Industry overview

Metals and mining in Ukraine

ear Reader, It is my great pleasure to introduce you to our new publication about attractive sectors of Ukraine, made in partnership with Deloitte. We developed these brochures to make information about sectors of Ukraine accessible and easy to understand. The booklets provide analysis of economic attractiveness, as well as comparative characteristics and undiscovered opportunities. Ukraine enjoys a long industrial tradition, robust transportation and technical infrastructure, rich natural resources, strong secondary and tertiary education, a broad network of research and development institutes, and a large pool of technically skilled labor. As a WTO member since 2008 and having signed International Agreements for the Avoidance of Double Taxation with 63 countries, Ukraine is a fair player in the business world, a transparent and predictable partner. InvestUkraine offers individual support to investors and is here to assist potential investors with setting up production in Ukraine. We offer professional support in obtaining information and analysis, legal advice, site visits, site selection services, assistance in communication with local authorities, and an aftercare program. I encourage you to consider Ukraine as a place for your future business and discover all the benefits of locating your companys operations in our country. I look forward to welcoming you in Ukraine.

favorable geographic position, vast consumer market, ample resources and high level of education all these factors ensure great investment potential for the economy of Ukraine. At present, Ukrainian market is at the development stage. There are many niches and opportunities for introducing new players and strengthening the positions of existing ones. However, most of Ukraines industries lack investments, though international investors are highly interested in them. We believe that foreign investments will be very successful and promote economic growth if a favorable investment climate is created in Ukraine. To assist you in determining the most promising areas to invest in and get an insight into Ukrainian market, Deloitte experts in cooperation with InvestUkraine have conducted this research. We hope that this overview will be useful and interesting for all companies interested in investing in various industries of our country.

Vladimir Vakht, Managing Partner Deloitte

Sergiy Yevtushenko, Head InvestUkraine

State Agency for Investment and National Projects of Ukraine

Table of contents

1. Executive summary 2. Sector overview 3. Trends and developments 4. Leading players 5. Organizations and associations 6. Legislation 7. List of references

5 5 14 16 19 20 22

1. Executive summary
Metals and mining sector in Ukraine is represented by ferrous and non-ferrous metallurgy which includes variety of processing stages starting from mining and raw materials enrichment and ending with production of metals and alloys. Ferrous metallurgy produces iron ore and ferrous metals including steel, pig iron (with a carbon content of a few percent) and alloys of iron with other metals (such as stainless steel and other types of alloyed steel). Nonferrous metallurgy produces aluminum, copper, zinc, titanium, nickel, magnesium, platinum, gold, silver as well as other non-ferrous metals including their alloys. At the same time the scale and degree of ferrous and non-ferrous metallurgies development in Ukraine is different. Specifically, the share of non-ferrous industry in the structure of Ukrainian GDP is relatively small (2010: less than 5%), which is due to relatively insufficient in industrial terms known reserves of respective mineral resources in Ukraine. In contrast, due to literally immense proven and probable reserves of iron ore, ferrous subindustry has strong potential and historically has played a key role in Ukrainian economy. In the recent years ferrous metallurgy contributed approximately 20-25% into GDP and generated approximately 30%-35% of Ukrainian export. High export orientation of entities representing Ukrainian metals and mining sector (80% of the output would normally go to export), positions Ukraine among key global players. Based on the export statistics for 2011, Ukraine is the 5th largest iron ore exporting country and 6th largest steel exporting country in the world, exporting 34 m tons of iron ore and 26 m tons of steel respectively. In spite of Ukraines currently strong ranking, metal and mining sector of Ukraine needs to invest approximately USD 15-20 bn within a decade to overcome existing technological gap. Without intensive modernization of heavily depreciated production facilities, minimization of negative environmental impact and long-awaited technology changeover, in the medium perspective Ukrainian metal and mining producers may loose their leadership due to inability to further challenge technological superiority of other global players.

2. Sector overview General

Metals and mining sector of Ukraine is mainly represented by ferrous metallurgy. According to the State Statistics Committee of Ukraine turnover of non-ferrous production in 2010 comprised only 6% of the total metallurgical production. As for ferrous metallurgy the highest percentage of the total metallurgical production comprised pig iron, steel and ferroalloys production 82%, followed by pipes production and other kinds of primary steel processing, which constituted 8% and 3% respectively. The total turnover of metallurgical production in Ukraine in 2010 comprised UAH 182,251 m.

