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Rebel conflict imperils Ukraine's steel industry
August 1, 2014 / 6:02 PM / 3 years ago

Rebel conflict imperils Ukraine's steel industry

* Top producer Metinvest no longer accepting new orders

* Steel exports to Russia down 38 pct Jan-April

By Alessandra Prentice and Svetlana Burmistrova

MOSCOW, Aug 1 (Reuters) - Ukraine’s important steel sector is being rocked by violence in the east of the country, with the crisis sparking fears exports to neighbouring Russia could fall 50 percent this year.

Steel-making is centred in the conflict-torn regions of Luhansk and Donetsk, where many factories, mills and mines have been forced to stop work.

For months, armed pro-Moscow separatists there have clashed with Ukrainian forces, with buildings taken over and others destroyed by artillery fire.

The conflict in east Ukraine has also hit transport links into Russia, further slowing exports.

Steel makes up about 15 percent of the economy of Ukraine, which last year ranked as the world’s fifth-biggest exporter.

Output fell by more than 7 percent in the first half of 2014 and exports have been hit. Shipments to Russia slumped by 38 percent in the first four months of the year, International Steel Statistics Bureau (ISSB) data showed.

“The situation is no picnic. New clients aren’t rushing to the market,” a Kiev-based export trader said.

Ukraine sold three-quarters of its 32-million-tonne annual steel production to foreign markets in 2013 and Russia was a major buyer, accounting for around 15 percent of Kiev’s ferrous exports.

PROTECTIONIST PUSH

Amid fractious relations between Moscow and Kiev, Russian steelmakers have aggressively lobbied for measures to defend domestic producers from Ukrainian imports. There has also been a flood of new Russian supply.

Exports of construction product rebar, Ukraine’s main steel product export to Russia, fell 66 percent in the first four months of 2013, ISSB data showed.

The governor of Donetsk, Serhiy Taruta, said this week steel shipments to Russia were expected to fall by up to 50 percent this year, yet expressed confidence that supplies could be redirected to other buyers.

Traders, however, say there is little demand for Ukrainian steel on international markets already over-supplied with supply from China.

“All is not well ... We’re not selling much at all. The market is sluggish. We’re just surviving thanks to a fat list of old orders. We’re waiting for Ukraine and the external market to stabilise,” said an export trader in the city of Mariupol.

Ukraine’s overall steel exports fell by 10 percent in the first four months of the year and are likely to remain down around 5-10 percent in 2014, according to Jeremy Platt, an analyst at steel industry consultants MEPS.

CHEAP CHINESE STEEL

Ukraine’s largest steelmaker, Metinvest, said on Friday it was no longer accepting new orders due to the crisis which has forced it to cut production.

Privately held and controlled by Ukraine’s richest man, Rinat Akhmetov, supply disruptions from the violence have forced Metinvest to limit output at two steel mills. Production was temporarily halted at its main Avdiivka coke plant after it was hit by artillery fire.

“I can say without exaggeration that the combat operations have threatened not only Avdiivka but also the entire Ukrainian economy,” Musa Magomedov, chief executive of the plant, said last week.

Metinvest controls about 50 percent of Ukraine’s steel market. Top foreign player ArcelorMittal, the world’s largest steelmaker, has 12 percent.

ArcelorMittal’s operations are based in central Ukraine, which is not rebel-controlled and has been spared the worst of the fighting.

The company’s Ukrainian business posted higher production in the second quarter with shipments up 2.4 percent quarter-on-quarter.

Over 50 percent of its exports are focused on the Middle East and North Africa (MENA) region with sales to Russia, Ukraine and other members of the Commonwealth of post-Soviet States accounting for the remainder.

This year it has been exporting more to the MENA region with lower demand in Ukraine due to the unrest, the company said.

Ukrainian exports to certain markets have ballooned as a result of producers redirecting supplies, said Dmitry Popov, analyst at metals consultancy CRU.

Rebar exports to Egypt jumped by 830 percent in the first four months of the year, making Egypt the third biggest market for rebar exports, he said.

However, Egyptian producers are fighting back against the wave of foreign imports, Reuters reported in July, including calls for restoring anti-dumping duties on imports of rebar from Ukraine, China and Turkey.

China’s aggressive export pricing poses the biggest threat to Ukraine’s hunt for markets beyond Russia, Eavex Capital analyst Ivan Dzvinka said.

“The markets are highly competitive due to oversupply and intensive export growth by China to its traditional markets in the Far East, Middle East. It’s even managing to find a way into Europe,” he said. (Additional reporting by Andrey Kuzmin, Philip Blenkinsop in Brussels, Maytaal Angel in London; editing by Jason Neely)

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