Ukrainian economy faced a serious threat. The metallurgical industry, which accounts for about a third of the country's foreign currency earnings and the same amount of industrial production, was the first to encounter the problem of global recession this year. It led to a decrease prices for steel products. As a result of the negative situation, which, according to experts, will be prolonged, many enterprises will be closed, losing in the competition for maintaining production capacities with significant surplus in the world. Countries that will be able to maintain the industry will receive significant dividends in the form of an inflow of cash receipts and investments into the country. This will happen due to price increases that only winners can take advantage of.
Understanding this, the authorities of many countries, including Ukraine’s main competitor in foreign markets - Russia, are supporting metallurgical enterprises. In contrast, the Ukrainian authorities are increasing pressure on the industry, including increasing the tax burden. This negates the efforts of an effective business, which is trying to maintain external markets and production volumes during the crisis, providing jobs both in the metallurgical industry itself and in related industries. Such a policy can be bad for ordinary Ukrainians, who will experience the loss of the national mining and metallurgical complex through devaluation of hryvnia and a serious aggravation of the already difficult economic situation, experts warn.
Gloomy times of the world economy
The protracted "trade war" of the United States and China, the uncertainties over Brexit, the domino effect in the implementation of the protectionist policies of several countries have led to the fact that this year the world economy began to slowly slide into crisis. Back in 2018, the United States introduced a 25% duty on steel imports and a 10% duty on aluminum imports, which served as a trigger for launching protectionist processes around the world. The EU has introduced quotas for metallurgical products in order to protect its market. The trade barriers of the Customs Union countries, the states of Asia, the Middle East and North Africa were introduced. In addition, Brexit, the riots in Hong Kong, the Turkish invasion of Syria and the aggravation of the situation in the Gulf region have a negative impact on the economy.
Note that the the International Monetary Fund warned about the possible negative consequences back in December last year. Then the IMF deputy head David Lipton said that a stable trade conflict between the US and China is likely to cause "far-reaching and long-term consequences" for the global economy and, most of all, the crisis will hit those countries that sell raw materials.
"The global economic slowdown has affected the mining and metallurgical sector, as metallurgy products are in demand primarily in construction, engineering, the pace of which is slowing down," said Konstantin Fastovets, head of analytics at Adamant Capital. "A significant drop in steel demand is observed in Europe: at the end of October, Eurofer estimated the drop in steel demand in the 2nd quarter at 7.7% year-on-year. No improvement is expected until the 2nd quarter of 2020. Worldsteel in October lowered its assessment of the steel consumption dynamics in Germany by 6% in 2019 (a decrease of 0.9% was expected in April). The outlook for Turkey was also worsened - down by 14.5% (in April it was forecasted to be 4.9%). There are countries with strong consumption dynamics, for example China (+ 7.8%), India (+ 5%), Russia (+ 5%).”
“In general, the world economy continues to show growth, but this year we are seeing a certain slowdown. At the end of 2019, it will amount to 2.9-3% - this is the lowest annual growth rate after the crisis of 2008. Moreover, the situation in different parts of the world is uneven. Even within the eurozone, some countries are growing, while others, like Germany, at the end of the 2nd and 3rd quarters were at a rate close to a recession. But it’s too early to talk about the global crisis. Another thing is that there are signs of a decline in business activity. If the consumer sector and services do not feel this yet, then industrial production begins to fall. Metallurgy is especially vulnerable, the situation in it is complicated by a surplus of production capacities. There are no more white spots on the world map - countries that do not have their own steel capacities. This leads to a protectionism policy, with the help of which many countries protect their market and their manufacturers," the press service of ArcelorMittal Kryvyi Rih told.
If most countries with developed metallurgy have a significant home market, which consumes a considerable amount of their own products, then our metal enterprises can sell within the country no more than 15-20% of the total production, the company emphasized: “The entire Ukrainian market place no more than 5 million tons of metal products of all kinds. Therefore, the main share of sales falls on world markets, where competition intensifies and supply significantly exceeds demand."
