- Mills operating at around 20% capacity utilization
- Ukraine lost 40% of steel capacity after invasion
- Crude steel production and exports drops over 60% over Jan-Jul
- Post-war reconstruction may require 15 mnt of steel
Morning Brief: As the Russia-inflicted war rages on in Ukraine, the metals and mining industry is bearing the brunt of it the most, steel in particular. With Ukraine’s steel mills located in the frontline cities, these are under the constant threat of shelling and the safety of its employees, countless of whom have already lost their precious lives, is of paramount importance to the plant owners.
With two major steel plants- Azovstal, and Ilyich Iron and Steel Works- destroyed by shelling in Mariupol, crude steel production over January-July, 2022 is down 62% to 4.82 million tonnes (mnt). Both plants contributed more than 40% of Ukraine’s steel production, as per a report in Ukrainian consultancy GMK Center.
As per the report. The remaining mills are currently operating at around 15-20% capacity utilization. Mining operations have seen a sharp plunge from 70% till June to the current 25%.
Mining operations at Inguletsky, Pivdenny, and ArcelorMittal Kryvyi Rih have been temporarily stalled, due to the drop in production at steel plants and changing global price scenario. Iron ore and steel prices have fallen approximately 35% and 30%, respectively, since the beginning of 2022.
Current revenues are covering only 50-80% of variable costs of mills.
EU still Ukraine’s largest importer
Ukraine, once heavily dependent on exports, is beset with logistic challenges, thanks to the Black Sea blockade. The share of Ukraine’s steel exports is 80% of its production and this is being retained despite the war. However, volumes have dropped a sharp 62% over January-July to 3.4 mnt, and the export geographies have changed because of the blockade. As a result, the share of EU countries has increased from the pre-war 32% to 51% currently.
As per Ukraine Customs data, over January-August, 2022, its iron ore exports dropped 33% y-o-y, pig iron exports by 60%, and semis exports by 67%. Exports of flat products over this period declined by 64% y-oy and long products by 67%.
Logistics challenges loom large
The key challenge for steel is transportation and delivery. Ukraine mills in the pre-war period moved 60% of its material via ports which are now blocked, raising logistics costs 4-6 times. It is more expensive to transport goods to its western borders than to the ports, and then through foreign territories.
Railway infrastructure is not equipped to handle the suddenly increased load — for one, the track width mismatch. Track width in the EU is 1,435 mm against 1,520 mm in Ukraine.
Plus, the series of Ukrzaliznytsia (Ukraine railways) tariff hikes since September 2021 have increased the cost of carrying iron ore and coal by 2.5 times. Tariffs for transporting steel have shot up 70%, the highest since Ukraine’s independence. Added to that are the rail bottlenecks at the borders forcing goods to a standstill for weeks. The steel industry is concerned that the Ministry of Infrastructure took the decision to increase UZ’s tariffs without any consultation.
Oleksandr Kalenkov, President of Ukrmetalurgprom, in an interview to GMK Center, feels if seaports are reopened by the end of the year, then it would be a “breakthrough”, “since the current crisis in the industry is largely related to logistics, which has become more expensive due to the forced redirection of exports.”
He seeks international mediation in this regard. Turkey, for instance, is interested in resuming its trade with Ukraine and has shown willingness to be a mediator in such negotiations.
Steel exports offer 1.5 times more foreign exchange than agricultural products. The opening of ports for mining and metals will ensure an additional $600 million inflow into the country every month and allow the local currency, hryvnia, to stabilise.
Low production negates raw material challenges
There is no shortage of coking coal but that is because plants are operating at such less capacity utilization levels. Currently, there is no shortage of scrap either. But scrap generation has fallen, because regions that traditionally supplied around 50% of Ukraine’s scrap, have now been occupied by Russians or are located within the frontlines. Thus, there are fears that once production goes up, scrap may become scarce.
Gas supply is not a problem at present, again because highly reduced industrial production has led to lesser energy needs. However, in the event of a severe winter and “possible gas blackmail” from Russia, the authorities will have to divert natural gas towards household heating and industrial use will then take a backseat.
Steel industry relief proposals
As per the GMK Center report, Ukraine’s steel industry has presented a set of proposals seeking reliefs from the government. These include:
- Reduction in UZ’s freight tariffs by 50% for raw materials and by 70% for steel products, as well as a reduction in tariffs for electricity transmission.
- Zero rent for extraction of iron ore during the war. Mills and miners are already operating at a minimum, and, accordingly, rent payments have also decreased. But, if production and exports increase, the state will receive more taxes, more currency. UZ cargo load will also increase.
- During the war period, taxes on CO2 and other emissions should be abolished.
Outlook
By the year-end, taking into account the 85% under-capacity utilization by mills, Ukraine is likely to produce 6.5-7 mnt of crude.
Domestic mills already have eyes on the post-war reconstruction, which can increase steel consumption from the pre-war 5 mnt to 15 mnt and are confident of fulfilling the entire steel needs.
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