The Ukrainian steel industry has entered a new modernization drive which, while reducing its use of raw materials and energy resources, is intended to ensure a place for the national industry in the global market for finished steel products - as opposed to remaining focused on low value added products (primarily billets), which was the case a couple of years ago.
The majority of the steel industry modernization programs in Ukraine are directed toward five major areas - updating existing semis facilities with new continuous caster technology in order to improve end-product quality and decrease the cost of production; toward replacing open-hearth furnaces (OHFs) with oxygen converters and electric arc furnaces (EAFs) in order to increase the industry's productivity and be more environmentally friendly; developing and updating the raw materials base as EAFs and oxygen converters require greater amounts of scrap; toward decreasing the industry's dependency on gas and implementing new technologies to reduce energy expenditures; and finally toward strengthening high value added steel production.
A large part of Ukrainian steel production is accounted for by semi finished steel products, mainly billets. Although there is good demand for Ukrainian semis in the global market, latterly this traditional export material has begun to face tough competition from South Asian producers in the Middle East markets and from Italian producers in Algeria - the main advantages of these competitors being price and product quality. To be able to compete in the new market conditions Ukrainian steel producers have moved to modernize their production processes by replacing old methods with continuous steel casters in order to achieve improved yield, quality, and cost efficiency. One of the first producers to move in this direction was Enakievsk MZ (EMZ), a subsidiary of Metalinvest holding, which inaugurated three continuous billet casters at the end of 2002. Since then many domestic steel producers, such as Ilyich, Alchevsk of ISD and others have moved toward introducing continuous steel casters in their production processes. However, this technology still accounts for a very small share of overall Ukrainian steel production. For instance, whereas in the USA and European countries over 98 percent of produced steel comes from continuous steel casters, in Ukraine this technology only makes up about 34 percent of all cast steel.
Ukraine is one of the very few countries in the world which still uses OHF as a primary method in steel production. Whereas in Europe and the USA only a small amount of steel is produced by the OHF method, in Ukraine more than 90 percent of steel is manufactured in this way. With their existing plans for increasing steel production, many Ukrainian steelmakers are now moving towards introducing EAFs and oxygen converters into their production processes. However, of these two methods, the Ukrainian steelmakers tend to choose oxygen converters as they give higher production capacities. The introduction of oxygen converters is currently underway at the Alchevsk and Metinvest Holding plants, while ArcelorMittal Kriviy Rih is planning to completely switch to the oxygen converter method by 2010. In addition, the largest Ukrainian pipe producer Interpipe has recently announced a modernization program worth $600 million for the replacement of OHF by EAF. Indeed, according to expert estimates, by 2012 Ukraine will produce 12.5 million mt less using the OHF method and produce 19 million mt and four million mt more by the oxygen converter and EAF processes respectively.
However, with the increased steel manufacturing capacities using oxygen converters and EAFs, Ukraine is expected to up its scrap consumption. If the country achieves the above-mentioned production capacity of steel, the projected annual shortage of scrap is thought likely to total about three million metric tons. Although many scrap collectors and producers have voiced their readiness to invest in the technical updating of existing facilities so as to increase annual scrap collection to 12-13 million metric tons, no actual upgrades have been started yet.
Due to the persisting problem with natural gas supplies in Ukraine (which was sharply felt at the beginning of the current year when Russia and Ukraine were not able to agree on the renewal of gas prices), the Ukrainian steel producers have started to search for new fuel alternatives for their blast furnaces. Thus, in order to reduce their dependency on gas, the price for which has continued to increase, several Ukrainian steel mills have decided to modernize their blast furnaces in order to be able to use coal dust fuel injection technology. The first of these producers was Donetskstal which started to use this technology a couple of years ago. At the moment, Ilyich, Zaporojstal and Metinvest are in the preparatory stages of introducing the new technology at their mills. In addition, EAFs and oxygen converters can more easily be adjusted to this technology, in place of the use of gas, than OHFs can. Indeed, the former use less gas in any case. For instance, Interpipe reduced its gas consumption by 8.5-fold after it began to operate its new EAF facility.
Last but not least, another focus of Ukrainian steel sector investment is the development of higher value added products. As already stated, Ukraine is very much oriented towards semi finished products in terms of its exports. Semis currently account for about 40 percent of overall Ukrainian exports. Although Ukrainian semis are in strong demand in the export markets, lately they have started to meet tough completion from the Southeast Asian countries, and especially from China. In addition, semis are low value added products which do not turn a great profit. All these factors have pushed the Ukrainian domestic steelmakers to modernize their facilities and increase their output of high value added products. Currently, the mills of Alchevsk, Ilyich and Metinvest (EMZ and Azovstal) are performing long-term modernization programs aimed at reducing the production share of semis and raising the share of high value added products. In addition, steel producers such as Metinvest and ISD have opted to acquire production facilities in Europe which already specialize in high value added production. This smart move will not only allow the companies in question to increase their share of high value added products but also will give them an opportunity to increase their sales to the European Union without being restricted by quota regimes.
As a result of its current modernization program, the Ukrainian steel sector does not only expect to achieve a considerable increase in production capacities, but also to expand its share of high value added products, to improve overall production quality and reduce production costs. However, as with any other massive projects, the modernization in the Ukrainian steel industry may face some shortcomings, the main one of which is likely to be a shortage of raw materials. Although the majority of raw material producers have announced their intention to implement modernization programs with the aim of increasing production capacities, these exist only on paper for the moment. In addition, a switch to coal dust injection technology will require the country to increase its coal production capacity. Here again, regardless of the large amount of coal deposits available in the country, in general the Ukrainian coal industry is largely state-owned and lacks the necessary investments. Thus, for effective modernization of its steel industry, Ukraine will have to modernize its raw materials base, since without it the country may find itself having to depend heavily on raw material imports in the future.