Increased output is hampered by logistical difficulties, shelling, staff shortages and lack of a risk insurance mechanism

Under war conditions, Ukrainian iron and steel enterprises face the same problems as companies in other sectors of the economy. Apart from military risks and all other things being equal, the main one is logistics. The opening and active operation of the sea corridor since August 2023 has allowed companies in the sector to increase production and exports. And although iron and steel exporters face the problem of priority in favor of AIC products when sending cargoes by rail to ports and port transshipment, the factor of the corridor operation inspires confidence in the industry’s prospects in the current year as well. Despite all the wartime difficulties, the enterprises of the industry are planning to increase production in the current year as well.

Oleksandr Kalenkov, president of the Ukrmetalurgprom association of enterprises, told GMK Center in an interview about logistical difficulties and other current problems and prospects of MMC development under war conditions.

What are the main problems now facing Ukrainian iron and steel companies?

– In the conditions of war, the enterprises of the iron and steel complex have more than enough problems. And from the whole list, first of all, it is necessary to pay attention to the following:

  1. Logistics. Although the sea corridor has been operational since last fall, its throughput capacity does not yet allow to fully ensure the required shipment volumes. First of all, we are talking about the export of iron ore raw materials and, to a lesser extent, finished rolled steel products. Exports of products of a number of steel companies were also affected by the blockade of road crossings on the border with Poland, which is still in effect. At present, the situation and prospects for the development of the industry largely depend on logistics.
  2. Shelling of enterprises. The majority of operating enterprises are located in front-line areas, so the threat of shelling does not diminish over time. On the contrary, they occur almost daily.
  3. Shortage of personnel due to mobilization. This problem is typical for all industries of the Ukrainian economy without exception, but in steel sector it is aggravated by the need to have highly specialized qualifications, significant experience in their specialty for almost all engineering and technical and working personnel of the enterprises.
  4. Lack of risk insurance mechanism. For two years of the war, even in dialog with international partners, it has not been possible to form an effective mechanism for insuring military risks. But without this, no investments can be expected. During the same time the enterprises of the industry have almost completely exhausted their own internal investment resources. Also, due to the lack of insurance, large Ukrainian companies are unable to attract the necessary funds for their activities in foreign markets.
  5. Restrictions on currency settlements. From the very beginning of the war, the NBU imposed severe currency restrictions, which were absolutely justified at that time. In particular, it banned private companies from transferring foreign currency abroad. Now this ban prevents large companies in the industry from servicing their debts, paying for equipment components and imported materials. This threatens technical default and extremely negative consequences for the country and the industry: loss of creditor confidence, deterioration of the situation for companies in foreign markets, etc. Since last summer, this ban has ceased to apply to debt settlements with international financial institutions and to Ukrainian state-owned enterprises for any of their debts, but it still applies to private companies – so there is some discrimination.

What are your expectations for steel production volumes in 2024 based on the results of the first two months and enterprise plans?

– It is difficult to give any forecasts now. We can only make cautious assumptions based on the current situation and influencing factors. If logistics through the sea corridor works well, mining companies will be able to return to 80-90% of the 2021 level. This will make it possible to significantly increase export volumes.

In steel industry, there is also a prospect of increasing production. We hope that steel output in 2024 will be at least not lower than last year, and, taking into account the plans of individual enterprises, we can expect steel output in the current year at the level of about 7-7.2 million tons. All enterprises of the industry have planned a slight growth of 10-15% for the current year.

If the sea corridor continues to work, we can expect a significant increase in export revenues this year due to the growth of exports of iron and steel products, primarily at the expense of iron ore raw materials. Unfortunately, we are still far from the pre-war export volumes and port transshipment of iron and steel products.

How does the shortage of personnel affect the operations and production capabilities of iron and steel enterprises?

– For the enterprises of the industry the task of preserving labor collectives is of paramount importance. For example, from the first days of the war, Metinvest provided evacuation of employees of both steel mills from the destroyed Mariupol and employed people at enterprises in the unoccupied territories. At the same time, ArcelorMittal Kryvyi Rih in 2022 worked with minimal load and suffered a loss of UAH 49 billion, but nevertheless continued to pay salaries, trying to preserve the labor collective as much as possible.

