Mauro Longobardo: “The problem is competitiveness, even after the war”

CEO of ArcelorMittal Kryvyi Rih — about prospects and problems of iron & steel production in Ukraine

Crude steel output in Ukraine grew by 21.5% in 2024. Launch of the second blast furnace at ArcelorMittal Kryvyi Rih mainly contributed to this result. But the situation in the industry is not so rosy and steel output could be reduced by 9% this year, according to GMK Center estimates. A number of challenges such as continued hostilities, weak prices on global market, trade barriers, coal supply, electricity supply, raising costs created the basis for cautious expectations. We found out from the discussion with Mauro Longobardo, CEO of ArcelorMittal Kryvyi Rih how one of Ukraine’s largest investors and taxpayers ArcelorMittal Kryvyi Rih copes with these challenges.

In the exclusive interview with GMK Center, he told about the company’s results in 2024 and plans for 2025, as well as factors influencing the company’s performance.

Mr. Longobardo, what was 2024 like for ArcelorMittal Kryvyi Rih?

So, the last year was better than 2023. We started the year with operations of one blast furnace. Then, starting from the second quarter, we moved to two blast furnaces. And we had actually two quarters with a pretty high utilization  of operated capacities. We tried to go to the maximum, despite the lack of some resources, people mainly. But it was still 50% lower capacity compared to pre-war.

But when we are faced with high energy prices and market weakness, we shut down one of the blast furnaces in Q4, instead of operating both for the full nine months. So, we produced 1.65 million tons of steel and 0.7 million tons of commercial pig iron, mainly exported to the United States.

In mining segment, we started 2024 with the idea of producing initially around 7 million tons of iron ore concentrate, that amounted to 70% of pre-war volumes. Then we said we can produce more – even 8.5 million tons, because prices were okay. In the end, we finished the year with 7.8 million tons, as the market in China weakened and prices went down. Despite the stimuli the market is still there and the price forecast for 2025 is not the best.

If the market weakens, then lower operating results should be expected?

We hope this year to go for more. Our target is 1,9 million tons of steel, 1.78 million tons of finished steel, 1.15 million tons of semis, and of course 0,83 mln tons of commercial pig iron. And it means that we aim to operate one blast furnace in Q1 and two blast furnaces in the rest of the year. But plans could change as there are a lot of impacting factors.

Is it right that export was the main factor of output growth in 2024?

Yes. Domestic market provided us with good dynamics only in the first half of the year. There were some infrastructure projects. But then, when they were finished, the market was not going at the speed that we expected.  I would assess domestic market dynamics last year as neutral.

So, we have been starting developing the new markets, that we didn’t have before. Before the war our products 80% used to go to exports, and 20% to domestic market. And the markets that we used to serve were our traditional: Mediterranean Sea, Middle East, Africa. But we supplied very limited volumes to Europe as we used to face quotas.

With the beginning of the war we started developing Eastern Europe market. It wasn`t easy task as the competition is very high. Fragmentation of customers is also very high. All of them accepted us as a company with a reputation. So, we started the process of certification in 2022. Then some trials were in 2023. This year we are able to create a base for further development.

But we need to be accurate. You can’t enter new markets with big quantities. So, our products were going to different countries in different areas of the world. The sea corridor contributed to this, because export routes via Romania or Poland were too expensive and squeezed us out of the market.

Can we say that in 2024 ArcelorMittal Kryvyi Rih took advantage of the disproportion in prices for iron ore and scrap by exporting billet?

I would say square billet is a product that we sell to Europe intragroup to our company in Poland, to open market, to other markets like Turkiye. But it’s a matter of price, when it`s beneficial to sell billet.

For example, supplies of Russian produced billets is a big issue. The prices are low because Russians try to sell their material with discounts. And these offers form market prices. It’s very difficult to go from Ukraine with the package of extra costs that we have and compete with Russian billets. Maybe you don’t compete directly with them, but we should work on the market, that based on Russian offers. Also, customers of Russian semis get cost advantages, that they can realize in production of finished steel and compete with us.

