Once the single largest source of hard currency, accounting for 38 percent of Ukraine’s export revenues in 2011, steel, iron ore and other metal exports have plummeted 24.5 percent since Russia’s war on Ukraine began last year.
First quarter 2015 alone, steel exports were down by more than 30 percent compared to the same period last year, according to Industrial Consulting, a news portal that analyzes the industry.
Combined with low global commodity prices, weak domestic demand, increased energy and transportation costs, Ukraine’s once-mighty steel industry may soon hit bottom.
The main steel and coke plants in the east remain largely unharmed, with the exception of Rinat Akhmetov’s frequently shelled coke plant in Avdiivka. The attacks threaten to disrupt steel production further.
Russia’s proxies have also destroyed or disrupted key railway links. They are crucial for supplying steel-making inputs to plants and for transporting final products, but their damage is causing bottlenecks that hamper production in the occupied territories.
“We’ve managed to preserve our production assets and our workforce, albeit at high costs,” said Yuriy Ryzhenkov, CEO of Metinvest, Ukraine’s largest steel producer. “But the government isn’t paying enough attention to restoring the infrastructure.”
Ryzhenkov illustrates his argument by pointing to the troubled rail lines in the dense network around Donetsk on a huge railroad map of Ukraine stretching across a wall in his spacious top floor office in downtown Kyiv.
Bureaucracy is hurting. No less than four agencies inspect steel-transporting trains today: the tax service, the customs service, the Security Service and the military.
“After each physical inspection, they ask Kyiv for written permission to let our freight through … so turnaround for our freight has grown from days to weeks,” Ryzhenkov said, adding that Ukraine practically have an economic blockade of occupied Donbas in place.
One Metinvest steel mill, the Yenakiieve Iron & Steel Works, is situated in separatist-controlled turf, and three other plants are near the front line, but still on the Ukrainian side: two steel mills in Mariupol and the nation’s largest coke plant in Avdiivka.
The exposure creates supply chain obstacles. Metinvest’s steel and coke output declined by 39 percent and 40 percent, respectively, in the first quarter compared to last year, according to data provided by the company.
Combined Russian-separatist forces have shelled the Avdiivka coke plant more than 270 times throughout the armed conflict, including 30 times on May 22 and 40 on May 24. Located just six kilometers from occupied Donetsk and a supplier of 27 percent of the group’s coke, the Avdiivka plant has seen production cut to one-third of its pre-war output of 12,000 tons of coke daily.
Renewed bombardment led to a complete standstill on May 23, sparking accusations from Prime Minister Arseniy Yatsenyuk that the plant was being targeted to cripple Ukraine’s steel industry.
Ryzhenkov said that although the situation is critical at the plant, he also accused the Ukrainian military of shooting from positions in Avdiivka and drawing retaliatory enemy fire.
Melting metal in the open-hearth plant metallurgical plant “Zaporizhstal” in Zaporizhya on Nov. 15, 2013.
Authorities also are not letting iron ore concentrate reach the Alchevsk Iron & Steel Works, a plant in occupied territory that is Russian majority-owned, Pavel Potemba, editor of the plant’s in-house newsletter, told the Kyiv Post.
This has brought the plant to a halt. Modernized with financing from the International Financial Corporation while it was still managed by former Donetsk Governor Serhiy Taruta, the plant produced nearly five million tons of steel before the war, more than 10 percent of Ukraine’s yearly production.
Only 36 of Ukraine’s 105 legal coal mines operate, with some in Donbas flooded. Also a key component in the steel-making process, the coal industry is also feeling the pain of war.
“We’re now importing coal,” Ryzhenkov said. Still, only seven mines are considered lost and 60 could resume operations, he said.
On the demand side, world prices are at their lowest in a decade. “We’re back to 2005 levels, both for iron ore and steel,” Ryzhenkov said. “With luck, we might be looking at the bottom of the cycle right now.”
Metinvest sold 9.2 million tons of steel last year, 2.3 million less tons than the previous year. With only about half of the country’s steel production capacity located in the war-torn region, other steel producers have fared better than Metinvest. ArcelorMittal’s plant in Kryvyi Rih in Dnipropetrovsk Oblast, actually increased steel output by 10 percent in January–April over the same period last year.
Industry analysts say that 2015 output could fall to levels not seen since the deep economic crisis of the first post-Soviet years. Their estimate of around 22 million tons of steel products – it was 32.8 million tons in pre-war 2013 – could become a reality if current disruptions in the production process continue throughout this year.
Ultimately, says Roman Tobolyuk, an industry expert at Concorde Capital, any eventual comeback for Ukraine’s steel industry will depend on the status of the occupied territories in eastern Donbas.