Since the beginning of the war, an average of 12-15% of personnel has been mobilized at the enterprises of the industry, at some – even more. However, even the existing reservation rate of 50% did not fully solve the staffing problems of the enterprises, negatively affecting the technological and production capabilities. It is practically impossible to replace many employees due to the specifics of technological processes.

Besides, the enterprises of the industry work in a fully transparent manner (official employment, white salary) and properly keep records, having lists of employees with military specialties. Military commissions take advantage of this, they come and simply “shovel” people out of production, rather than mobilize, for example, the unemployed, who are harder to find. It is easier for the military commissions, but the damage to specific enterprises and the economy from such actions is much greater.

If the approaches and criteria of mobilization change significantly after the adoption of the relevant law and if it intensifies, it is likely that iron and steel enterprises may simply start to stop. The plants are already at a critical level of staffing of technological processes at 15% mobilization level.

In turn, the shutdown of iron and steel enterprises will cause destabilization in the frontline zone (in which, as mentioned earlier, these enterprises are located), as they are city-forming enterprises. Taking into account the fact that the population of these regions are taxpayers, labor and military resources, related industries, defense and the entire economy of the country as a whole will start to collapse.

In this regard, it is extremely important to keep the industry functioning, and we are in favor of the possibility of iron and steel enterprises booking at least 85% of their personnel. We also propose that when a new person is hired at a company, he or she should immediately receive a reservation, at least for six months.

Despite the opening of the sea corridor, the enterprises of the industry still experience certain problems when using the ports of Big Odessa for export cargo shipment. What are the main ones?

– Our exporters face the problem of priority in favor of agro-products when transporting by rail towards ports and port transshipment. Since the beginning of the corridor operation, more than 28 million tons of export cargoes have been shipped, of which about 2/3 are agro-industrial complex cargoes and only 1/3 are iron and steel products. It is expected that the situation for iron and steel cargoes in the ports will worsen after July 1, when the new export season for agrarians begins and the flow of their cargoes to the ports will increase. This is when the question will arise as to how efficiently we will be able to continue shipping our products for export.

There is also a problem of expensive insurance – from the beginning of the corridor and up to the present moment our exporters pay 3-3.5% of the cargo value. This figure should be reduced to 0.75-1%. Perhaps the industry companies will be helped in this by the expansion of the Unity ship insurance program for all types of cargoes that pass through the corridor.

Well, and it is necessary to further strengthen air defense in the Odessa region and escort caravans of merchant ships by NATO ships.

How has the blockade of western road crossings, which continues on the border with Poland until now, affected the work of exporters in the industry?

– Traditionally, export transportation of steel products by road was insignificant. However, after the outbreak of war, all logistics were reorganized and the share of export road transportation increased. After the blockade of the Ukrainian-Polish border, trucks with steel products for European consumers were redirected to road crossings with Slovakia, Romania, and Hungary.

This resulted in higher logistics costs and longer delivery times. In some cases, Ukrainian exporters lost contracts due to the disruption of delivery deadlines, as buyers refused the products. In the long term, this will result in a catastrophic loss of markets. It is difficult to accurately estimate the losses from the blockade of western road crossings for the entire industry, but this figure amounts to tens of millions of dollars per month.

We are alarmed by another thing: the Polish authorities have started talking about temporary cessation of all transportation from Ukraine – both export and transit. Given the protests by farmers in many European countries, these actions could spill over to other states. It is difficult for me to understand the logic behind such destructive and completely untimely actions. I hope that this situation will be resolved quickly, because this is more an issue of Poland’s relations with the European Union than with Ukraine.

What types of raw materials does the industry lack or have delivery problems with?

– Due to the loss of some coke-chemical facilities, the industry is experiencing a coke shortage. The situation with coking coal is also complicated – the mining facilities in Pokrovsk are located in the frontline zone, which is constantly shelled. Therefore, the importance of the sea corridor for import of coking coal may grow in the near future.

After the beginning of hostilities, the situation with scrap has deteriorated significantly – both scrap collection and demand have significantly decreased, but the collection of raw materials has fallen more severely. Also, unfortunately, scrap exports increased sharply – 3-4 times compared to 2022, up to 182.5 thousand tons. All exports went to EU countries at a preferential duty of 3€ per ton, but some of these shipments were further diverted to Turkiye, India and other countries.