Let’s be honest, sanctions are clearly not effective. There are several ways to circumnavigate these sanctions. And especially for products like pig iron. We saw that Russian pig iron is continuously being sold to Europe anyway. Incredibly we are selling more pig iron to the United States than to the neighbor markets, because they buy from Russia.

The main excuse of Russian products buyers is that that company specifically is not under sanctions. From their perspective everything is okay. From our perspective it is a little bit different story. Because sanctions were put not to hit one or two companies, but to hit the economy and avoid the economy getting money to reinvest in the military. But when you sanction only the part of the sector, the other part is continuously flowing. So, you don’t have the required effect.

Ukrainian industry is currently operating with European electricity prices. How efficient is the mining segment today, given that the share of electricity in concentrate production is over 50%?

Unfortunately, in the moment there is a deficit of electricity in Ukraine. We need to import and commit 60% of imported electricity to ensure stable electricity supply. As a result, we pay the price of electricity that formed in the countries electricity is coming from – Poland, Slovakia, Hungary. But then there is a huge share of electricity transportation in total electricity price. So, we pay for electricity more than European companies, but they have access to energy subsidies.

If, as forecasted, iron ore will go down lower $100 per ton in China, at the end of the day, it will be very difficult with our cost structure to continue export concentrate. Of course, we will produce material for ourselves and for our sister company in Poland. But the extra, that could be exported, for example, to China will be halted. We are also aware that if we produce less volumes, we increase our unit costs. It will have a negative impact on other sales.

Of course, developments on the Chinese market could change everything. The geopolitical situation might impact this situation too. It will depend on Trump’s administration decision in terms of market protection against China. That’s the point – decisions of the US could affect developing countries like Ukraine, that could lose its exports because of introduction of new tariffs against China.

Recently, the US extended the anti-dumping duty on bars from Ukraine. How much trade barriers affect the company’s exports?

We applied to the Sunset Review for the anti-dumping duties in the US. Our case went to the International Trade Commission, where I went myself as a witness.

Honestly, I was thinking that our case was pretty solid in the sense that looking at the quantities that we can send to the United States and looking at the market they have. Anyone could understand that this will not generate any harm. By the way, the United States is already importing a lot of material from other places in the world.

And in general, our position is that our material to the United States will just replace some other imports. We will not attack any of the US produced material. But the opposition they put in front of the International Trade Commission told that Ukraine will destroy the market in the US with dumping.

So, we lost this case, the duties remain. They just managed it on the political side. Not considering that it was not a good moment to allow the revision of the anti-dumping duties for Ukraine. Ukrainian steel producers don’t have any chance for dumping with current costs level and policies.

Another day the war will be finished. Can we say that it resolves some limiting factors and boost operational results?

As per today, I would say we aren`t limited to produce the maximum we can, in terms of resources availability. The problem is competitiveness. And this competitiveness will be a problem also after the war. And I will go through a short list of things.

The first one is electricity. You see that the electricity companies, despite all the losses and attacks, their financials are still positive. They are positive because the tariff is increased and manufacturing sectors pay for this. There are some peak hours when energy import costs $600 per MWh. So, this is completely out of scale. And it is very difficult for a company like us to switch on and switch off the plant accordingly. If we want to operate, we need to take it when it is expensive. But this is creating a huge amount of cost increase.

All the companies that are transporting energy, including gas, increased their tariffs. Okay, Ukraine refused transit of Russian gas, closed the pipeline. But customers in Ukraine, every manufacturing company must pay for pipeline maintenance. I assess our cost increase for energy transportation in $11 million this year.

Water supply costs also increased. After the destruction of the Kakovka Dam, the quality of the technical water is deteriorating dramatically. Because we take it from another place. But the price of it has increased continuously. Why? Because the water company also pays for electricity. They transfer their elevated costs onto consumers, on us.

Now we are in discussion of railway tariff growth by 37%. They actually announced it, but the decision has not been taken. Logistics is still expensive. Port charges compared to pre-war, double, as well as insurance and freight.

Coal is another issue. Of course we sourced coal from Pokrovsk, that stopped operations. We will have to import. I don’t think it will be a problem of availability. The point is the higher cost of bringing it.

