Russian steelmakers jostle Ukrainian steelworks abroad as the latter are suffering a serious decline in output

If the military actions in the Donbas do not come to an end, the local steelworks will face full shutdown

Photo: Ivan Chernichkin

Russian steelmakers have started to benefit from the military operations in eastern Ukraine. While Ukrainian metallurgy reduces production and jeopardizes its supplies, the Russians are increasing output and are displacing Ukrainian producers in foreign markets.

Heavy decline

The Metallurgprom Association published the performance results of Ukrainian metallurgical enterprises for 7 months in 2014. They are quite disappointing. For example, steel production amounted to 17.9 mn t (7% less than during 7 months in 2013), rolled metal – 15.8 mn t (a 7% decline). The results do not seem to be catastrophic, but the problem is that the sharp decline in production was observed over the last reporting month. According to Metallurgprom in late July there were serious problems with supplies of raw materials, mainly coke and power resources, to the enterprises, which led to a decline in production in the industry by 40% compared to last July.

In August the situation has not improved. “Within 11 days in August the average daily steel production amounted to 54,800 t, rolled metal – to 45,100 t, which is 40 – 43% less than this May, when it reached the maximum of monthly production,” reported Metallurgprom. At the same time, Russian steelmakers are doing much better. The association says that in the same period they have increased steel output by 2.4% and rolled metal – by 3%.

Full retreat

According to analyst at Concorde Capital Roman Topolyuk, although the devaluation of the hryvnia plays into the hands of our export-oriented steel industry (they supply 80% of their output abroad), it also has a negative impact on domestic steel consumption. “In Russia devaluation of the ruble was not as dramatic compared to Ukraine’s currency, although domestic consumption in Russia has slowed down a bit. But the Russian market is more stable and production at facilities that were built to replace imports from our country has increased,” he said.

In addition to displacement of Ukrainian metallurgists from the market, the Russians took the offensive on export fronts. In August, the decline in production of steel and rolling at Ukrainian metallurgical enterprises will be even worse, while the consumption and demand on foreign markets will not dwindle that much, experts predict. “Part of our niche will be taken primarily by enterprises in Russia, Turkey and China,” said Topolyuk.

Director of the Research Department at Ukrpromzovnishekspertyza Pavlo Perkonos said in a conversation with Capital that the trend of displacement of Ukrainian metal from external markets has appeared in the last two or three weeks. “In August, when production at Ukrainian steelworks declined dramatically, Russian companies have successfully started taking advantage of the situation offering customers more reliable supply. Our steelworks have enough orders, but they cannot guarantee timely delivery,” he stressed.

Perkonos says that while in May, which was the peak for Ukrainian steel, the load capacity of rolled steel production was 67%, in July, when certain enterprises started collapsing, it dropped to 60%. “In August the load still does not exceed 40 – 45%. Currently, there are no particular prospects for improvement of the situation and in August – September the load at enterprises is likely to remain at the same level,” predicts the expert.

Stopping means death

Topolyuk is convinced that if Ukrainian steelmakers achieve the previous volumes of output, they will be able to regain their positions. However, in addition to the low load and financial losses, domestic steelmakers may face more serious problems. The fact is that stopping the blast-furnace for a long period of time may have irreparable consequences. If the blast furnace is shut down, in the best case scenario the cost of restarting its operation will be significant. In the worst case – it will be completely shut down. The most sensitive to such disruptions is coke production. “The Avdiivka Coke Plant is currently not operating and if the situation does not change for an extended period of time, we will have to consider the full shutdown of the plant. The situation at the Alchevsk Coking Plant is similar,” said Perkonos. At the same time, recovery of both blast-furnace and coke oven production is very expensive. Perkonos says the cost of construction of a new blast furnace at the integrated full cycle steelworks is US $200 – 300 per each ton of produced steel.