In 2015, Ukraine, it seems, will leave the global top ten metallurgical states.
The country finished the first quarter in 12th place in the Worldsteel ranking with a three-month steel production volume of 5.15 million tons.
The gap from the figure for January-March 2014 is 31%.
Similar quarterly production figures are reported by the Metallurgprom industry association.
Experts’ forecasts for 2015 are also not encouraging.
The country risks collapsing metallurgical production by several million tons of steel, losing billions of dollars in foreign exchange earnings. And this is after the industry collapse in 2014 by 5.5 million tons of steel.
What is pushing the ferrous metallurgy of Ukraine down?
If there were no war
War negativity and related force majeure are the basis of many explanations for the production failure of Ukrainian metallurgists. In recent months, there has been a rare speech by industry representatives without listing “eastern assets” that have been stopped or are operating intermittently.
The war in Donbass leads to damage to facilities and disruption of the energy and transport infrastructure of metallurgical production. At certain periods, the delivery of raw materials to some factories and the shipment of finished products from them became impossible tasks.
For example, the Yenakievo Metallurgical Plant – EDZ, part of the Metinvest group of Rinat Akhmetov and Vadim Novinsky – having been launched in October 2014 after several months of inactivity, stopped again in February 2015.
The company started operating in March, but the shutdown affected its production results. In the first three months of the year, EMZ reduced steel production to 260 thousand tons, or almost 66% compared to the same period in 2014.
Donetsk Metallurgical Plant – DMZ, from the Donetskstal group Victor Nusenkis – also stopped production at the beginning of February due to problems with the delivery of iron ore raw materials. The first of the stopped blast furnaces at the enterprise was able to resume operation only in April.
The two-month volume of pig iron smelting at the DMZ decreased by 64% to 77 thousand tons; February smelting produced only 6 thousand tons of metal.
The situation with the Alchevsk Iron and Steel Works, AMK, which is part of the ISD corporation controlled by the Russians, is indicative. A year ago, they planned to increase production output in 2014 by 20%, but at the height of the August battles in Donbass, the enterprise stopped and is still standing. What does this mean for the industry?
In the first three months of 2014, the level of steel production at AMK exceeded 1.1 million tons. At that time, the plant accounted for 15% of the total Ukrainian smelting volume. Last week, industry agencies reported that the restart of the plant could start in early May with the start of steel production in June.
According to Metallurgprom, in the three months of 2015, Ukrainian metallurgy produced 2.36 million tons of steel less than in January-March 2014. Interruptions in work worsen the export positions of metallurgical plants and combines, which sell about 85% of their products on foreign markets.
State Enterprise “Ukrpromvneshekspertiza” – UPE – reports that in the first quarter of 2015, 4 million tons of steel were exported. This is 29% less than a year earlier.
Market shares of Ukrainian metallurgists go to the Russians and Chinese, says Concorde Capital analyst Roman Topolyuk. He states that the decline in export sales of Ukrainian steel occurred due to the war in Donbass.
For this reason, some enterprises in the region are idle. Others, for example, Mariupol Azovstal and Ilyich Iron and Steel Works, cannot load all their capacities.
In current market conditions, domestic metallurgists remain competitive, the analyst claims. According to him, the profitability of Ukrainian enterprises has increased significantly, prices for raw materials have normalized, and the devaluation of the hryvnia has made it possible to reduce costs.
At the same time, there is excess capacity in the world, and if demand falls, some manufacturers will have to leave this business.
“Under normal conditions, in peacetime, our factories would not be the first to leave the market. It’s a shame that the war is pushing them out of the market in a situation where economically they are quite capable of fighting for their place in the sun,” complains Topolyuk.
He adds that some enterprises in the industry belong to Russian shareholders, who may well be satisfied with a decrease in production in Ukraine. “There is little economics in this approach,” he states.
Lower and lower
Since the beginning of 2015, competition in foreign markets has been intensifying and prices have been falling. A representative of Concorde Capital provides the following data: if in January square steel billets from Ukraine were offered at $393 per ton on FOB Black Sea terms, then by April its price dropped to $362 per ton.
