The Russian invasion of Ukraine came as an unprecedented shock for the local steel industry. Most Ukrainian steel plants suspended their operations and set the equipment to the hot conservation mode, the issue of safety came first. Steel plants cannot work during shell, which poses a threat to the lives of workers and production facilities.

Stanislav Zinchenko, CEO, GMK Center

Stanislav Zinchenko, CEO, GMK Center

At the same time, logistical problems arose. Since the beginning of the war Ukrainian seaports have been unavailable because Russian warships blocked the Black Sea, in addition to the risk of mines. In fact, there was only one direction left for the export from Ukraine – to the EU by railway. Export opportunities to the EU are limited by the capacity of border crossings.

The war has disrupted supply chains. According to our estimations, 90% of steel capacities are not operating now. Some enterprises are trying to resume production and increase volumes, but it is difficult due to downtime of other plants in the supply chain. In particular, most coking plants have stopped production.

To resume the operation of coking plants, it is necessary not only to ensure their safety, but also to arrange supplies of coking coal. Russia was the main supplier of soft and semisoft coking coal, which was used for coke production and pulverized coal injection. In 2021 Ukraine imported from Russia 8m tons of coking coal. The share of Russian supplies in the Ukrainian domestic market was 43% and substitution of coal supplies from Russia is challenging.

Currently in Ukraine only one out of six integrated steel plants are working fully, Kametstal (former Dniprovskyi Iron and Steel Works). According to a statement by Metinvest Group, which controls Kametstal, this plant works with 80% of production capacity utilization. Other companies resume only rolling operations or supply steel products from warehouses. ArcelorMittal Kryvyi Rih announced the possible launch of a blast furnace in April.

About 1/3 of Ukrainian steel capacities are located in Mariupol – Azovstal and Ilyich Iron and Steel Works. Mariupol is the hottest point of this war. The city of half a million people has been surrounded for a month and is constantly being shelled. Active hostilities are going on in the city streets. No one knows exactly what damage the steel plants received. Management says that the plants will be restored as soon as peace returns to Ukraine. The restoration of urban infrastructure may take a longer time, this is important for the resumption of production.

Transport is a major problem that prevents factories from starting up. Steel companies are trying to solve the issue of expanding transportation together with the national railway operator Ukrzaliznytsya.

Stoppage of steel production led to disruption in supplies of by-products. Almost all integrated steel plants in Ukraine have air separation units (ASUs), which produce oxygen and other industrial gases. Ukraine is the world’s largest supplier of noble gases including neon, krypton and xenon. All these gases are essential for semiconductor manufacturing. Globally, Ukraine supplies about 70% of neon gas and 40% krypton gas.

Moreover, Ukraine supplies 90% of the highly purified neon for chip production in USA. The two major purifiers for Russian and Ukrainian neon are in Odessa. Now it is nearly impossible to use those facilities in supply chains. Termination of noble gas supplies from Ukraine will push prices up and we will inevitably see aggravation of chip shortage.

The war led to the cessation of iron & steel supplies not only from Ukraine, but also from Russia. The segments of pig iron and semi-finished products felt the most negative impact of the war. In 2021 EU imported 22.4% from Russia and 29.4% from Ukraine. USA imported 34.3% of pig iron from Russia and 28.5% from Ukraine.

The lack of Russian and Ukrainian supply led to an increase in pig iron prices from Brazil by 16-19% in a month (from the end of February to the end of March). By comparison, iron ore prices rose 12% over the same period.

Source: Eurostat, customs services of Ukraine and Russia, calculations of GMK Center

 

The termination of iron & steel supplies from Russia is due to two reasons. Firstly, some Russian plants cannot supply products to the EU and the USA due to personal sanctions against owners. Secondly, buyers voluntarily refuse to import from Russia because of ESG risks and settlement problems. This situation exacerbates the shortage in the iron & steel market.

To resume supplies, it is necessary to stop hostilities and unblock the ports of the Black Sea. In such conditions most Ukrainian steel plants can restore operations within 1-2 months after the conclusion of the peace agreement. For Mariupol plants, this process will not be fast. After current hostilities in the city damage audit will be required to assess state of the plants. Also, it will take some time to restore the destroyed infrastructure in the city.

So, war creates challenges for all participants in the global economy. We can see disruptions in supply chains, decreasing production volumes, rising prices. The economy needs peace. Only end to the war will make it possible to restore global value chains fully.

Stanislav Zinchenko is the CEO of GMK Center, a Ukrainian based think-tank with focus on CIS iron&steel sector. GMK Center offers comprehensive consulting services and industrial expertise. GMK Center works with all key players in Ukraine – Metinvest, Interpipe, Ferrexpo, ArcelorMittal Kryviy Rih, DCH Steel, Centravis. Also, GMK Center highlights the main events and trends in steelmaking industry through the web-portal https://gmk.center/en/GMK Center is a communication platform as well, organizing forums, round tables and meetings for market participants.