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By John Helmer, Moscow

Interpipe, the steel and pipemaking group owned by Victor Pinchuk (lead image, centre) and based in Dniepropetrovsk, is high and dry, according to the latest financial report signed by the auditors on June 30, 2014. That is despite having suffered a 14% downturn of sales revenues for the year to $1.5 billion; a 5% increase in the bottom-line loss to $73.4 million; and its default on borrowings which now total $1.03 billion. Just $34.5 million in cash is on hand. With additional current liabilities of $343.2 million, Ernst & Young, Interpipe’s auditors calculate that , “the Group’s current liabilities exceed its current assets by $649.1 million.” That’s ground, the auditors warn, “of a material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern.”

Excerpts of the report were issued to creditors and bondholders two weeks ago. The full report can be read here. The company’s website has yet to publish the 55-page document.

clinton_pinchukInterpipe may be on the rocks, so far as Ernst & Young are concerned. But Pinchuk, one of the most active advocates among Ukrainian oligarchs of the alliance with the European Union and the North Atlantic Treaty Organization, is not letting on that the civil war is having a direct effect on Interpipe’s production, trade, or financial position. War risk is unmentioned. Instead, the statement of the “principal risks and uncertainties” refers to the “cancellation of quota regime for pipes in the Customs Union (signed by Russian Federation, Belarus, and Kazakhstan)” and a “decline in Ukrainian railcar construction industry resulting in lower Group’s sales of wheels.”

Interpipe was able to sell pipes to Russia, its principal market, until July 1, 2013; revenues from that trade for the year amounted to $405.8 million, down by just $91.2 million. The loss of the domestic, Ukrainian trade was much bigger – down by $138.3 million to $392.8 million. The Russian trade comprised 27%; the trade with Kazakhstan and Belarus added another $252 million or 17%. The domestic trade contracted from 30% in 2012 to 26% in 2013.

There has been no sign that Pinchuk’s plants in Dniepropetrovsk region have been directly affected by the surrounding political and military violence. For that Pinchuk is dependent on his arch-rival, the current governor of the region Igor Kolomoisky. Pinchuk is suing him in the UK High Court for more than a billion dollars, and Kolomoisky is likely to retaliate.

trainDemand for Pinchuk’s pipes depends on activity levels and new investment in the oil and gas sector, as well as in construction and infrastructure. As the Ukrainian economy contracts this year at a rate of almost 6%, sales of pipes are bound to fall by at least double that percentage. The prospect for Pinchuk’s wheels is no better. Railway rolling-stock construction in the Ukraine is concentrated in the eastern regions, including Poltava, Lugansk, Dniepropetrovsk, and Donetsk. It is also dependent on the state budget for procurement.

“Armed confrontations” are noted in passing by the financial report, along with “market downturns”, “economic slowdowns elsewhere in the world”, and “political unrest”. Despite them all, Interpipe says it is counting on the devaluation of the hyrvnia, the new association agreement with the European Union (EU), and the International Monetary Fund’s (IMF) $17 billion assistance programme.

According to Interpipe, “the Group is also actively exploring new geographical markets for its higher margin goods”. Can sales to the rest of the world, including the US and the other American states, the Middle East, and Asia, amounting to 19% of Interpipe’s sales aggregate last year, offset the growing losses in its main markets? Neither the EU nor the US is identified as likely to do so.

beckerOne sign that Pinchuk is trying to improve sales to the EU is the appointment in June, just before the financial report was signed, of a new board director. This is Ulrich Becker (right). No details are provided about him. He appears to have been the chief operating officer of Kloeckner, the large German steel distributor and service centre until September 2012. This is when Kloeckner suddenly announced Becker was leaving “by mutual agreement”.

No cost-benefit analysis is attempted by Interpipe of the IMF programme. However, on page 46 of the new report it is noted that among Interpipe’s costs of production, gas and electricity came to $219.8 million, 18% of total costs. The impact of the IMF’s requirements that Ukrainian gas tariffs be raised by 40% this year, and debts for past deliveries paid up, is likely to exceed the benefit of the currency devaluation. Also, the auditors have identified provisions for litigation awards, customer and other claims amounting to $44.2 million. But there is no mention of Interpipe’s long-running, losing lawsuits as the Ukrainian state supplier of gas, Naftogaz, has tried to recover more than $70 million for past deliveries, and Interpipe has negotiated to reduce this by bartering pipes the gas company requires for its operations. Interpipe executives have acknowledged to bondholders that the current cash obligation to Naftogaz stands at about $40 million. The IMF is now pressing Naftogaz to show Interpipe no further mercy.

According to Ernst & Young, an analysis has been carried out of the impairment of Interpipe’s producing assets, their market performance, their sales projections, and the likelihood they will be able to collect from their debtors. Despite the worsening of all these parameters last year and this, the total impairment charged on the balance sheet for 2013 was $20.3 million; in 2012 the impairment charge was $137 million. Had impairment been accounted for at the same level as 2012, the bottom-line loss would have been a three-digit blow-out.

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