Despite the problems with export logistics and the closed mining and proccesing plants, the government has budgeted large rents from iron ore mining in the next year
The issue of state budget revenues from rent for iron ore mining caused many discussions every year. Despite this, the next year’s budget includes solid revenues in the form of fees for the use of subsoil for ore extraction.
In the military year 2022, the iron ore mining sector in Ukraine shows negative dynamics due to the influence of many factors, including:
- a drop in domestic iron ore consumption due to the shutdown of the steel industry;
- impossibility of export due to blockade of Black Sea ports;
- limited possibilities of export by railway transport to the EU;
- decrease in iron ore and steel prices on world markets;
- a 10% drop in steel production in the EU due to high electricity prices.
Current indexes of the industry in Ukraine indicate a sharp drop in domestic demand for iron ore. The reason is the reduction of steel production in 8 months of 2022 by 64.5% y/y – to 5.19 million tons. Ukrzaliznytsia transports less and less cargo for export every month due to limited opportunities. For example, in August, the iron ore shipments fell to 1.404 million tons.
Against this background, the Cabinet of Ministers adjusted the indicators included in the state budget, but they remain quite optimistic. Industry experts believe that the formula for calculating rent payments is incorrect, as it does not include logistics costs, which, according to companies, have increased by 3-5 times due to the war.
In 2023, according to the draft law “On the State budget of Ukraine for 2023” (№8000 dated September 14, 2022), the government expects to attract to the state and local budgets revenues from fees for the use of subsoil for the extraction of iron ore in the amount of UAH 5.41 and 2.32 billion, respectively, which is only 21.9% lower than the expected value in 2022.
“The draft budget envisages a 22% reduction in rent revenues from iron ore mining. The dynamic is understandable because of the war in Ukraine and the deterioration of the world market. The problem of export logistics remains unresolved. In the current conditions of uncertainty, it is very difficult to make predictions. Therefore, the estimates included in the budget are approximate, and noticeable deviations for the worse next year cannot be ruled out,” says the GMK Center analyst Andriy Glushchenko.
Budget estimates roughly correspond to the optimistic expectations of global analysts. Although the international agency Fitch Ratings revised its forecasts for iron ore prices in 2023 and 2024 to $85/t and $75/t, respectively.
Representatives of the industry take a more realistic view of the situation and suggested temporarily abandoning rent collection, referring to the difficult situation at mining and beneficiation enterprises.
“We also proposed (to authorities) to zero out the rent for the extraction of iron ore during the war (enterprises are already operating at a minimum, accordingly, rent payments have also decreased, and if production and exports increase, the state will receive more other taxes, more currency, and will increase the load on the state UZ)”, Oleksandr Kalenkov, the president of Ukrmetalurgprom, told earlier in an interview with GMK Center
The authorities did not respond in any way to the proposals of Ukrmetalurgprom.
The situation regarding rent for gas production is different – on September 20, 2022, the Verkhovna Rada reduced the rent for Ukrainian gas production, removing the peg to spot gas prices in Europe. Thus, we can come to the disappointing conclusion that the issue of temporary refusal to collect rent for iron ore mining depends on political will.
The situation at the enterprises of the industry is no more optimistic:
- at the end of June 2022, the head of the company Rudomine Volodymyr Kolos stated, that due to disruptions with logistics on the railway, the company is operating at 50% of its pre-war capacity;
- at the end of July, the Metinvest group announced the suspension of production at the Southern, Ingulets and Northern mining and processing plants;
- at the beginning of August, Ferrexpo published data based on the results of January-June 2022, according to which the company reduced the production of pellets by 16% compared to the same period in 2021 – to 4.8 million tons;
- at the beginning of August, the Kryvyi Rih Iron Ore Plant (KZHRK) announced that in January-July 2022, it reduced the production of iron ore from underground mining by 19.7% compared to the same period last year – to 2.034 million tons.
All enterprises of the industry, despite the difficult situation, continue to pay wages to employees, actively implement humanitarian projects, help city residents with food and medicine, support the Armed Forces and territorial defense.