GMK Ukraine

The authorities and the industry are trying to come to an understanding regarding the support of the iron and steel sector

The military aggression of the Russian Federation against Ukraine caused significant damage to the entire economy of the country. At the same time, the most affected industry is iron and steel sector. A drop in production by 70% and a complete loss of 40% of production capacity is far from the full list of war losses for industry. As one of the budget-generating branches of the economy, iron and steel sector now needs state support.

The biggest victim

During 2022, the industry faced new challenges that severely limited its production capabilities and exports. Since the beginning of the war, in connection with the blockade of seaports, a significant part of the industry’s exports has shifted to the railways and European ports. However, the railway infrastructure on the western borders of Ukraine and the priority in favor of agricultural products greatly narrowed the possibilities of exporting iron and steel products. A sharp increase in railway tariffs, logistical difficulties and weak demand for these products in Europe led to the fact that several mining and beneficiation plants stopped working at once in the summer.

At the same time, the non-reimbursement of VAT to exporters or its insufficient volume during 2022 washed away the working capital of enterprises. As a result, some companies even had to borrow funds. Thus, the EBRD will provide ArcelorMittal Kryvyi Rih with a $100 million loan to finance working capital.

Another blow to the industry was the Russian missile attacks on the energy infrastructure. Due to interruptions in energy supply, some of iron and steel enterprises stopped work or, like ArcelorMittal Kryvyi Rih, had to alternately start up key production equipment.

“The mountain department works at 20-25% of our regular volumes. In steel production, we will soon re-blow blast furnace №6 in order to reach the level of steel production in 20-25% of our capabilities,” said Mauro Longobardo, CEO of ArcelorMittal.

At the Kametstal Iron and Steel Works, after the repair of the main equipment, which suffered as a result of the Russian attacks on the energy infrastructure, only one building is working. The plant resumed steelmaking after a forced shutdown in November. In general, the entire industry now works at no more than 20-30% of its pre-war capabilities.

“A critical situation has developed in the basic branch of the economy – the iron and steel complex. The drop in production here is from 68 to 70%. Only two steel mills and four iron ore plants are working,” emphasize the Ukrainian Union of Industrialists and Entrepreneurs (UUIE).

Good intentions

Back in August, the Ministry of Economy created a headquarters to solve urgent economic issues. This was preceded by an appeal from branch organizations with a request to review the situation at the industry.

Already in October, representatives of the authorities and the stee industry discussed the following topics:

  • improvement of logistics for mining and metals complex’s products ;
  • acceleration of customs and phytosanitary clearance of Ukrainian exports;
  • extending the terms of Ukrainian entrepreneurs’ access on preferential terms to the markets of the EU, the USA and Canada for a longer period than is provided for now;
  • sanctions against Russian companies and a ban on importing products from Transnistria into Ukraine;
  • inclusion of steelmakers in the list of enterprises that can use the law on industrial parks.

“At this meeting we discussed the main challenges facing the industry since the start of full-scale war. In addition to the issue of the safety of our employees and enterprises, this is a significant increase in the cost of production due to the forced change of logistics routes. The main issue of logistics is the unblocking of sea ports for sending steel cargo by sea. The declared position of Turkiye and other international partners can contribute to this, but even greater pressure is needed from the Ukrainian side. As for the issue of cost price – steel enterprises are currently operating at a loss, cash receipts do not even cover variable costs. In particular, Minings cover an average of 50-70% of variable costs. At the meeting, the intention to create a high-level working group to solve the problems of the industry was announced, but this has not been done so far,” says Oleksandr Kalenkov, president of Ukrmetalurgprom.

The Ministry of Economy plans to promote the increase in the processing of steel raw materials and the export of finished products with a high share of added value. The ministry is also ready to provide potential investors in steel sector with cheap electricity and raw materials. Moreover, the ministry named this sector among the priority industries, along with the defense complex, military-tech and agro-processing.

“The situation can be improved by reducing railway tariffs to the level of the beginning of 2022, as well as reducing electricity transmission tariffs. Ukrzaliznytsia and Ukrenergo can improve their condition at the expense of loans and grants from international partners, without transferring the financial burden to the industry, which has already suffered a lot during the war. It is also necessary to consider the possibility of canceling the mining rent and environmental fees at least until the end of the war. However, these decisions require political will at the highest level. I hope that such decisions will be made at the beginning of 2023,” adds Oleksandr Kalenkov.

What has been done?

It cannot be said that the authorities did not listen to the industry, but most of the issues relate to the uncertain future and largely do not depend on Ukraine. In 2023, the Ministry of Economy plans to work on the expansion of Ukrainian exports, in particular, on the extension of duty-free trade regimes with the EU, the USA and the UK at least for the period as long as the war continues.

“The key task for the development of the steel products export with high added value is the removal of trade barriers. For example, this applies to pipes, which are subject to customs duty in all major markets,” explains Andriy Tarasenko, chief analyst at GMK Center

According to Oleksandr Kalenkov, positive dynamics of the movement of steel cargoes through the western border crossings were observed in 2022 – Ukrzaliznytsia, the Ministry of Infrastructure and other departments did everything possible on their part to increase the cargo flow. However, transport infrastructure has physical limitations from neighboring countries and the need for significant investment to expand capacity.

The government also plans to stimulate the process of creating joint railway checkpoints of Ukraine on the border with neighboring EU countries to speed up export logistics.

The key point for the steel export is the unblocking of the Black Sea ports, but no one in Ukraine can promise this.

“At the beginning of the war, the Russian fleet blocked Ukrainian seaports. This destroyed Ukrainian maritime exports. According to our estimates, monthly export losses for Ukraine reach $420 million due to blocked seaports (1.3 million tons of iron ore, 151,000 tons of pig iron, 192,000 tons of semi-finished products, and 218,000 tons of finished steel products). To mitigate the first wave of war consequences, which include disruption of supply chains, Ukrainian seaports must be unblocked. This will support the Ukrainian economy and restore supply chains,” emphasizes Stanislav Zinchenko, CEO of GMK Center.

This year, steel industry did not receive any tax preferences. As part of the spring tax reform and the introduction of taxation at 2% of turnover, PIFs benefited, while big business did not get what they expected. As for VAT refunds, the state reached relatively rhythmic indicators only in October and November – UAH 10.9 and 13.6 billion, respectively.

It is obvious that the industry needs real and specific state support, because not only the fate of the industry will depend on it, but also foreign exchange revenues to the state budget and even the exchange rate of the hryvnia.

Point solutions will allow to increase the loading of enterprises of the industry to 60-70%, companies will be able to increase payments to the state budget.

Despite all the difficulties, iron and steel companies continue to support the country’s economy. In January-September 2022, Metinvest Group transferred almost UAH 18 billion of taxes and fees to the budgets of Ukraine at all levels.

“In these difficult times, we are trying to support the country’s economy in any possible way. Despite the shutdown of several enterprises in Mariupol and Avdiivka, Metinvest remains one of the largest taxpayers, a reliable pillar of the Ukrainian economy. The closure of the Black Sea ports due to the war leads to a difficult situation with the logistics of the products of our minings in Kryvyi Rih, a decrease in the level of loading, downtime of enterprises. However, we are looking for alternative ways to export products, improve operational efficiency, help the army and the population in order to bring Ukraine’s victory closer as soon as possible,” says CEO of Metinvest Yuri Ryzhenkov.

Iron and steel companies turn to the state for support for the industry, which can become a positive driver for the entire economy of the country.

“We will prepare an appeal to the president regarding the situation in the iron and steel complex. The industry needs complex state support,” summarizes Anatoliy Kinakh, president of UUIE.