plant’s shares. We estimate free float as 22%, or about USD 20 mn. As SCM has surplus of coke capacity against coke consumption at its steel mills, DKOK delivers most of its production to independent users as Ilyich Iron and Steel Works and Donetskiy Metallurgical Plant, 62% and 31% respectively. This allowed Donetskkoks to enjoy the highest net income margin among coke producers in 2004, 22% and projected 27% in 2005. |