Ukrainian Railways has not sold scrap for more than a year

For more than a year now, Ukrainian Railways JSC (UZ) has not been selling scrap to the domestic market of Ukraine through auctions in the Prozorro.Sale system. The last time the raw material was put up for auction was in September 2023, but since then the railroad operator has considered it expedient to refrain from selling it, despite the fact that it hits the state budget, iron and steel and state-owned companies hard.

Scrap is a strategic raw material for steelmaking at steel plants, and its availability is especially important for ensuring stable operations of the plants in the ongoing war. Since most scrap producers were located in the eastern territories that are now occupied or near the frontline before the Great War, the market has been facing a shortage of raw materials. An additional blow came from a sharp increase in exports, despite the critical need for scrap by domestic steel companies.

The railroad operator’s prolonged absence of scrap sales is due to several factors. Initially, UZ wanted to obtain the right to export raw materials, but did not receive permission from the Cabinet of Ministers. In the spring of 2024, UZ planned to resume sales, but this intention was not realized. The company claims that the sales were hampered by an imperfect regulatory framework. At the same time, according to MP Musa Magomedov, UZ has all the legal capacity to hold auctions and sell scrap through Prozorro.Sale.

Since UZ is the largest state-owned company producing scrap, with annual sales of about 10-13% of domestic scrap consumption, the refusal to sell poses a real threat to Ukraine’s steelmakers, who are gradually increasing steel production. In 2023, the company sold only 76.4 thousand tons, while in 2022 it sold 113 thousand tons against the planned 170 thousand tons.

This has led to an increase in operators’ costs, made significant changes to the companies’ policies and market balance, and has become an additional negative factor in the current difficult operating environment for Ukrainian steelmakers.

At the same time, the delay in the resumption of Ukrainian Railways scrap sales may have more consequences than just difficulties in procuring raw materials. In particular, this includes a reduction in tax payments to the state budget, failure of steelmakers to meet production targets, financial losses for UZ, and reduced opportunities for steel companies to support the Armed Forces and society.

In addition, UZ is now determined to increase freight transportation tariffs, while the previous 70% increase in tariffs took place in June 2022. The company argues that this step is necessary to maintain profitable operations, increase capital investments, etc., but the real facts point to problems in operations that are being solved at the expense of shippers. One of the methods to improve the company’s profitability, which, unfortunately, is not being implemented, is to restore scrap sales. In 2023, revenue from sales of raw materials amounted to UAH 460 million, in 2022 – UAH 670 million, and in 2021 – UAH 1.5 billion.

As GMK Center reported earlier, in the first half of 2024, scrap collection in Ukraine increased by 62% y/y – to 860 thousand tons. Raw material supplies to domestic consumers amounted to 687 thousand tons (+66% y/y), while exports amounted to 124.5 thousand tons (+35.3% y/y). Steel production in January-June increased by 37% y/y – to 3.87 million tons.