Our company, as the final ring of the chain, absorbs all of these points. Steel industry is the latest ring of the chain that cannot transfer this extra cost to the price, that forms by the global market.

So, someone has to do something in order to make our industry sustainable. My vision is that most of the issues aren’t directly linked to the war. So, these problems will not disappear after the war and negatively affect the industry in the long term. That’s why we need actions.

What urgent actions do you think we need here in Ukraine?

The first idea is to stop any tariffs increase on things that are controlled, at least by the government. Utilities, energy, logistics are all state companies. And to make sure that also regional institutions do the same.

There should be central coordination of tariffs regulation. There should be someone saying how much taxes and money the industry could contribute to the GDP of the country and calculate fair consequences of tariffs or taxes rates raising.

Many of the problems that I mentioned are independent from the war. When the war is over, we will be safer, we will be happy for sure. But from the business perspective, we will have big problems to compete anyway. I’m afraid that after the war, we will not be able to solve all of these things.

Also, we need systematic economic and industrial policy.  Because if we live 5 years after the war without actions, we will not be able to compete anyway. Some steps can be very simple. Electricity can be cheaper by developing nuclear generation, for which there is all the infrastructure. Gas can also be cheaper. We buy gas in the EU, so we pay more for it than European companies because we have to pay for transportation. Ukraine is rich with energy resources, it`s reasonable to stimulate investments in their development. This is beneficial both for industrial companies and for the entire economy of the country. Cheap energy is the key that will attract investors to Ukraine for industrial development, as we see in other countries.

All problems that you mentioned are systematic that relate to all manufacturing companies in Ukraine. So, it could add to losing competitiveness of all Ukrainian industrial potential.

Because if costs in Ukraine are similar to European, Ukraine will not have the development that other countries have. Look, when CEE countries joined the European Union, they had lower costs than other European countries for a long period. That’s why they developed. Companies from Western Europe opened facilities there and step by step developed the country. Then the costs somehow aligned but still remained somehow lower. So, if I compare Romania with Germany, the costs of manufacturing are lower.

But in Ukraine now, it looks like we move in another direction. So, how will we develop industrialization in Ukraine if the costs are the same as in the EU? For what will investor come to Ukraine?

If costs are the same nobody put a plant in Ukraine. So, we need to keep competitiveness of this country.

That’s a very important point. Because the European steel industry is also call for urgent actions to restore their competitiveness. And they manifested several steel action plans.

But look, I believe that Europe will do. Because they have financial and institution abilities to do. I don’t think that Ukraine could provide us any funding or subsidies, or other supportive measures. It didn’t happen even before the war. We  have always relied on our own.

But another problem, that we need to compete on the European market with companies that receive state support. Because I compete with someone that is already in the middle of the market. And on top of it, they receive subsidization or grants or whatever. But we need additionally to pay for transportation to reach the European market.

If we really think that Ukraine should develop, costs in Ukraine should be lower. I don’t think a company that invests billions, will choose to invest in Ukraine instead of Poland, for example, if costs in Ukraine and Poland are the same. I don’t see anyone at the top level that is really thinking about that yet.

If current policies continue what future awaits ArcelorMittal Kryvyi Rih and Ukrainian iron & steel sector?

The risk that we won’t develop and have to downsize is very high. Even our current operation results will be unsustainable. It will affect the size of the capacity installed in the country. Because local production should be the most competitive for the domestic market, because of logistic advantages. But exports will be lost.

Let’s imagine a circle. The logistics circle. As far as you go, as less you are competitive, because you spend more on logistics. So, if you start already with a big cost, then you can serve only the neighbor market.

So, if the cost issue isn`t resolved, Ukraine cannot be an effective exporter of finished products. It will become only an exporter of raw materials. Regulation decisions make us, as a metallurgy industry, a mining industry.

We need to address the social impact of this, because it will be huge. If you produce 10 million tons of pellets, you don’t need so many people. Most of our people are involved in the downstream. And it could be the reason for migration. Less jobs, less people.