Metalurgical products turnover structure in 2011, UAH bn

Source: State Statistic Service of Ukraine

Currently ferrous metallurgy combines more than 200 entities, including 19 integrated steel mills and plants, 12 tube plants, 12 coke plants, 10 refractory plants, 12 mining and metals enterprises, a number of ferroalloy plants and more than 100 companies specializing in scrap and waste metals reprocessing. Metals and mining sector has a long history in Ukraine. Its main advantages are: Strong internal metal consumption (metal intensive machine building); Rich and suitably located resource base (iron ore, coking coal, cheap electricity etc.); Developed transport network and proximity to global markets; High degree of vertical integration; Skilled workforce.

Key production inputs

The mining and metals sector of Ukraine is comprised from enterprises performing the following activities: Mining and preparation of key inputs for further processing (ore mining, production of ore concentrate and pellets); Ferroalloys production; Coke production; Metal processing key technological process resulting in production of pig iron, steel, semi-finished products from ferrous metals (slabs, rods, billets, tubes etc.) and alloys; Scrap and by-products utilization.

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The diagram below schematically demonstrates major production stages within mining and metal sector.

Ore extraction

Dressing Fines Lumps

DR pellets

BF pellets Sinter

Alternative iron making processes

Scrap and other metallics

Blast furnace (BF)

Basic oxygen furnace steelmaking (BOF)

Electric arc furnace steelmaking (EAF)

Blooms/Billets/Slabs (semi finished products)

Finished products
The key production input for ferrous metallurgy in Ukraine is the iron ore. For instance, combined iron ore and coke comprise around 50% of a steel billet cost. Apart from iron ore and coking coal, scrap and ferroalloys form around 17% of a steel billet cost. Ukraine is fully self-sufficient in iron ore supply, somewhat reliant on coking coal and significantly reliant on non-ferrous ores supply being a net importer of non-ferrous ores required for production of ferroalloys.

Billet production cost, USD per ton, EXW (for non-integrated mills in Ukraine)

Source: Ukr Prom Zovnish Expertyza

Proven and probable iron ore reserves

According to US Geological Survey (2009) Ukraine has the largest deposits of crude iron ore reserves in the world of approximately 30 bn tons. Relatively low ferrum content (30%) in Ukrainian ore ranks it 3rd after Russian and Australian ores in terms of ferrum content in proven and probable ore reserves.

World iron ore reserves in 2009

Source: US Geological Survey. www.eavex.com.ua

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Ukrainian mining and beneficiation companies (also referred to as GOKs) extract iron ore via both underground and open pit mining. Ore mined from underground has ferrum content of 50-60%, while ferrum content of crude ore mined from open pits is only around 26-33%.

Metals and mining sector output and structure

The diagram below demonstrates Ukraines metals and mining sector output and structure in dynamics.

Ukraines mining and metals sector output, m tons

Source: State Statistic Service of Ukraine

As can be seen from the diagram above on the whole output of metals and mining sector in Ukraine tends to grow, except for 2008 when global metal markets collapsed due to the world financial crisis. The impact of the crisis can be felt even now: in 2011 Ukraine produced 35.5 m tons of steel which is significantly lower than in the pre-crisis 2007 and hardly matches the level reached in 2002. At the same time the output of non-agglomerated iron ore (the key input of steel pro-

duction) in 2010 and 2011 surpassed the pre-crisis level. The latter was in line with the global tendency of raw materials prices appreciation and more fierce competition between steel producers on the global arena in the post crisis period due to existence of unutilized production capacities. As a result of the mentioned trends since 2008 profit margins have been improving for Ukrainian exporters of iron ore as well as of other raw materials (coke, coal) and deteriorating for exporters of steel and semifinished products.

Global ranking
Currently Ukraine is a serious global player. In 2011 it ranked No. 8 in terms of global crude steel production, No. 5 among top steel and iron ore exporting nations and No. 3 in terms of proven and probable deposits of iron ore.

