Ukraine received more money from privatization during 50 minutes last Monday than it did in the previous ten years. This tender yielded an unexpectedly large amount of money, yet it aroused even more fears. Too great is the temptation to repeat the attempt and get one more piece …and not only in Nikopol.

Generally it is clear that, if the entire process is repeated, we can completely forget about investments in the next year (as the example of this year has already shown). Yet parliamentary elections dictate the rules. It is not by chance that recent political opponents Tymoshenko and Yanukovych are unanimous in their intention to spend the money for social needs. The inflationary consequences of this move are a non-economic issue.

Technically the competition was held without serious faults. Even the absence of the head of the State Property Fund (SPF) Valentina Semenyuk did not hinder it. Yet before it began, SPF was discussing how to heat up the interest of the participants to get more than 12 billion hryvnias. This “record” was broken even at the point of initial bids when the consortium Industrial Group (Arcelor and Industrial Union of Donbass (IUD)) offered 12.6 billion hryvnias.

It was obvious even before the start of the competition that the major rivals would include Mittal Steel and Industrial Group. However, it is impressive that even obvious outsider Smart-Group owned by Vadim Novinsky (and Alisher Usmanov, who joined it) was bargaining until the price of US$3.5 billion was reached. To win the competition, Mittal Steel had to raise the price by US$1.3 billion. The representatives of the Industrial Group did not conceal their disappointment. Although later the key share holder of the IUD Serhiy Taruta said that the Krivorozh plant did not cost this money.

However, for Taruta and Haiduk the cloud had its silver lining. Had they won the completion, they would have had to look for US$1 billion each to pay for their shares in the plant. In fact, this would mean passing all the assets of the group into the external control. Now this will not happen, but they will have the record of participation in a tender in a consortium with the largest European metallurgical group, which is also good.

Smart-Group was not very disappointed with the loss. Vadim Novinsky played a role in raising the price for the shares. Moreover, the very fact of demonstrating the ability to raise US$3.5 billion is a serious bid for the future. Besides, Smart Group indicated its partners. Its partner in Moldavian metallurgic plant, Hares Group Holding, also submitted its bid for Krivorizhstal. In the view of the forthcoming privatization sell-off of Krivorozhsky mining and enriching plant, this could be regarded as a certain demonstration of financial strength.

The result of the competition was not good news for the previous owners of Krivorizhstal. Mittal Steel paid a price for the plant that exceeded the total cost of all of its assets. Thus it will be difficult for the former owners to assert their position. The former owners also participated in this “sale of the century” at the earlier stages of the competition. After this, it will be much more difficult to dispute the legality of the competition.

On Friday October 28, SPF and Mittal Steel Germany GMBH singed the agreement of sale and purchase of 93.02 percent stock in Krivorizhstal. Under the agreement, Mittal Steel will pay 50 percent of the price with securities (US$2.4 billion) by the end of November and the rest of the amount by December 29. The National Bank of Ukraine is already working on the scheme of the buy-out of this amount in order to avoid revaluation of hryvnia. The funds received from the sale of Krivorizhstal equals to a standard two months turnover of the Ukrainian money-market.

Mittal Steel has shared information on how this deal was financed. It turns out that US$2.7 billion was specifically reserved for it. In addition, by early October the company had a US$5.2 billion banking limit. It also had signed a renewable credit agreement for US$3.2 billion with Citigroup.

Krivorizhstal was not an easy deal. Before the beginning of the sell-off, everyone was oriented toward Turkish plant Erdemir (this is where the expectation of US$3.5 billion dollars comes from). However, Mittal Steel staked everything and exceeded the expectation by 38 percent. As a result, one ton of the plant’s rolled metal cost for the new buyer was US$800 (without the consideration of the investment program). Returning such an amount won’t be an easy task. However, the head of Mittal Steel, Lakshmi Mittal, said at a news conference that he expects to return the investment into the enterprise, “earlier than 12 years.” It is already known that Hindu Navala Kishore Choudhary will be the new director of the plant. Currently he heads the Kazakh metal plant Mittal Steel Temiratau. The introduction of the new board chairman is scheduled for Tuesday, November 1.

The owners seem happy with their new asset. According to them, Kryvorizhstal, with its low prime cost of production and a strategically important location in the center of a rapidly evolving market, is part a large iron-ore complex (over a billion tons of iron ore in reserve) capable of covering about 90 percent of the company’s needs… Thanks to good railway communications, about 80 percent of export goes through the major ports situated within 400 kilometers from the enterprise.

Mittal Steel pledges to provide Kryvorizhstal with up-to-date technical equipment and know-how, access to new markets and marketing support, as well as management expertise. The new owner believes that future cooperation and opportunities created by the sale will raise its long-term value for the shareholders. Given that 88 percent of Мittal Steel belongs to the family, it will be the one who benefits most. Nonetheless, the high selling price has its downsides, too. In particular, experts expect a rise in prices for rolled metal in the domestic market amounting to US$70-US$100 per ton, which will inevitably affect the cost of construction and machine building.

Besides, the Standard & Poor’s Rating Agency could downgrade the long-term corporate credit rating of the Mittal Steel Consortium due to a potential increase in the company’s borrowing in the course of the latest transaction and the need to invest intensively into the Kryvorizhstal modernization and capacity growth. Standard & Poor’s says that the current rating of Mittal Steel (ВВВ+) is based on the company’s low costs, rapid integration, status of the world’s largest and most diversified steel manufacturer, and low debt prior to the purchase of Kryvorizhstal.

This is the first time that a foreign company has entered Ukraine’s domestic metallurgical market, so far vigorously protected from outsiders. The entrance ticket price that the company paid testifies that it has come here to stay. Thus, one can expect a re-allocation of influence on the market. The state has practically no clout left here: except for Makeyevka Metal Works, it has sold out all enterprises in the industry. Moreover, the state has offered the latter for sale to Novinsky (purportedly, for US$55 million). So we are in for another, albeit minor, market shrinkage. The tender has also facilitated the revaluation of DIU, Akhmetov’s and Kolomoisky’s metallurgical businesses.

What is the SPF position in the matter? SPF head Semeniuk promised to watch the new owner closely: “Should the company fail to fulfill its investment obligations, the state will repossess the asset.” Semeniuk is, reportedly, prepared to sell Kryvorizhstal ten times, if need be.

Table 1. Cost of regional metallurgical assets sold in 2005

Estimates by Ukrsotsbank

Table 2. price advance at the auction on 24 October 2005