Dnepropetrovsk Electromechanical Plant
During this time, a ton of slab fell in price by $42 to $318, rebar – by $15 to $400. Hot-rolled coil lost $54 in price, its April quotes fell to $366 per ton.
The price decline affected the decline in foreign exchange earnings from sales of steel products. According to UPE estimates, in the first quarter of 2015 this figure amounted to $1.72 billion – 41% less than in the same period in 2014.
In the current situation, metallurgists are being helped out by the devaluation of the hryvnia and the drop in prices for raw materials. A depreciation of the national currency against the dollar always plays into the hands of exporters, and iron ore raw materials – iron ore – fell in price by 47% in 2014 alone to $68 per ton for material with 62% iron content.
On the Chinese import market, which influences ore prices in the world, in early April, iron ore prices fell to a ten-year low of $47 per ton. Then the price exceeded $50 per ton, which is still 2.5 times less than a year ago, Topolyuk emphasizes.
Other types of metallurgical raw materials – scrap, coking coal, ferroalloys – have also fallen in price. At the end of March, direct production costs of Ukrainian steel plants, according to UPE, amounted to $297 per ton of steel.
Ukrpromvneshekspertiza analyst Oleg Gnitetsky claims that this figure is even better than that of Chinese metallurgists. When other costs are added, including the cost of delivering products to the port of shipment, the situation evens out.
The cost of Ukrainian and Chinese factories is approximately the same, the expert notes, but Ukrainian metallurgists may lose out to competition due to the unpredictable rhythm of order fulfillment. The latter is made dependent on the normal functioning of the transport infrastructure.
Ukrainian metallurgists still provide effective market competition to their Chinese colleagues, but by the end of 2015 the situation may change.
“Chinese steel exports are intensifying, the volume of which amounted to 25 million tons in the first quarter. For the entire year, this figure may exceed 100 million tons. Chinese manufacturers offer steel in markets traditional to Ukraine,” comments Alexander Sirik, vice president of the consulting company RCG.
Domestic demand for metal in China is declining due to the slowdown in the national economy. Chinese producers redirect surplus steel to foreign markets. The process actively manifested itself back in 2014, during which steel exports from the Middle Kingdom increased by 51%, reaching almost 94 million tons.
If ore continues to fall in price in the second half of 2015, then the Chinese purchasing it through import will receive a certain cost advantage.
“Reducing prices for iron ore reduces the importance of the factor of own raw materials and plays into the hands of competitors,” explains Sirik. In addition to the Chinese, competition is also increasing from Russia (*country sponsor of terrorism), which is also taking advantage of the moment with the devaluation of its currency.
Variations in decline
The domestic market will not support metallurgists again in 2015. Ukrainian machine-building plants, which previously focused on the Russian market, sharply reduced production and purchases of rolled steel.
Gnitetsky predicts a reduction in sales of metal products within Ukraine by 1.5-2 million tons in 2015. Exports, according to his estimates, will fall by 2 million tons or 10% compared to 2014 from its 20.4 million tons of steel sold on foreign markets. The average price of steel will decrease by 20% – by approximately $100 per ton.
“In 2015, foreign exchange earnings from the sale of steel products may decrease by 30% or $2.9 billion from $10.64 billion in 2014,” the expert predicts.
According to UPE calculations, in 2015 the plants will produce 23-23.5 million tons of steel compared to 27.2 million tons in 2014. Eavex Capital analyst Ivan Dzvinka gives a moderately optimistic scenario: 22.5 million tons. This means a drop of 17% compared to 2014. Concorde Capital talks about 22 million tons of steel in 2015.
Of course, these forecasts can be revised towards improvement if the truce in the east of the country takes stable forms and factories are able to increase utilization. However, so far plans to increase production in the industry are only being talked about at factories that are remote from the combat zone.
Thus, the management of Arcelor Mittal Krivoy Rog announced its intention to increase steel production in 2015 to 6.5 million tons against 6.3 million tons in 2014.
All enterprises will have to reduce costs when consuming materials and energy resources. Another question is that for some it will not be easy to do this even if they have the funds for the appropriate equipment. The war doesn’t allow it.