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TOP steel exporters , m tons

Position 2011 1 2 3 4 5 6 7 8 9 10 Country China Japan EU-27 S. Korea Ukraine Russia Turkey USA Brazil Taiwan 2010 38.8 42.2 32.7 23.9 25 27.2 15.9 11.2 8.9 9.8 2011 44.4 40.3 36.1 28 25.8 24.6 16.7 12.5 10.7 10.3 Change y-o-y, % 15 -5 10 17 3 -10 5 12 21 5

TOP-15 crude steel producers, m tons

Country 2010 2011 Change Share in y-o-y, % 2011, % 683.9 177.2 107.6 88.4 71.3 68.9 68.5 35.3 35.2 34.1 22.9 18.1 13 12.6 7.5 74.3 7 3 -2 7 4 3 16 6 7 17 18 7 0 5 -1 6 45.1 11.7 7.1 5.7 4.7 4.5 4.5 2.3 2.3 2.2 1.5 1.2 0.9 0.8 0.5 4.9

Exports of iron ore, m tons

Country 2010 2011 Change y-o-y, % 9 6 -24 11 4 10 33 2 14 60 0

China EU-27 Japan USA India Russia S. Korea Ukraine Brazil Turkey Taiwan Mexico Canada Iran S. Africa Other

637.4 172.6 109.6 80.5 68.3 66.9 58.9 33.4 32.9 29.1 19.8 16.9 13 12 7.6 70.1

Australia Brazil India* S. Africa Ukraine Canada Russia Sweden Iran* Indonesia Other
* imports from

427 311 104 48 33 31 20 21 15 9 51

466 331 79 53 34 34 27 21 17 14 51

Source: http://www.issb.co.uk

The further development and growth of the mining and metals industry in Ukraine is highly dependent on the global and domestic demand, timelines of technological changeover, and ability to produce new marketable metal products that would be a descent substitute to the imported metals and alloys.

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Metals production capacity

In 2011 crude steel production capacity of Ukraine comprised 46.6 m tons. During the year these capacities were utilized at a rate of 75.8% (2007: 95.4%).

Crude steel capacity utilisation in Ukraine

Steel making capacity utilization, %

Source: State Statistic Service of Ukraine

Source: WSA, OECD, UPE Co

Although the level of unutilized steel production capacity was in high correlation with the global average it declined significantly during the post-crisis period. Together with the overall decline of the global demand for steel this trend also indicates Ukraine in the post crisis period has experienced more severe competition from other more technologically advanced global steelmaking players.

Technology
Ukraines steelmaking technology, in general, is decades behind that of most other major steel producing countries. As a result, steel companies have not been able to reap maximum cost benefit from the countrys strong raw material sector. According to the World Steel Association in 2011 Ukraine was the country with the highest percentage of outdated open hearth furnace (OHF) technology used in production of crude steel among 10 major steel producing countries.

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TOP-10, crude steel producers by technology used in 2011, %

Country China Japan United States India Russia South Korea Germany Ukraine Brazil Turkey OBC, % 89.6% 76.9% 39.7% 38.1% 63.4% 61.4% 67.9% 69.3% 75.0% 25.9% EAF,% 10.4% 23.1% 60.3% 60.5% 26.9% 38.6% 32.1% 4.5% 23.5% 74.1% OHF, % - - - 1.4% 9.7% - - 26.2% - - Other, % 1.5% -

Source: World Steel in Figures 2012

As can be seen from the table above, OBC technology was the most popular among the major steel producing countries such as China (89.6%) and Japan (76.9%) in 2011. According to the State Statistics Service of Ukraine, the technological structure of steel making capacity in Ukraine in 2005-2011 was as follows.

Ukrainian steel capacities by process, m tons 2007 2011

Source: State Statistics Service of Ukraine

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During 2011 4.0 m tons of OHF capacities in Ukraine were decommissioned, whereas 4.0 m tons of OBC and 1.3 m tons of EAF capacities were put in use. Further replacement of open hearth furnaces by more productive, more energy efficient and less polluting EAF furnaces and converter units will remain a priority for Ukrainian metallurgy in the coming years. Complete replacement of OHF in Ukraine is planned to be completed by 2018. Evidently the lack of modern equipment constrains Ukraine steel industrys ability to produce and sell higher value added products, including carbon plate and hotand cold-rolled steel, instead concentrating on semi-finished products.

Continuously-cast steel output by country in percentage to the crude steel output in 2011

Source: World Steel in Figures 2012

The graph shows, that only 53.9% of crude steel output in Ukraine is processed further, while in other major steel production countries like China, Japan and United States almost 100% of crude steel is continuously-cast before going to the finishing mill.

Furthermore, in first half of 2012 most Ukrainian steel producers reduced finished roll production by 7% y-o- y, produced 14.962 m tons of finished roll. During the same period crude steel production fell by 3% to 16.939 m tons, but pig iron production rose by 2% to 14.521 m tons.

