Earlier this year, amid political tensions and conflict between Russia and Ukraine, most Ukrainian steel plants suspended production and put their equipment into hot conservation mode. The issue of employee safety was paramount. A steel plant cannot operate during a shelling attack, which threatens both workers and the production facilities themselves.
The Russia-Ukraine conflict has already had a disruptive effect on the global iron ore and steel supply chains because of the heavy involvement of both countries in those markets. Russia and Ukraine produced 76 million tons and 21.4 million tons of crude steel respectively in 2021, ranking fifth and 14th in the world, accounting for 3.9% and 1.1% of the world’s total crude steel output, respectively. Now, the war between the two countries is shocking the steel market and causing prices to rise.
What’s Unfolding in Ukraine
According to estimates, 90% of steel production capacities are not operational currently. Some manufacturers are attempting to resume operations and increase production volumes, but this isn’t easy due to the downtime of other plants in the supply chain. In particular, most coke facilities have ceased operating.
Only one of six integrated steel plants in Ukraine are currently working fully. About a third of Ukraine’s steel production capacity is located in Mariupol, the location of heavy fighting in the current conflict. The city, home to 500,000 people, has been under siege and constantly shelled.
Active aggressions are going on in the city streets. No one knows precisely what damage the steel plants received. Management says that the plants will be restored as soon as peace returns to Ukraine. But it may take longer to repair urban infrastructure, which is essential for resuming production.
Due to transportation issues, which are being addressed by Ukraine’s national railway operator Ukrzaliznytsya, factories have not yet been able to start up. As a result, steel production has been disrupted, leading to the disruption of supplies of by-products.
Integrated steel plants in Ukraine have air separation units (ASUs), which produce oxygen and other industrial gasses. Combined, these plants supply about 70% of neon gas and 40% of krypton gas globally. These gasses are essential for semiconductor manufacturing, and Ukraine is the world’s largest supplier of rare gasses, including neon, krypton, and xenon.
The war has led to the cessation of iron and steel supplies not only from Ukraine but also from Russia. The European Union imported 22.4% of its pig iron and semi-finished products from Russia in 2021, while it imported 29.4% of these goods from Ukraine. The United States imported 34.3% of its pig iron from Russia and 28.5% from Ukraine in 2021.
The lack of Russian and Ukrainian supply led to an increase in pig iron prices from Brazil by 16-19% in a month (from the end of February to the end of March). By comparison, iron ore prices rose 12% over the same period.
What This Means for the U.S.
A drop in steel imports could significantly impact the U.S. construction industry, forcing buyers to look for supply from other markets or hope domestic firms that are already running near full capacity can take on more orders for building and bridge projects. Data from the U.S. Census Bureau shows that shipments from Russia and Ukraine account for about 5% of total U.S. imports for consumption, which will add to the outlook for a tightening market as the spring construction season gets underway in North America.
Russia is a big aluminum producer and a source of pig iron, which is used to make steel.
Nearly 70% of U.S. pig iron imports come from Russia and Ukraine, so steelmakers will need to switch to production from Brazil or use alternative materials.
However, steel prices may stabilize as international players increase steel production capacity (while trying to balance environmental commitments with any increased coal use needed to deliver that extra capacity).
The Battle for Mariupol’s Azovstal Steel Plant
The Ukrainian steel plant, Azovstal, has been blockaded by Russian forces for much of the last two months. The site has become one of the last significant holdouts of Ukrainian forces in the besieged southern port city, Mariupol. Roughly 2,000 troops are fighting to defend this landmark where up to 1,000 civilians have taken refuge underground.
Ukraine has called for the United Nations to oversee any safe evacuation route from Azovstal and be the initiator and guarantor of the humanitarian corridor from Azovstal for civilians,
All participants in the global economy are affected by the challenges created by war. Supply chains are disrupted, production volumes decrease, and prices rise. It is only when peace has been restored that it will be possible to restore value chains fully.
At Mainline Metals, we are committed to closely monitoring the evolving situation in Ukraine and remaining empathetic to those affected — directly and indirectly. We will continue to communicate with our customers, so please reach out to us if you have any questions about the conflict’s impact on the steel industry.
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