Domestic steel industry is already part of the European industry

Ukraine must ensure economic integration on its way to EU. Domestic business should be adapted to the new conditions and be able to benefit from them. What exactly these conditions will be is the subject of heated discussions. We have recently heard certain statements from our European partners about the need to regulate grain supplies for Ukraine’s accession to the EU, so it is not known what other issues may arise in other sectors of the economy.

For Ukraine’s steel industry, the issue of European integration has a long history and we can say that the domestic steel industry is already part of the European industry. But there are certain challenges and a long way to go to overcome them.

Ukrainian steel industry was integrated into European production chains even before the war

Indeed, it can be said that the European market was «home» for Ukrainian steel producers. Before the war, the share of sales to the EU was about 35%, compared to 20% in the domestic market. However, trade integration was not due to, but in spite of, economic policy of EU, as import restrictions were actively imposed on the EU market.

This stimulated the development of another form of integration, namely vertical integration. Ukrainian steel companies were forced to build vertical integration with European rolling mills. As a result, Metinvest Holding acquired plants in Italy (Ferriera Valsider, Metinvest Trametal) and the United Kingdom (Spartan UK). ISD Corporation included plants in Hungary (Dunaferr), Poland (Huta Czestochowa) and Bulgaria (Promet Steel). The scheme of work was that Ukrainian plants supplied semi-finished products (slabs, square billets) from which European plants produced rolled products.

This interaction was beneficial for both Ukrainian producers and European consumers. Ukrainian producers were able to utilize their own iron ore mining and steelmaking capacities, while European consumers received products to meet their own needs.

Vertical integration also worked in the other direction. Ukraine’s largest steel enterprise is owned by ArcelorMittal, a global company with its headquarters in Luxembourg. Until 2005, the plant was known as Kryvorizhstal, and now it is called ArcelorMittal Kryvyi Rih (AMKR) in honor of its parent company. AMKR supplies pig iron, square billets and iron ore concentrate to the Group’s other EU operations.

The war has created a need to find new forms of integration

But the war broke the existing cooperation schemes. Initially, back in 2014, the ISD actually ceased to exist. And after a full-scale invasion, Ukraine lost control over Azovstal and MMK named after Ilyich, which exported more than 2.3 million tons of slabs per year to the EU. Accordingly, European factories that are part of Metinvest are forced to look for other opportunities for purchasing slabs.

By the way, the issue of restarting the slab market in the EU is quite acute after the loss of supplies from Ukraine. Market erosion is possible due to the shortage of semi-finished products. A significant part of European rolling mills continue to buy Russian-made slabs. This situation distorts competition on the EU market, as Russian suppliers try to give “reputational” discounts. And this is precisely what prevents access to the market of other suppliers of slabs that cannot compete on price with Russian ones. Such a closed circle.

It is possible to correct this situation by creating an additional domestic offer on the slab market. One of the possibilities is a new plant on the territory of the European Union, which will work on Ukrainian iron ore raw materials. It is this idea that the “Metinvest” group, which has announced plans to build a new plant in Italy in partnership with Danieli, is trying to implement. The new metallurgical plant would help increase the loading of Ukrainian mining and processing plants due to the production of DR pellets. So far, this project has not received the necessary permits, there is a certain bureaucratic red tape.

Needless to say, the Europeans are not keen on seeing Ukrainian business in their market. Another example is when Metinvest Holding tried to buy Dunaferr in July 2023. The attempt failed due to the position of the Hungarian government, which did not allow the company to participate in the tender. However, if the deal had gone through, it would have been beneficial for both parties. Ukrainian mining and beneficiation plants would have been able to increase production meeting the needs of the Hungarian plant, and Dunaferr would have continued to operate. But Liberty Steel, which became the new owner of Dunaferr, suspended steel production at the plant in August 2023 for 3 months.

The EU has become more open to trade cooperation

On the other hand, the war has contributed to the development of trade integration between Ukraine and the EU. Back in June 2022, the European Union suspended protective import quotas and anti-dumping measures for Ukrainian steel products. And today we see that domestic companies are developing their business and opening steel service centers in the EU. The EU has become the main export market for Ukrainian steelmakers since the war began, with the share of exports to the EU increasing for all types of products.

Trade integration also works in the EU-Ukraine direction. European companies are actively interested in the Ukrainian market. More than one company has already expressed its intention to open representative offices and service centers in Ukraine. Opening steel service centers is a way to attract new customers and deepen cooperation.

But again, the risks of trade partnership remain. For example, the EU abolished duties on steel products, realizing that there would be no significant supplies from Ukraine during the war. But after the war is over, the situation may change, as European countries are very pragmatic about protecting domestic producers. The process of Ukraine’s accession to the EU may be lengthy, and possible reintroduction of trade restrictions will hinder economic integration. At the same time, Ukraine is unlikely to protect its market from European suppliers. This means that Ukraine’s market will remain open. This is an important area for future diplomatic work.

Climate issues have a significant impact on the future of Ukrainian integration

A separate factor that may hinder the European integration of steelmakers is climate issues and the green energy transition. What climate commitments Ukraine will make to join the EU is an important discussion that is currently taking place. The outcome of this discussion will determine the future of the steel industry in Ukraine.

In particular, the introduction of a carbon payment mechanism for importers to the EU (CBAM) could lead to the fact that the pig iron segment in the EU, where Ukraine has a share of about 50%, could cease to exist and be replaced by hot briquetted iron from the Middle East or Russia. Ukraine does not produce these products. Along with the loss of 1.5 million tons of pig iron supplies, CBAM could lead to the loss of an additional 1.6 million tons of semi-finished and finished steel products.

Over the past 20 years, climate policy in Ukraine and the EU has been asynchronous. Therefore, Ukrainian enterprises should have access to European decarbonization funds. Otherwise, in 5-10 years, Ukrainian companies may not be ready for economic integration into the EU market.

But at the same time, we have areas for mutually beneficial cooperation in the decarbonization of steel production. European plants need DR pellets to produce direct reduced iron. Ukrainian enterprises can supply such products. In other words, the EU needs Ukraine to decarbonize its steel industry.

Ukrainian steelmakers have a history of European integration that has been fraught with trade barriers. It is positive that the situation is changing for the better. But the main risks in the future are climate-related. Without overcoming them, further economic integration into the EU is impossible.