European countries look at Ukraine, trying to help. But they will be happy if Ukraine reduce its finished products exports and expand with raw materials. No one except Ukrainians is interested in the development of the country. If we provide raw materials to others and the others make their downstream. I disagree with this approach.

Is the lack of personnel limiting the company’s operations today?

Mobilization is a huge problem. 3,500 people of our employees were drafted to the army. But at the same time, 3,000 people left the company on their own. So, we lost more than 6,000 employees. Last year we needed  to hire 1,000 workers to ensure smooth operation of the plant

Mobilization rules continuously change and make people afraid. The short-term issue is let’s stop changing the rules every 3 months because it’s a nightmare. When there is a new rule, we see the peak of people leaving the company. If mobilization age is lowered it will be another outflow of young employees.

How the company stays afloat in this situation? Has the company exhausted its margin of safety?

First of all, in the last two years we somehow created and optimized industrial footprint. Squeezing of course anything that we can squeeze in terms of our cost. Plus, the development of our position on the market. We are currently experiencing a deterioration in prices, and this is bad for our competitiveness, which is exacerbated by the increase in our costs.

The war actually consumed all our resources. The company has generated negative cash for the third year in a row. In 2024, I assess we close the year with about minus $100 million in cash. Even if you might have some positive EBITDA, then you have to finance all the investment plans from this amount. Our planned  CAPEX requirement  for 2024 was about $160 million per year. But this year we could execute only $100 million

Of course, the parent company supports us. This is the answer to our efforts here. But it becomes difficult to manage this situation. We cannot lose forever. If the movement is not in the direction of development, but degradation, and there are no prospects for changing the situation, the answer will be downsizing.

And being a large taxpayer, you often have some problems with control bodies.

This is a typical problem for large companies in Ukraine. Taxes in Ukraine are collected using a monopolistic approach, as well as with tariffs, through pressure.

We have the issue of the repeated tax claims. The last one concerns rent for using subsoil for iron ore mining for the period of 2015-2019. Based on the results of the audit, we were charged a certain amount of additional fees. We went to the court. We won all three levels of the court.

Then they came for a second time for the audit with the same subject. We again went to the court. And we again won all three levels of court system. Now they open again the same period. In any country, once the process of justice is completed, it’s finished. But not here. We hope again to win.

But we had two surprises this year with the land tax, land lease tax, in which there were some claims related to 2018 and 2019. And for both claims, we have been winning the first instance and the Court of Appeal. But for some reason, Supreme Court suddenly reversed both. And we lost 17 million dollars. We don’t generate such money, but we had to pay immediately. That`s why we were forced to reduce our investment program for this year.

Having all these problems, what makes you, as an investor, stay in Ukraine?

ArcelorMittal has been in Ukraine for 20 years this year. It’s a responsibility. We have been with Ukraine through thick and thin. And we want to take the fullest possible role in post-war reconstruction of the country.

We want to stay in Ukraine. We have kept all the people during the war. Nobody has been fired or removed from the company during the war. And it creates a lot of losses, much more than what we would have done if we decided to downsize. But we didn’t want to downsize, and this is one of the first examples why we want to stay in Ukraine. And we have plans, strategic plans we had before the war.

But underinvestment issues make Ukrainian industry vulnerable to green transition?

Before the war I could think that green transformation was a journey of maybe 15 years. So, we could wait to end life of our existing blast furnaces and then replace them with another technologies. But as for now I think we`ll need to have low carbon product in 5 years to stay on European longs market.

CBAM and climate commitments will oblige us to go in that direction. We might get a waiver from CBAM it would be helpful and provide us with some gap in time when the war finishes in which we will have to start our investment program.

But look, I’m worried about the business plan, green projects could not be accepted. With the current level of costs and cost structure it will be a problem. Before the war it was not a problem. Everything was approved. But as for now we have problems with the effectiveness of these investments.

The cost of investment is the same in every part of the world. When we talk about DRI facility investment requirements are close to $1 billion. So, you put it where your operational cost is less. That’s why I’m talking that we should do something to raise the attractiveness of Ukraine as a country for industrial development.