OREANDA-NEWS. June 30, 2010. The Ukrainian government may opt not to extend the special tariff regime for steel producers after its expiration on June 30, 2010, the Minister of Industrial Policy stated June 29. Meanwhile, domestic chemicals producers may retain some of the benefits of the special tariff regime until their situation improves.

Millennium Capital: the news is negative for the domestic metals and mining sector. Against the background of falling steel prices, the removal of the special tariff regime may squeeze the margins of domestic steel producers dramatically. The impact will be even greater for the non-integrated producers, namely Mariupol Illich Steelworks and Zaporizhstal, that will see their margins declining close to the zero point. Currently, domestic steel producers enjoy the railroad and electricity tariffs on the level of Oct 1, 2008, as well as no markup on the natural gas they consume. The removal of those benefits will result in a significant rise in the unit cost of steel for domestic producers. Meanwhile, this news is positive for the Ukrainian railways. If the special tariff regime is not extended on July 1, 2010 the railways will be able to improve their profits further (24-27% of the current EBITDA margins). This, in turn, will result in lower risks for holders of their bonds. Our previous expectations were that the special tariff regime would be removed by Jan 1, 2011.