We suspect that many scrap exporters obtained the EUR.1 certificate required to export raw materials to the EU through corrupt means. Due to such shady schemes, the state budget lost more than UAH 1 billion last year, as the current duty of €180 per ton was not levied on the above export volume.

Now Ukrmetalurgprom initiates the introduction of a temporary ban on scrap metal exports during the war period and for a period of 3-5 years after the end of hostilities. I think that our European partners can meet us in this respect. They realize that Ukrainian scrap exports are not going to them, but are being redirected to third countries, while this raw material will help us in rebuilding the country.

If nothing changes, scrap exports from Ukraine may reach 300 thousand tons this year, especially since the duty on shipments to the EU has been reduced to zero from January 1, 2024. This will create a huge deficit in the domestic market, which last year was at least 70 thousand tons. Because of this, the use of pig iron in steelmaking has increased, which has affected the increase in the cost of steel products.

The European CBAM mechanism has already actually started its work. What sources can be used to finance the environmental modernization of Ukrainian steel enterprises?

– Ukrainian steel companies have accepted decarbonization as part of their business and development strategy. But it is important for us that the conditions for our enterprises are the same as for European companies. The most important point in this is access to financing.

Currently, Ukraine does not yet have an emissions trading market, although it may appear soon. At the same time, we have a tax on CO2 emissions. However, in most European countries both the market of quotas and the emission tax do not operate at the same time – either one or the other. Therefore, I hope that as soon as a quota market is created in Ukraine, the emissions tax will be abolished.

We also see how the quota trading system works in the European Union. For the last 10-15 years, European companies have been receiving quotas for free and with a reserve, i.e. more than they actually need. This is a hidden system of subsidies to the European steel industry.

Moreover, now European companies receive billions of euros for modernization of enterprises from their governments, as well as through a large number of different funds. And these are not only loans, but also grants on an irrevocable basis.

What is the situation with us? Ukrainian steelmakers will definitely not be able to modernize their production facilities at the expense of their own or even borrowed funds – the amount of necessary investments is estimated in tens of billions of dollars. Already at the stage of negotiations on accession to the EU, Ukraine should be able to obtain funding from the relevant European funds in the form of grants or soft loans.

Our country has not yet participated in such programs, and it is difficult to say when it may start. The situation is aggravated by high insurance and military risks, strict currency regulation, etc. Of course, Ukrmetalurgprom constantly raises these issues at meetings with European structures, but negotiations should be conducted at the intergovernmental level.

According to your estimates, will the global market conditions in 2024 favor the growth of demand for Ukrainian iron ore and steel products?

– The world remains very turbulent – there are many conflict hotspots, many countries will hold parliamentary or presidential elections this year, all of which is not conducive to growth in economic activity and, as a consequence, a steady increase in demand for steel. On the other hand, a small point of growth in demand for steel is the military-industrial complex companies due to the sharp increase in military expenditures in the world.

The key markets for Ukrainian exports show mixed trends – India and Turkiye are growing, but China is a big question mark. The state of demand in China and Turkiye has a direct impact on Ukrainian steel industry, while in India – indirectly.

An important aspect is the reduction of export dependence of Ukrainian steel sector. In recent years, Ukrainian companies in the industry have exported 80% of their output. Last year, the domestic market grew to about 45% of its own rolled steel production. Therefore, we have great hope for domestic demand, for the increase in steel consumption through the program of fortification and restoration of destroyed infrastructure. Domestic demand in Ukraine has a great potential, so I hope that at least half of our output will be used for our own needs.

In the conditions of war, it is important to get the trade policy right. We support the extension of the preferential trade regime with the EU, the USA and other countries. However, despite the partial lifting of trade restrictions for Ukrainian steel products in the US market, there are still a considerable number of high anti-dumping duties of 20-25 years ago on Ukrainian steel products, which levels out the preferences granted to us. For our part, we are currently working on blocking imports from third countries of steel products made of raw materials or semi-finished products of Russian and Belarusian origin.