What can you say about the economic situation in Ukraine and the CIS in 2015?
In 2014, the economic situation in Ukraine deteriorated significantly, mainly due to the military conflict in the eastern regions of the country. This led to a financial and political crisis, causing a reduction in foreign trade. The deteriorating situation in the world markets certainly did not help either. Last year, Ukrainian GDP fell by 6.8 percent, mainly due to low industrial production and slow trade.
Negative economic trends have affected virtually every industrial segment of the country, the metallurgical industry being no exception. In 2014, Ukrainian crude steel output declined by 16.4 percent to 27.2 million metric tons. Several mills were completely shut down due to the military action in the east of the country. These included Yenakiyeve Steel, Alchevsk Iron & Steel, Donetskstal, and DEMZ. Some other mills have cut steel production due to difficulties with supply of raw materials and export of finished steel.
Further developments in this regard will depend on the political and economic situation in the country. However, even according to the most optimistic forecasts, in 2015 there is no chance of restoring production to the levels of 2012-2013. We expect this year's Ukrainian crude steel output to be around 26 million metric tons.
How do you see steel exports from Ukraine and the CIS performing in 2015? In your view, which countries are the most important markets?
The Ukrainian steel industry is largely focused on exports. About 80 percent of steel produced in the country is exported, which leads to the high dependence of local producers on foreign markets. Semi-finished products account for about 45 percent of steel exports, with raw materials accounting for 15 percent. The share of finished long product exports is 19.5 percent.
The main markets for Ukraine are the Middle East, the European Union and the CIS, which in total account for about 76.4 percent of Ukraine's steel exports. In 2015, we expect a reduction of steel exports by five percent to about 23 million metric tons.
How has the Ukraine-Russia conflict affected the steel markets?
Indeed, the conflict in eastern Ukraine, which was caused by Russia, has seriously affected export volumes, as the Russian market has traditionally consumed around 15-17 percent of Ukrainian steel output. In 2014, exports of steel products to Russia fell by 27 percent to about 2.4 million metric tons. Obviously, this year the downtrend in Ukrainian-Russian trade will continue.
How has the weakened hryvnia impacted the Ukrainian market? What is the situation now regarding steel trade in the territory where the conflict is taking place?
The devaluation of the Ukrainian national currency has certainly had an effect on the domestic steel market. First of all, it has affected imports of steel products which are not produced in Ukraine or are produced in limited volumes. In 2014, the volume of steel imports declined by 37.5 percent. Domestic sales have also gone down, as major consumers - the machine building and construction industries - are experiencing difficulties in their end markets, thereby being forced to reduce consumption of steel products.
Metallurgical and other industrial enterprises located in the military zone are not operating, or their operations are characterized by instability. Obviously, steel trading in these areas is out of the question. Also, metallurgical raw materials, primarily coal and scrap, are being constantly smuggled from the region in question to Russia.
Do you observe any problems with raw material supplies in the conflict zone at Mariupol port in particular?
There are two major steel mills in Mariupol: Ilyich Iron & Steel and Azovstal. In 2014, these enterprises saw their crude steel outputs decline by 20 percent and 30 percent, respectively, due to difficulties with procurement of steel scrap and coke. These problems are mainly logistical: only one of the three railway sidings is now operating. The other big problem is the outflow of labor resources.
In 2014, the cargo handling volume at Mariupol sea port declined by 16 percent. In particular, the reduction in the ferrous metals segment was 20 percent, while the handling volume of bulk cargoes (coal, coke, and ore) declined by 11 percent. However, in general, the operation of the port is stable, and it is actually the main sales channel for steel products produced by Ilyich Iron & Steel and Azovstal.
How have declining oil prices and the weakening euro influenced steel demand globally in your view? How has the weakened ruble affected the steel markets in your view?
The unexpected weakening of the euro against the US dollar, as well as the substantial decline of oil prices has affected the global economy. Countries extracting and exporting low-cost oil did not suffer as badly as, for example, Russia, where reduced oil prices instantly resulted in significant financial and economic problems. As Ukrainian metallurgy is one of the most energy-intensive industries in the world with very high raw material consumption rates, oil and energy prices definitely influenced steel production costs.
First of all, the rapid depreciation of the hryvnia, as well as the declines in GDP and inflation exerted serious pressure on the Ukrainian banking system. However, currency fluctuations (i.e., the fluctuations in the euro-US dollar exchange rate) might not be so critical for the moment, since Ukraine's imports of rolled steel products are not as substantial as compared to its exports. In fact, Ukrainian steel producers pay their major costs (raw materials, transportation, etc.) in Ukrainian currency, while earning US dollars or euros for exported steel products. This results in higher profitability for exporters. At the same time, the domestic market has faced extremely low demand. A similar situation has been observed in Russia, although, unlike Ukraine, the share of domestic rolled steel sales there is quite large. This is a bit confusing, but the collapse of the Russian ruble and Ukrainian hryvnia has made steel products from the CIS more competitive in the foreign markets.