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3. Trends and developments Output and consumption trends

The volume of steel consumption in Ukraine is growing, but is still far below pre-crisis levels.

Steel products consumption, m tons

Total consumption, m tons

Source: State Statistics Service of Ukraine, UPE Co

The expected growth rate of apparent steel consumption in Ukraine in 2012 is 10% vs. 26% in 2011. In 2012 steel import to Ukraine is expected to be nearly 2.1 m tons.

Prices for metals and key raw materials in Ukraine

Iron ore concentrate (65% Fe), USD/t cpt, w/o VAT Coking coal charge, USD/t cpt, w/o VAT Scrap 3A, USD/t cpt, w/o VAT

Source: UPE Co

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Prices for iron ore and coking coal in Ukraine in 2012 are expected to decline by 13% and 5% respectively in response to declining prices at the global steel markets. At the same time shortage of scrap will support growing price trend (+8.6% to 2011).

Tear-and-wear of metal making facilities

Today, the pace of renovation and modernization of iron and steel enterprises outperforms estimated figures outlined by the State Program for development and reformation of mining and metallurgical companies till 2012 (approved in 2004). In 2006-2007, capital investment in the modernization of iron and steel enterprises have reached the average European levels (USD 28.3 and USD 48.5 per ton, respectively). At the same time tear-and-wear level of Ukrainian iron and steel production facilities (65% and more) is twice above the similar indicators in EU.

Vertical integration
Low profitability of Ukrainian iron and steel enterprises in 2009-2011 amid steel prices volatility and high raw material prices forced steel making enterprises to join companies controlling highly-profitable iron orereserves. As a result, Ukraines iron and steel industry consolidated into the vertically merged holdings.

Internal market perspectives Internal consumption

Stronger domestic demand was recorded for rolled products in 2011 at almost 7.7 m tons, while the last year`s figure totaled only 5.3 m tons. Analysts attribute an upward dynamics to the revival of the domestic machine-building industry (especially, car-building sector) and partially to the recovery of the construction industry, including construction works related to Euro 2012. Still domestic market uses about 25% of the output. Increase in domestic consumption could be reached through implementation of complex program aimed at renovation of metal fund (content of metal in the countries production facilities). Currently 337 out of 571 m tons of Ukraine`s metal fund is depreciated and worn-out (60%). This fact shows existence of the powerful internal growth factor for metals and mining industry in Ukraine.

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Opportunities: insights
The total power consumption of Ukrainian steel making enterprises required for the production of cast-iron and steel is about 30% higher than for modern production facilities based in EU-27, India and China. Energy-output ratio per ton of steel in Ukraine reaches 840 kg of equivalent fuel while in EU countries this indicator is 1.9 times lower (450 kg of equivalent fuel). The cost of fuel and energy resources accounts for 50% of rolled metal products cost, while in some countries this indicator equals 20%. The production of one ton of steel in Ukraine requires 52.8 man-hours, whereas in Russia and Germany this figure totals 38.1 and 16.8 man-hours, respectively. The whole world demonstrates tendency towards development of flexible electrometallurgy, thus replacing inefficient and outdated open-hearth furnaces. Though, open-hearth furnaces are still in operation in Ukraine, Russia and India. Operating at full production capacity a Ukrainian entity doing primary steelmaking from ores, is able to demonstrate labor productivity close to 200-250 tons of steel per worker per year. In contrast labour productivity of a contemporary electrometallurgical mini mill would be 3000-4000 tons per annum.

4. Leading players
The following companies are considered to be the key players of Ukrainian mining and metals sector Key player System Capital Management (SCM) Description Ukraines largest business group, major owner of iron ore deposits in Ukraine. SCM owns 75% of Metinvest. SCM also has a 49.9% stake in Kriviy Rih Iron Ore plant, and shares control over this mining company with Privat, Ukraines second largest business group, which owns an identical 49.9% stake. Metinvest is a major steel group fully integrated vertically from iron ore extraction to steel production and is recognized mining and steel industry leader in Ukraine. It is already the 5th largest iron-ore producer in the world, and produces 14 m tons per year of crude steel. The group comprises a mining and steel production facilities located in Ukraine, Europe and the USA and has a sales network covering all key global markets. Russian business group Smart holding owns the other 25% of Metinvest. Smart holding is also a major stakeholder in Pivdenny GOK, owning 48%. Multinational ArcelorMittal operates an in-house mining and enrichment plant at its Ukrainian steel mill, ArcelorMittal Kriviy Rih.