As a result of the recession of the world's leading economies, steel prices have gone down. "The global crisis has begun, which is accompanied by a drop in prices for the metallurgical industry products. The prices of products sold by our enterprises have fallen by 12-15% since the beginning of the year," said Olexander Kalenkov, president of Ukrmetallurgprom enterprises association. “FOB steel prices have stabilized. The price of slab has risen by 10% from the minimum in early November and now stands at 368 dollars per ton. But this level is 29% lower than the average for 2018. A similar picture for hot-rolled coils: + 5% from the end of October to $ 385 / t, but 30% lower than the average for 2018," Dmytro Horoshun said.
The decrease in steel prices is taking place against the background that the price of iron ore - the main raw materials for steelmakers is still quite high, which is why enterprises without vertical integration became the most vulnerable in the current realities: many of them were forced to stop working.
It looks like all the circumstances turned into a perfect storm for Ukrainian metallurgists, said Kalenkov: “All metallurgical enterprises in Ukraine have been operating at a loss since the beginning of the year. The current significant strengthening of hryvnia exchange rate is also an additional burden (the metallurgical industry is focused on export and foreign exchange earnings). A number of enterprises, especially those that did not have vertical integration, have already left the race, in particular, Dniprovsky Metallurgical Plant. Kamensky plant has reduced production to a minimum and is already on the verge of stopping. If that happens, it would entail massive job losses.
As a result, the metallurgical industry in Ukraine reduced production volumes: now they do not exceed 21-22 million tons per year, compared with 40 million tons (in the best times in 2008). At the same time, the total volume of production capacities now allows producing up to 28 million tons, says the president of the Ukrmetallurgprom enterprise association. “The situation with logistics and market conditions do not allow increasing volumes to this level. In September, steel production fell by 10% compared with August, and in October by 10% compared to September. And if in the first half year, we had a pretty good start (+ 4% of production), then the situation that is happening now is likely to eat the dynamics of improvement: at best, we will reach the same production volume as last year, at worst - production volumes by 2019 will fall. The 2020-2021 year forecasts are also not very comforting: the situation will get worse," says Kalenkov.
The metallurgical giants of the world are also reducing production volumes and massively firing employees due to a sharp drop in demand for metallurgical products, said chairman of the Federation of Metallurgists of Ukraine Serhiy Belenky. “If you look at the world map of the mining and metallurgical complex producers, then ArcelorMittal, for example, closes its enterprises in the South African Republic and dismisses about two thousand people. US Steel also cuts 1,800 people. British Steel, which is on the verge of bankruptcy threatens 25 thousand people with dismissal,” he says.
The German Thyssenkrupp announced the dismissal of 6 thousand employees from January 1, 2020, the South African division of Arcelor Mittal will fire 2 thousand people. Also, the world's largest steel producer stops the sinter plant, blast furnace and converter shops at the metallurgical plant in Krakow. The Swedish SSAB stopped the blast furnace at the Oxelosund plant and at its Finnish Raahe plant. Also, the Italian Arvedi reported on the shutdown of blast furnace production at a plant in Trieste. In October, the largest African steel pipe producer, South African Robor, declared bankruptcy.
What companies do to stay afloat
Given the excess capacity in the world, metallurgical enterprises have recently had to work in conditions of fierce competition. It is worth noting that Ukrainian metallurgical enterprises live in difficult conditions since 2014, when hostilities began and together with the territories in Eastern Ukraine, a part of the production capacity was lost. The situation has deteriorated further as a result of the blockade of communications and supplies from uncontrolled territories, which resulted in a complete loss of control over enterprises, Kalenkov said.
