The Ukrainian steel producers are planning to increase their total crude steel production to 38.5 million metric tons in 2008. However, the current shortage of coking coal in Ukraine, which started in early summer this year, may threaten these ambitious plans. In addition, the forced switch to foreign supplies (other than Russian), due to the reduction of coking coal imports from Russia, may negatively affect the primary cost of steel production in Ukraine and consequently the competitive ability of the Ukrainian steel producers in the world market.
The reasons behind the coking coal scarcity in the Ukrainian market lie in the inability of domestic coking coal producers to satisfy the growing demand from domestic steel producers and the continuous reduction in coking coal imports from Russia - the main coking coal exporter to Ukraine to date.
When speaking about the Ukrainian coal industry, the first issues that come to mind are the industry's underdevelopment and fragmentation. Many of the coal mines in Ukraine are still government-owned and require significant investments which can only be provided by the private sector. Meanwhile, those which have been privatized are owned by private sector companies which, in the main, are not part of the vertically-integrated structures of steel mills. As a result, it is difficult for them to attract the necessary capital for investment, which would be more freely available as part of a large metallurgical holding. Due to underinvestment, in its current stage of development, the Ukrainian coking coal industry is unable to satisfy steel producers' growing hunger for raw materials. According to the latest data for January-September 2007, Ukraine registered an eight percent year on year decrease in coking coal production to 21.17 million metric tons. In the same period, Ukraine's production of coking coal concentrate totaled 18.5 million metric tons - the worse result for the last five years. Although coke production increased in the given period by five percent year on year to 14.85 million metric tons, this increase is not enough to satisfy the needs of the domestic steel producers.
Although the underdevelopment of the Ukrainian coking coal industry is not a new issue, the situation has been exacerbated by the reduction of coking coal supplies from Russia starting from the beginning of summer this year.
Russia was the main exporter of coking coal to Ukraine till very recently. Thanks to Russian supplies, Ukrainian coke producing plants were not only able to meet the requirements of the market, but were also able to do so at significantly low costs. Yet with the increasing demand for coke inside Russia due to that country's growing steel production capacity, exports of coking coal to Ukraine started to decline.
The situation with regard to Russian supplies also worsened at the beginning of summer due to the serious accidents which occurred at two of Evraz's coking coal mines, Yulyanovskaya and Yubileynaya. Since the majority of coking coal and coking plants in Russia are owned by metallurgical companies, as a result of the accidents and the shutdown of damaged mines, many of them broke off their supply agreements with Ukrainian companies in order to satisfy the needs of the Russian domestic steelmakers.
In addition, the issue of railway car scarcity, and the decision of Russian Railways in September to reduce the number of railways cars allocated for coking coal exports to Ukraine in order to satisfy the needs of Russian domestic market, left Ukrainian coking coal consumers almost completely without Russian supplies starting from September.
The scarcity of coking coal in the market has restricted the domestic steel producers' ability to realize their production plans. According to UkrKoks' data, against their current needs of one million metric tons of coking coal, Ukrainian coke producers have only 300,000 metric tons in stock. Due to the coking coal shortage in the market, Ukrainian domestic coke producers will only be able to produce 13 million metric tons of coke this year - just one third of the market's needs. Meanwhile, according to Metallurgprom's general director, Mr. Vasiliy Kharakhulakh, in September the shortage of coke in the market resulted in a shortfall of 169,000 metric tons in the country's pig iron production compared to the planned volume for the month.
Given the scarcity of coking coal, many Ukrainian steel producers were left with the choice either to rollback some of their production capacity or to find an alternative sources of coking coal or coke imports. For instance, Ilyich has followed the first road and shutdown one of its blast furnaces due to the coke shortage. Meanwhile, the coking plants of Privat Group- Dnepropetrovsk, Dneprodzerzhinsk Coking Plant and Baleikoks have started to work at 89 percent, 75 percent and 45 percent respectively of their designed capacities.
On the other hand, many steel mills have decided to switch to alternative import sources of coking coal and coke. For instance, ArcelorMittal Kriviy Rih imported 10,200 metric tons of coke from France, while in 2008 ISD plans to import about 1.5 million metric tons of coking coal from the US for its coking subsidiary AlchevskKoks.
However, with the steel producers' ambitious plans in mind, the Ukrainian markets will need much more than the above quantities to function at full capacity. Currently, imports of coking coal and coke are available from Australia, Brazil and the US, but at what cost? In other words, how will the rising freight rates and the international coking coal prices affect the Ukrainian steel producers' primary production costs and therefore their ability to compete?
Until very recently Ukrainian steel producers, especially those having their own coking facilities, were able to keep their production costs down due to the availability of cheaper coke in the market, the price of which was reasonable due to the stable supplies of coking coal from Russia. However, with limited supplies of coking coal now coming from Russia, Ukrainian steel producers are forced to turn to imports from other countries. Here, new factors come into play such as global price levels and continuously rising freight rates - both of which have increased sharply since the beginning of the current year due to separate reasons.
Taking into account all the above-mentioned factors currently affecting the development of the Ukrainian coking coal and coke industries, it is very unrealistic to expect a solution in the short term. On the contrary, the forecast for the development of these industries and its impact on the steel industry is rather pessimistic. Due the reduced supplies from Russia and the inability of domestic producers to fully satisfy the growing market needs for coking coal, the Ukrainian market is forced to increase its imports from countries other than Russia. However, the imports from these other countries will bind Ukrainian steelmakers to the international market conditions and to rising freight rates, which no doubt will affect the production costs of Ukrainian steel, making Ukrainian finished steel products less competitive in the international market.