Metinvest

Smart holding

ArcelorMittal

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Key player Ferrexpo Description The first Ukrainian company listed on the main market of the London Stock Exchange, member of the FTSE 250 UK Index. Ferrexpo is a Swiss- headquartered resources company with its main assets in Ukraine and is principally involved in the production of iron ore pellets which are used in the manufacturing of steel. Ferrexpos plants are situated on the Kremenchuk magnetic anomaly, a 50 km long iron ore deposit in Ukraines Poltava region making it the largest iron ore deposit Europe. Evraz EVRAZ is a large vertically-integrated steel, mining and vanadium business with operations in the Russian Federation, Ukraine, Europe, USA, Canada and South Africa and employs approximately 110,000 people. The company is ranked the 15th largest steel producer in the world based on crude steel production in 2010 (16.3 m tons). In 2011 EVRAZ produced 16.8 m tons of crude steel. EVRAZ is largely self-sufficient in respect of iron ore and coking coal with the majority of its internal consumption covered by its mining operations. Evraz owns 50% of Pivdenny GOK and 98% stake in Sukha Balka. Slovak-based company focused on steel-related commodity trading, controls Zaporizhia Iron Ore. Currently, annual extraction is around 4.5 m tons of high quality iron ore (sinter and lump ore), with iron content making it one of the highest quality ores from the countries of the former USSR. MINERFIN bought a stake of 36% in the ZZRK company in 1997. In the following years it gradually increased its stake in the company to the current 51.17%. Privat Ukraines second largest business group, which owns an identical 49.9% stake in Kriviy Rih Iron Ore. Privat Group controls dozens of companies from practically every industry in Ukraine, Ghana, Russia, Romania, United States and other countries. Steel, oil&gas, chemical, energy and food industry are sectors of the groups prime influence and interest. ISD ISD is ranked among Top-40 largest international steel producing companies with the annual production capacity amounting to 10 m tons of steel. Corporation owns a diversified product portfolio, including semi-finished, final flat and long products. The Corporation implements a number of ambitious programs in steel industry aimed at reconstruction and expanding of production capacities. From 2005 till 2011 ISD has invested USD 2.7 bn in technological modernization. ISD owns and operates the following steel plants in Ukraine: Alchevsk Metallurgical Plant, Alchevsk Coking Plant, Dneprovskiy Dzerzhinskiy Metallurgical Plant.

Minerfin

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These companies control 100% of Ukrainian GOKs (mining and beneficiation companies) and significant share of metal production. GOKs Inguletsky GOK Pivnichny GOK Poltava GOK ArcelorMittal KR Pivdenny GOK Centralny GOK Kriviy Rih Iron Ore Zaporizhia Iron Ore Sukha Balka Okrmekhanobr Owner Metinvest Metinvest Ferrexpo ArcelorMittal Evraz/Smart Metinvest SCM/Privat Minerfin Evraz Metinvest Method of extraction Open-pit Open-pit Open-pit Open-pit/underground Open-pit Open-pit/underground Underground Underground Underground Underground Basin of operation Kriviy Rih Kriviy Rih Kremenchuk Kriviy Rih Kriviy Rih Kriviy Rih Kriviy Rih Bilozersk Kriviy Rih Kriviy Rih Output 2010*000 t. 15,435 14,219 11,226 9,984 8,953 6,072 5,908 4,500 1,825 905 % 20% 18% 14% 13% 11% 8% 7% 6% 2% 1%

Ferrous metallurgy
Company name Mariupol Illich Plant Azovstal ArcelorMittal KR Donetskstal Met. Plant Zaporizhstal Dnipropetrovsk Dzerzhinsky plant Alchevsky Metall. Plant Nikopol Ferroally Plant Enakievsky Met. Plant Makeevka Metall. Plant Dneprospetsstal Dnipropetrovsk Petrovsky plant Zaporizhya Ferroall. Plant Stakhanov Ferroalloy Plant Donetsk Met. Plant Donetsk Metal-Rolling Plant Owner Metinvest Metinvest ArcelorMittal Donetskstal Metinvest ISD ISD Privat Metinvest Metinvest Privat/VS energy Evraz Privat Privat Donetskstal Donetskstal Disposable income 2010, USD m 24,885.3 23,832.8 23,480.2 18,981.8 13,197.9 10,752.2 10,653.1 9,378.7 8,872.3 5,402.6 4,014.6 3,674.5 3,001.7 1,488.1 697.5 442.5 Disposable income 2009, USD m 13,347.80 15,704.50 14,398.2 9,680.9 8,963.1 9,380.5 10,074.5 5,224.8 6,127.2 2,762.0 2,149.0 2,856.40 1,815.9 809.9 496.7 273.3

