Scrap use in steel sector

Steelmakers warn of raw material shortages amid increased scrap exports and plans to ramp up production

Since September 2023, Ukrainian Railways (UZ) has suspended the sale of scrap at open auctions. Such actions introduced uncertainty into the market balance and became an additional negative factor in the deterioration of domestic supply of raw materials after the multiple growth of scrap exports.

Export intentions

Before last fall, Ukrainian Railways made several attempts to free itself from the obligation to sell scrap metal through the Prozorro.Sales system. UZ wanted to obtain a source of additional income by independently exporting raw materials under direct contracts to Europe (among possible clients were ArcelorMittal, Voestalpine, US Steel, etc.) without paying export duties. In addition, UZ assumed that scrap sold by the state-owned company on the domestic market is exported through intermediaries.

Ukrainian Railways planned to send for export up to 25-30% of its scrap stocks. This floating indicator, at the beginning of 2023 amounted to 184 thousand tons, that is, the state company wanted to export about 46-55 thousand tons.

Ukrainian Railways’ export plans would inevitably face some nuances:

  1. The price should be lower than the market price. Otherwise, the demand from European consumers for Ukrainian scrap is not obvious at all. In recent years, the EU has been a net exporter of scrap metal (18.5 million tons in 2023).
  2. Ukrainian Railways does not have the necessary competencies and technical capabilities to process (sorting, cleaning, etc.) scrap to the state required by the customer. UZ scrap is scattered across many sites in different regions of the country. Its accumulation and processing require additional investments. The cost of collection and processing of scrap metal in accordance with the requirements of standards on average is 3-4 thousand UAH per ton.
  3. UZ cannot ship scrap quickly after signing a contract. As the practice of Ukrainian auctions shows, it takes 4-6 months from the moment of the auction to shipment. During this time, market prices for raw materials change significantly.
  4. The mechanism of making decisions on export creates organizational risks.

Direct export of scrap may become quite a difficult procedure for Ukrainian Railways in organizational, technical and financial terms. At the same time, Ukrainian Railways may engage third-party companies for scrap processing.

Regulatory obstacles

The Ukrainian government did not support Ukrainian Railways’ intention to sell scrap directly. Ukrainian Railways was ready to resume auctions for the sale of scrap with volumes of up to 20,000 tons per month as early as March. However, this has not happened until now, as the Cabinet of Ministers has not yet adopted the necessary regulatory changes. It is about amending the Procedure for disposal of property of Ukrainian Railways, which is regulated by the decree of the Cabinet of Ministers №1054 from 22.11.2017.

“Ukrainian Railways wanted to independently sell scrap for export, bypassing the mechanism of Prosorro. But as a result, UZ increased commissions – from a preferential 1% to 3% of sales volumes on Prozorro,” notes Volodymyr Bubley, president of UAVtormet.

In September last year, the Cabinet of Ministers by its resolution canceled the procedure, according to which the sale of property of state-owned companies was carried out by decision of the board. Now the sale of property, including scrap metal, must be coordinated by the Cabinet of Ministers. However, the new decree did not define the procedure for the government’s approval of such decisions.

“Unfortunately, there are objective circumstances why we do not sell scrap metal now. There have been changes in the “normative”, we are waiting for the Cabinet of Ministers to adopt amendments to the decree No. 1054, which will open up opportunities for us to resume the sale of scrap», said the head of the board of the state-owned company Yevhen Lyashchenko.

Ukrainian Railways initiated amendments to this decree last December. As of early spring, they had already been approved by the Ministry of Justice, Ministry of Economy, Federal State Property Management Service and other agencies, and at the moment they have been “hanging” somewhere in the bowels of the Cabinet of Ministers for several months.

At the same time, experts say that Ukrainian Railways can sell raw materials regardless of the shortcomings of the regulatory framework.

“Nothing prevents Ukrainian Railways from selling its scrap metal without any changes to the CMU resolution No. 1054. However, unfortunately, despite repeated appeals from metallurgists, the UZ management does not dare to take such a step,” says Oleksandr Kalenkov, president of Ukrmetallurgprom.

Impact on the market

In recent years, in general, and due to the cessation of scrap sales in 2023, in particular, Ukrainian Railways has not fulfilled its own plans to sell scrap. Last year, the state-owned company sold only 76.4 thousand tons, while in 2022 – 113 thousand tons with the planned 170 thousand tons.

The share of Ukrainian Railways’ scrap supplies in the consumption structure of the largest Ukrainian steel companies before the sales were stopped was about 10%. It cannot be said that with such a consumption indicator, steelmakers are critically dependent on UZ supplies. However, even the indicated volume is important for these reasons:

  1. Any scrap volumes are important given the plans of steel companies to increase production volumes.
  2. Consumers need a constant and predictable supply of steel raw materials from various sources.
  3. Scrap export growth. Export forecast for the end of this year is 250-300 thousand tons.

It is estimated that 40-50 thousand tons of scrap did not reach the market due to the cessation of sales. The problem turned out to be not only that other participants were forced to adjust their actions and plans, but also that the state-owned company last year began to delay scrap deliveries under already concluded deals.

“Starting last fall, Ukrainian Railways delayed scrap deliveries under already paid contracts, but as of today almost all obligations have already been fulfilled,” says Volodymyr Bubley.

Steelmakers say that the lack of sales of scrap metal by rail had a significant impact on the market, as exports increased to 87.4 thnd tons in January-April.

“UZ is able to sell about 20 thousand tons of scrap metal monthly. As of today, the scrap deficit for Ukrainian steelmakers averages about 40 thousand tons per month. Thus, railway scrap would halve the scrap metal deficit and increase the production of steel products», emphasizes Alexander Kalenkov.

With domestic steelmakers ramping up production, the industry may face a shortage of scrap metal, a raw material that is strategic for achieving carbon neutrality goals and industry performance.

«Since July last year, steel production in Ukraine has been relatively stable and, therefore, has not required a significant increase in scrap supplies. However, an increase in steel capacity utilization could have a significant impact on the situation, as the launch of at least one blast furnace will require an increase in scrap supplies by about 30%. This could be a challenge for scrap producers and a shock to the market, given that scrap procurement is supported by export opportunities and Ukrainian Railways has stopped selling scrap to the domestic market,» said Andriy Glushchenko, GMK Center analyst.

No auctions

Steelmakers are actively raising the issue of the need to resume Ukrainian Railways’ auctions, but in the short term, we should not expect the adoption of changes and their resumption. There are two reasons for this:

  1. A closed bureaucratic circle. Some state bodies do not want to accept changes to the decree No. 1054, saying that Ukrainian Railways can sell scrap as it is, while UZ says that changes are necessary.
  2. The resignation of the specialized Deputy Prime Minister Oleksandr Kubrakov. This leads to the inability to make decisions important for the industry quickly.

According to market participants’ estimates, UZ’s current scrap metal stockpiles amount to about 120-150 thousand tons. In other words, there is a lot to sell to the state-owned company. It seems that the state company is not interested in potential revenues of at least UAH 1 bln from the restart of auctions. This amount could well improve the difficult financial situation of Ukrainian Railways.