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Business proposes to revise the approaches to calculating the price of a unit of commodity production of a mining company

15/ 08/ 2024
  In July, representatives of the Subsoil Use Committee of the European Business Association participated in meetings of the working group on determining the price of unit production of a mining enterprise—extracted minerals—as observers without voting rights. The business community is grateful for the opportunity to attend the working group. However, entrepreneurs remain concerned about the decisions made and the published prices for the unit production of mining enterprises, which impact the activities of subsoil users, both domestic and foreign investments, and the industry as a whole. Cabinet of Ministers Resolution No. 1374 approved the Methodology for Determining the Starting Price for the Sale of Special Permits for Subsoil Use at Auction (electronic auctions). According to Paragraph 4 of the Methodology, the price of a unit of production of a mining enterprise—extracted minerals—is determined on the date of calculation and equals: The actual sale price of natural gas, oil, and condensate, published on the official website of the Ministry of Economy; The price determined according to this Methodology for all other minerals by processing the source information received from the STS and the State Commission, and the price published on the official website of the State Service of Geology and Subsoil of Ukraine for the previous quarter, with the higher value being selected. At the same time, experts from the ЕВА’s Committee note that unlike the markets for natural gas, oil, and condensate, which are relatively well-formed, competitive, and balanced across the country, the markets for other minerals can be volatile. As a result, constant fluctuations in the price of unit production of mining enterprises significantly affect the planning of acquiring special permits for subsoil use and the business activities of mining enterprises. To understand the price fluctuations, the approved price of unit production of a mining enterprise for Q3 2024 was published on the official website of the State Service of Geology and Subsoil of Ukraine. The prices for some types of unit production exceed market prices by more than 26 times. For example, the price of sand in Q2 2024 was 165.48 UAH per cubic meter, while in Q3, it was already 4,427.3 UAH per cubic meter. Considering the aforementioned provisions of the Methodology, ЕВА experts conclude that in the next quarter, the approved price of unit production of a mining enterprise cannot be lower than that approved for the previous period. According to business representatives, this situation could pose a risk of halting the sector’s activity in terms of acquiring new special permits for subsoil use through auctions, among other things. In other words, for many potential and existing domestic and foreign investors, acquiring a special permit for subsoil use may become unprofitable. A loss of interest in the sector could significantly reduce the industry’s investment attractiveness, decrease revenue and fee inflows to the state budget, which, according to the Committee’s experts, could negatively impact the country’s economic situation as a whole. Thus, the business community believes that the sharp increase in the price of unit production compared to previous periods results from an imperfect approach to determining it. According to companies operating in this field, actual market prices for the aforementioned minerals have not changed significantly; neither seasonal changes nor the global market situation had an impact on pricing policy. Additionally, business representatives argue that the same minerals in different regions (even districts) can vary significantly in price per unit of measure. Therefore, considering the average unit price when determining the price of unit production of a mining enterprise is not entirely correct. Consequently, the European Business Association believes that the approaches to calculating the starting price for the sale of special permits for subsoil use at auction should be reviewed, or the indicators provided, particularly by the STS, to the State Service of Geology and Subsoil of Ukraine for approving the price of unit production of mining enterprises should be reconsidered. The ЕВА has already sent letters to the Minister of Environmental Protection and Natural Resources Ruslan Strilets, Minister of Finance of Ukraine Serhiі Marchenko, and Head of the State Service of Geology and Subsoil of Ukraine Roman Opimakh, requesting assistance in changing the approach to calculating the starting price for the sale of special permits for subsoil use at auction, including through amendments to the Methodology. At the same time, the business community proposes a meeting to discuss the situation described above. As of the publication date, the ЕВА has received responses from the State Service of Geology and Subsoil of Ukraine and the Ministry of Environmental Protection and Natural Resources of Ukraine expressing readiness for dialogue and preparation of draft amendments to the mentioned normative legal act.

In July, representatives of the Subsoil Use Committee of the European Business Association participated in meetings of the working group on determining the price of unit production of a mining enterprise—extracted minerals—as observers without voting rights.

The business community is grateful for the opportunity to attend the working group. However, entrepreneurs remain concerned about the decisions made and the published prices for the unit production of mining enterprises, which impact the activities of subsoil users, both domestic and foreign investments, and the industry as a whole. Cabinet of Ministers Resolution No. 1374 approved the Methodology for Determining the Starting Price for the Sale of Special Permits for Subsoil Use at Auction (electronic auctions).

According to Paragraph 4 of the Methodology, the price of a unit of production of a mining enterprise—extracted minerals—is determined on the date of calculation and equals:

  • The actual sale price of natural gas, oil, and condensate, published on the official website of the Ministry of Economy;
  • The price determined according to this Methodology for all other minerals by processing the source information received from the STS and the State Commission, and the price published on the official website of the State Service of Geology and Subsoil of Ukraine for the previous quarter, with the higher value being selected.

At the same time, experts from the ЕВА’s Committee note that unlike the markets for natural gas, oil, and condensate, which are relatively well-formed, competitive, and balanced across the country, the markets for other minerals can be volatile. As a result, constant fluctuations in the price of unit production of mining enterprises significantly affect the planning of acquiring special permits for subsoil use and the business activities of mining enterprises.

To understand the price fluctuations, the approved price of unit production of a mining enterprise for Q3 2024 was published on the official website of the State Service of Geology and Subsoil of Ukraine. The prices for some types of unit production exceed market prices by more than 26 times. For example, the price of sand in Q2 2024 was 165.48 UAH per cubic meter, while in Q3, it was already 4,427.3 UAH per cubic meter. Considering the aforementioned provisions of the Methodology, ЕВА experts conclude that in the next quarter, the approved price of unit production of a mining enterprise cannot be lower than that approved for the previous period. According to business representatives, this situation could pose a risk of halting the sector’s activity in terms of acquiring new special permits for subsoil use through auctions, among other things.

In other words, for many potential and existing domestic and foreign investors, acquiring a special permit for subsoil use may become unprofitable. A loss of interest in the sector could significantly reduce the industry’s investment attractiveness, decrease revenue and fee inflows to the state budget, which, according to the Committee’s experts, could negatively impact the country’s economic situation as a whole.

Thus, the business community believes that the sharp increase in the price of unit production compared to previous periods results from an imperfect approach to determining it. According to companies operating in this field, actual market prices for the aforementioned minerals have not changed significantly; neither seasonal changes nor the global market situation had an impact on pricing policy. Additionally, business representatives argue that the same minerals in different regions (even districts) can vary significantly in price per unit of measure. Therefore, considering the average unit price when determining the price of unit production of a mining enterprise is not entirely correct.

Consequently, the European Business Association believes that the approaches to calculating the starting price for the sale of special permits for subsoil use at auction should be reviewed, or the indicators provided, particularly by the STS, to the State Service of Geology and Subsoil of Ukraine for approving the price of unit production of mining enterprises should be reconsidered.

The ЕВА has already sent letters to the Minister of Environmental Protection and Natural Resources Ruslan Strilets, Minister of Finance of Ukraine Serhiі Marchenko, and Head of the State Service of Geology and Subsoil of Ukraine Roman Opimakh, requesting assistance in changing the approach to calculating the starting price for the sale of special permits for subsoil use at auction, including through amendments to the Methodology. At the same time, the business community proposes a meeting to discuss the situation described above.

As of the publication date, the ЕВА has received responses from the State Service of Geology and Subsoil of Ukraine and the Ministry of Environmental Protection and Natural Resources of Ukraine expressing readiness for dialogue and preparation of draft amendments to the mentioned normative legal act.

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