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Non-ferrous metallurgy
Company name Nikolayev Alumina Plant Artemovsk Non-Ferrous Metal Plant Zaporizhya Alluminium Plant Ukrsplav Zaporizhya Ferroall. Plant Owner Rusal Ukrpodshipnik Rusal ISTA Privat Disposable income 2010, USD m 2,757.4 1,857.4 658.3 322.0 583.1 Disposable income 2009, USD m 2 ,967.0 1, 081.5 673.5 179.1 246.3

Coke industry
Company name Avdeevski Koksochim Plant Alchevski Koksochim plant Yasinovski Koksochim plant Zaporozhkoks Makeevkoks Gorlovski Koksohimprom Dneprokoks Bagleykoks Dneprodzerzhynskiy Koksochim plant Owner Metinvest ISD Donetskstal Metinvest Donetskstal ARS Privat Evraz Evraz Disposable income 2010, USD m 7,040.7 5,934.2 3,518.4 2,870.4 2,583.1 1,559.5 1,537.4 1,365.5 1,310.0 Disposable income 2009, USD m 3,715.0 3,953.6 2,122.2 1,719.5 1,507.0 911.0 793.4 729.1 724.4

5. Organizations and associations

Organization UKRFA Brief description Ukrainian Ferroalloy Producers Association (UkrFA) was established in 1998. The aim - to represent and protect the interests of Ukrainian producers of ferroalloys. http://www.ukrfa.org.ua/main.html Ukrainian Association of Steelmakers (UAS) a nonprofit, nongovernmental organization that is dedicated to development and dissemination of scientific knowledge and technological information about melting, ladle treatment and casting, as well as the quality of metal. http://uas.su/articles/raznoe/00004/00004.php

UAS

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Organization The Ukrainian Association of Ferrous Metallurgy Enterprises UkrMet Brief description Nowadays UkrMet consists of 38 enterprises, industrial unions and organizations of mining and metallurgical complex (MMC) of Ukraine. The main goal of the Association is to protect and coordinate activities of Ukrainian ferrous metallurgy enterprises on domestic and international market, increase the efficiency of industrys activity and improve MMCs investing attractiveness. http://www.ukrfer.org.ua/Map_eng.php The main goal of the Federation is to protect the interests of owners and their organizations - employers mining complex - in economic, social, labor and other relations, protection of their legitimate rights and interests, influence on the process of socio-economic policies to improve social and labor relations and social partnership development in Ukraine. http://www.frgu.org.ua/ The structure of the state stock company Ukrrudprom consists of 6 mining and processing iron ore and three companies for the production of flux products. Creation of conditions for development and raising of technical standards as well as assisting in solving state issues and representation and protection of interests of its members Coordination of processing and trading companies that perform operations on the secondary metals in domestic and foreign markets of Ukraine. http://www.ukrscrap.com.ua/index.html

Federation of Employers of Miners of Ukraine Ukrrudprom

Ukrainian Association of Scrap Ukrscrap

6. Legislation Licenses, permits, limitations

As subsoil is the exclusive property of Ukrainian people it can only be used and not owned. Mining operations including those performed according to product sharing agreements (hereinafter referred to as the PSA) are in general treated as subsoil use. Ukrainian legislation requires licensing for the following types of activities within metals and mining sector: Extraction of precious metals and stones, precious stones of organigenic origin, semiprecious stones; The licensing body is the State Service of Geology and Subsoil of Ukraine (hereinafter referred to as the SSGS); Storage, recycling, metallurgical processing of scrap base and ferrous metals. The licensing body is the Ministry of Economic Development and Trade of Ukraine; Collection, primary operations with waste and scrap of precious metals and stones, precious stones of organigenic origin, semiprecious stones. The licensing body is the State Assay Office of Ukraine.

