Steel production in Jan-Sep'22 falls nearly 70% y-o-y in war-torn Ukraine

• Country slips to 21st spot in WSA rankings from 14 in 2021
  
  
• Destruction of key facilities paralyses production
  
  
• Port blockades, rising logistics costs hit steelmakers
  
  
• Leading mills temporarily stop production post missile strikes
  
  

Morning Brief: The steel and mining industries have been one of the worst affected in war-ravaged Ukraine. Latest data shows that steel production in Ukraine decreased by more than 66% in January-September 2022 over the same period last year to 5.53 million tonnes (mnt). Production of pig iron, too, fell sharply y-o-y to 5.46 mnt in the first nine months of 2022. Production of rolled steel declined by over 67% during the period to 4.73 mnt, according to the data compiled by GMK center.

Pig iron production in September fell by 7.5% compared to August to 310,000 t, while steel production at 340,000 t was 7.1% lower compared to August. Although output of rolled steel products at over 250,000 t was 2.4% higher than August, rolled steel production fell by over 80% on the year in September.

The country's steel mills had increased steel and pig iron production by 3.6% on the year in 2021 to 21.37 mnt and 21.17 mnt, respectively. However, since the Russian invasion commenced in late February this year production has been severely affected. In March, 32% of all companies had ceased operations. In April, this number dropped to 17%. However, 60% of the enterprises are operating below the pre-war level. Ukraine has slipped to the 21st spot in World Steel Association (WSA) rankings from 14 in 2021.

Steel mills under siege
Drastic decline in steel production can primarily be attributed to the destruction of the Azovstal and Ilyich Iron and Steel Works in Mariupol both controlled by Metinvest, the country's largest steel producer. The two mills had a significant share in the company's over 11 mnt of steel production in 2021.

Metinvest has relocated its headquarters to Kyiv from Mariupol. The company now has two assets left to supply - Zaporizhstal Iron and Steel Works in Zaporizhzhya focusing on flat steel production, and the long steel-focused Kamet Steel mill in Kamianske, both in central Ukraine. Both, however, are working at reduced capacity.

Metinvest has wound down iron ore mining operations at its Ingulets GOK, Southern GOK and Northern GOK units in July. The company is continuing production at Central GOK, but at a reduced level.

ArcelorMittal Kryvyi Rih, the country's largest standalone steel mill which specialises in long steel, is also working at substantially reduced capacity. The company has put on hold all expansion plans including a pellet plant at Kryvyi Rih and repair and relining of BF 9, which contributes almost two-thirds of the total hot metal output of the mill.

Logistical disruptions
Additionally, severed supply chains and logistical bottlenecks have hit steelmakers hard as exports to Europe, Turkey, North Africa, China and Asian countries were the mainstay of Ukrainian steelmakers. Port blockades and seizures by Russian forces have hit exports. All the major ports on the Sea of Azov, as well as the port of Kherson, which has a river connection with the Black Sea, are currently under Russian control. The major Black Sea ports are blocked for all vessels except those shipping grains and fertilizers.

Delivery of goods to Europe by truck and rail, as well as shipments from Black Sea ports in Romania and Bulgaria and from Baltic Sea ports in Poland are the options that steelmakers are left with. However, delivery of goods by rail has almost doubled logistics costs. Moreover, Ukraine's railway system operates on a gauge track different from the European one, which means that goods have to be shifted at the border.

In addition to logistical disruptions and loss of markets, production is disrupted by curfew, port blockades, and occupation or destruction of production facilities, including 37% of steel production facilities, 40% of semi-finished production facilities and 37% of finished metal production facilities.

Temporary production suspension
Now, some Ukrainian mills are forced to temporarily stop or limit production because of the damage to state electricity infrastructure inflicted by Russian missile attacks on 10 October, which threatens to halt energy supplies.

SteelMint reported that Ferrexpo, the world's third-largest high-grade pellets exporter, temporarily stopped production at its enterprises in the Poltava region due to limited power supply. However, the company said it currently has sufficient material in its warehouses or in transit to meet expected sales volumes, subject to logistical operations remaining stable.

Similarly, ArcelorMittal Kryvyi Rih has decided to reduce production in order to curtail power consumption. Therefore, the near-term steel production outlook remains grim.

Outlook
Experts from Metinvest had predicted at a recent IREPAS conclave that should Ukraine emerge victorious, its crude steel output could reach 7.6 mnt in 2022 and 8.3 mnt in 2023. In case of a prolonged war, the country's steel output is expected to be only 6.5 mnt in 2022 and 6.1 mnt in 2023, while rolled steel output may fall to 5.9 mnt in 2022.

Considering the current state of affairs, the second scenario looks increasingly more likely.