During the period of severe recession that is observed today, metallurgical companies especially consider every penny and reduce costs as much as possible. The ArcelorMittal Kryvyi Rih press service noted: “Some have to take radical measures, announce reduction in investment programs and administrative staff, and switch to truncated working week. This happened already in 2014 and in 2016. Neither in those periods, nor now does ArcelorMittal Kryvyi Rih take radical measures. Despite the reduction in production (from 16-17 to 13 thousand tons of pig iron per day), largest mining Ukraine’s metallurgical enterprise does not plan to cut staff. Another thing is that it is unlikely that it will be able to maintain the previous growth rate of salaries. So, from November 2017 to December 2018, the average salary at ArcelorMittal Kryvyi Rih increased by 43.4%, this May - by another 15%. But now it’s obvious that the company will not increase its salary twice this year, as it was in 2018 (in May and October). "
The company assured that the AMKR investment program would not undergo significant changes. The company only reduced capital and operating expenses from $ 450 million, as it was originally planned at the beginning of the year, to $ 390 million. At the same time, strategic projects, including those aimed at reducing the industrial load on the environment, are not going to be postponed - the plans of the enterprise for them do not change. Projects that are underway will be continued. At the same time, the number of orders for contractors to perform various works and services will decrease, ArcelorMittal Kryvyi Rih admits.
Metinvest Group has announced an optimization that should help the company overcome the difficult economic situation with minimal losses. In particular, the company is cutting back on its 2019 investment program. The implementation of certain projects will be suspended, except for critical ones provided for by the Technological Strategy, and projects with a significant environmental effect. The company will also carry out optimization aimed at reducing fixed and administrative costs. "There is no talk of massive reductions in production: optimization measures will primarily affect administrative staff and the management of company. At the beginning of 2020, administrative staff will be reduced to 30%," the statement said, clarifying that Metinvest is developing joint programs with the city authorities for the employment of their ex-workers. Among other things, the group is forced to suspend the recruitment of staff for existing vacancies and limit the recruitment of people in the place of employees who have decided to quit, with the exception of critical professions. Travel expenses will be reduced, fleet renewal will be stopped.
"Metinvest" reduces the number of administrative staff by 30%, while retaining the employees of working specialties to the maximum, "Olexander Kalenkov emphasized.
How long the recession will last?
It is difficult to judge how long the crisis in the global economy will last. "The industry is cyclical. World market prices fall and rise constantly, every few years. World prices continued to decline in the third quarter of this year, forecasts for the fourth are also not encouraging. Before the second quarter of 2020, our metallurgists do not expect demand to recover," the press service of ArcelorMittal Kryvyi Rih stated. "The metallurgical industry is cyclical, therefore the Metinvest group considers the current crisis as a temporary phenomenon. The implementation of the developed action plan in combination with operational improvements will allow the Group to maintain the maximum number of jobs and ensure the stable operation of its enterprises," the Metinvest official statement said.
Resolving situations that have become the prerequisites for the current decline in steel demand will have a critical impact on the process of overcoming the recession, says Khoroshun: “Perhaps something will become clear by mid-December. If December 12 in the UK conservatives will win the election and be able to somehow advance with the process of leaving the EU, this can stabilize Europe, its demand for steel.
It is very important that the situation with the surplus of steel production in the world does not improve due to the Ukrainian mining and metallurgy sector, which could lead to a domino effect and further aggravate the difficult economic situation in the country, experts emphasize. "Metallurgical products - steel, cast iron, rolled products, pipes, iron ore - account for about 30% of foreign exchange earnings, and also about a third of the total industrial production, it accounts for 12-15% of the total GDP. More than 40% of the volume of railroad transportation and transshipment in ports is also a cargo of the mining and metallurgical complex. We should not forget that due to the peculiarities of location in some regions, metal enterprises account for up to half of the total regional GDP, in some cities they are budget-forming. The recession will have not only economic, but also serious social consequences in the region,”- said Olexander Kalenkov.
Today, 350 thousand people work in the mining and metallurgical complex and related industries in Ukraine. The exchange rate of the national currency directly depends on the stable operation of the industry.