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For use of subsoil it is necessary to obtain special permit. Special permits are issued by SSGS (through auction with some exceptions) after agreement of the land plot issue (if required) with local councils. The issue to be noted is that the owner of special permit cannot alienate his rights on subsoil use granted by the relevant special permit and cannot contribute such right to authorized share capital. There is an exception when the rights may be transferred to the third parties simultaneously with transfer of rights and obligations under PSA with mandatory reissuance of respective special permit. There are three main types of permits: For the purposes of mining operations special permits are granted for 20 years (30 years for gas and oil within offshore sea and exclusive economic (sea) zone). The term can be prolonged; For the purposes of geological survey of mineral deposits of state importance, for extraction of fresh groundwater, development of peat deposits another special permit is required. There are additional approval procedures with regard to these types of activities (with Ministry of Ecology and Natural Resources of Ukraine (hereinafter referred to as MENR), State Committee of Ukraine for Supervision on Labor Safety, Ministry of Health of Ukraine). Special permits of this type are granted for 5 years (10 years for gas and oil subsoil). For some cases terms are 20 (30) years; The third type of special permit is permit for some mining and construction related operations. Such permits may be granted for 20(50) years. After obtaining special permit the company should start mining within two years (180 day for gas and oil) otherwise such permit will no longer be valid (this rule is not applicable for PSA). There are also special requirements for storage, recycling, metallurgical processing of scrap (i.e. companies which perform such activities should have qualified staff and relevant equipment, ensure ecological safety, possess equipped land plot and to be compliant with other requirements).

Controlling authorities
The central executive bodies in the sphere of metals and mining are Ministry of Economic Development and Trade of Ukraine and MENR. Other authorities involved in management of this field are: SSGS, State Assay Office of Ukraine etc.

Special regulations
The main legislative act governing the industry is the Code of Ukraine on Subsoil dated 27 July 1994. Additionally, there is a significant number of other regulatory acts, including those of the Cabinet of Ministers of Ukraine.

Taxation
Metals and mining enterprises as a general rule are obliged to pay corporate income tax (hereinafter referred to as CIT), Value added tax (hereinafter referred to as VAT). The CIT is currently calculated at a flat rate of 19% until 31 December 2013 and 16% from 1 January 2014 onwards. VAT is currently levied at a rate of 20% of the taxable value of domestic supplies, imported goods and auxiliary services. The VAT rate will be reduced to 17% from 1 January 2014. Additionally to CIT and VAT enterprises of metals and mining sector are taxable with special taxes/duties below: Duty for subsoil use Business entities using subsoil for the extraction of mineral resources (including extraction of mineral resources during geological surveys), on the basis of abovemen-

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tioned special permits, must pay subsoil usage duties. For tax purposes, duty payers should maintain separate (from other types of activities) financial and tax accounting of incomes and expenses for extraction of each type of mineral resource for each type of subsoil, for which a special permit is provided. The duty rate depends on the type of resource extracted and the volume of mineral resources extracted during a reporting period. For example, use of land to perform oil and gas extraction is charged at UAH 147.63 (app.EUR 13.8) per ton of oil and at UAH 42.05 (app. EUR 4) per 1000 cubic meters of gas. Rent duty for extraction of oil, gas and gas condensate in Ukraine Rent duty rates for extraction of oil, gas and gas condensate depend on the volumes of natural gas, oil and gas condensate extracted in relation to the depth (i.e., above or below 5,000 meters) of the subsoil plots, from which these resources are mined. Rent duty for oil and natural gas extraction is currently charged at UAH 2,141.86 (app. 200) per ton of oil and at UAH 237 (app. EUR 22) per 1000 cubic meters of gas for wells that are less than 5km deep; and at UAH 792.54 (app. EUR 74) and UAH 118.5 (app. EUR 11) for oil and gas respectively for wells that are more than 5km deep. Environmental tax Environmental tax is levied on pollution of air and water and relates specifically to a number of environmental problems caused by shale gas and oil extraction technology. The environmental tax is a complex and subjective area of taxation that is linked to the type of pollution, storage and waste. The tax depends largely on the method of extraction and permit held by the PSA/Joint Venture Agreements and is paid by legal entities engaged in shale gas and oil extraction.

7. List of references:
1) Billet production cost // Ukr Prom Zovnish Expertyza 2) Yearbook // State Statistics Service of Ukraine , Kyiv 2010 - ukrstat.gov.ua 3) Global ranking // ISSB, - http://www.issb.co.uk 4) Statistics // The World Steel Association, - worldsteel.org 5) Market Statistics // OECD, - oecd.org 6) Market Statistics // UPE Co

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Industry overview