Panic is at the raw materials and metal markets
Ukraine’s iron ore producers were the first of the large industrial enterprises to start working after the shock of the first days of the war. The enterprises worked with 50% load, which at that time seemed surprisingly high. Resuming the production of iron and steel in Ukraine was difficult, so for domestic mining companies, the only opportunity to work was export.
Before the war, 60% of iron ore exports were exported by sea to China, the MENA countries, and Turkey. Now, with Ukraine’s seaports blocked, Europe has become the only market for exports. Due to the refusal of European steelmakers to work with Russian suppliers, Ukraine got the opportunity to increase supplies to Europe and partially compensate for the loss of overseas markets. As a result, Ukraine increased its share in the EU market to 30%.
Some attempts were made to resume exports to China. New export routes were developed – through the Romanian port of Constanta, as well as through Poland to the port of Świnoujście. There were test deliveries, which, unfortunately, never turned real.
In the second half of April, lower iron ore prices first made deliveries to China unprofitable, then created risks for the entire Ukrainian export of iron ore to Europe.
We waited for summer, winter came
The hopes of Ukrainian miners for a further increase in activity and output did not come true. Few events happened at once, extremely negative for commodity markets:
- the Chinese economy slowed down sharply amid lockdowns that were larger than the first lockdown in February-March 2020;
- the US stepped up with its anti-inflation campaign: the base interest rate was raised, strengthened by verbal interventions.
In general, prices for iron ore have fallen since the beginning of June by 20%, for scrap – by 27%. Prices for rolled steel show a similar trend – minus 23%. Steel producers’ margins have shrunk sharply. They, in turn, put pressure on producers of raw materials, forcing them to lower prices. Seeing what was happening, the end customers simply stepped aside. The fall has accelerated, causing panic in the market in the last few days.
A year ago, when we saw the price of iron ore powders Fe62% in China at $116, it seemed that this was quite an acceptable figure. But that was a year ago. Today, the situation is different, due to both the war and the ill-conceived regulatory policy of “plucking” the solvent sectors of the economy in Ukraine. As a result, the domestic mining industry does not have a safety margin for such force majeure as price decline.
The cost of iron ore production increased significantly before the war. For example, at the end of 2021, Ferrexpo’s cash costs for pellet production were $55.8 per ton, up 34% from a year earlier. There are several reasons. First, high energy prices, which account for 46% of the iron ore cost structure. Second, an increase in rent rates for the extraction of iron ore. Last year, industry-wide rent increases cost $120 million.
In 2021, the cost situation worsened even more, when both electricity and diesel became much more expensive. The wholesale price of electricity (base) increased by 62% yoy, diesel – more than twice, natural gas – up to three times. Given the cost structure, this could mean an increase in cash costs of up to 30% yoy in dollar terms.
At the end of 2021, the Verkhovna Rada again revised the rent mechanism and rates, which could lead to an increase in the costs for mining companies by $200-600 million this year.
Even monetary policy is against the mining industry. Due to the actual existence of two different rates, the exporter loses up to 15% of revenue.
The increase of transport costs also affects the producers. Understanding all the difficulties of logistics from Ukraine, the European buyers accept only the DAP conditions, shifting all the risks to the seller. The longer the wagons wait at the border (and today it can be up to two months), the more the exporter pays.
Last year, a 34% increase in costs was passed on to the buyer, and everything worked. But now the situation has changed, and the increase in costs came at a time of falling prices, which questions almost all Ukraine’s iron ore exports.
The scale of the tragedy
The prices for iron ore in our only European market as of June 24 are:
- sinter ore – $70-80 DAP per ton, depending on the iron content;
- concentrate – $90-100 per ton;
- pellets – $130-140 per ton.
The cost of transporting iron ore by rail to the EU is up to $70 per ton, if we talk about the Baltic ports in Poland. With such prices on the market, it is a priori impossible to talk about the supply of sinter ore. The concentrate price has also already fallen below the break-even point. Pellets, the highest value-added product so far are almost on the edge of profitability.
That is, almost all of our iron ore exports turned unprofitable in June.
We can already see the consequences: production plans for June have decreased compared to May. Today, the average level of industry utilization has decreased to 45% compared to the pre-war period. The volume of exports in June should still be up to 2 million tons. The prices that we see now assume delivery in August. The end of summer and the rest of the year will be very challenging for the industry.