Ukraine's economic crisis is having a profound effect on the country's metallurgical industries, with doubts over the future of its only aluminium smelter and sharp reductions in capacity utilisation at its steel plants, which are heavily reliant on inefficient open hearth furnaces. BMI's Ukraine Metals Report forecasts a 55% drop in steel output as the construction and automotive industries, the chief victims of the credit crunch, grind to a halt both in Ukraine and in key export markets such as Russia. In response to the crisis, most of Ukraine's larger steel mills reduced finished roll production considerably in January 2009. Arcelor Mittal Kryviy Rih, Ukraine's biggest steel producer, reduced crude steel production by 53.7% year-on-year (y-o-y) to 297,000 tonnes, pig iron by 50.5% y-o-y to 282,000 tonnes and roll production by 42.9% y-o-y to 337,000 tonnes (although this was an 8.0% increase over December 2008). Azovstal said it reduced roll output 53.2% y-o-y to 222,000 tonnes, Zaporizhstal reduced it 25% y-o-y to 222,000 tonnes, the Ilich Iron & Steel Works of Mariupol cut output by 57.3% y-o-y to 194,000 tonnes and the Alchevsk Iron & Steel Works cut production 10.8% y-o-y to 273,000 tonnes. The dispute between Russia and Ukraine that led to a cut in gas supplies in early 2009 has not had a significant impact on production, according to Ukrainian industry sources. Recent production cuts and holidays meant that the steel industry had already brought a large amount of capacity offline. The government is supporting the switch-over to pulverised coal injection systems that should reduce the steel industry's dependence on Russian gas, although this is a lengthy and expensive task. In December 2008, Azovstal, part of Metinvest Group, announced that it has stopped using natural gas in its blast furnaces, switching to coke for liquid iron production. Metinvest's Enakievo plant had also stopped using gas in Q308. The Ukrainian government has announced a series of measures intended to support the steel industry amid the growing crisis. In March 2009, legislation was finalised to boost the construction industry, with plans for the government to buy up unfinished construction projects, targeting those that are 70% complete in 2009 and 50% complete in 2010. If carried out, the programme would accelerate domestic demand for construction steel, which represents around 15% of domestic steel consumption. Nevertheless, Ukraine will need more than stabilisation in the domestic market to revive the steel industry, which is export-dependent, and 2009 will remain a difficult year. BMI forecasts a 55% y-o-y cut in steel output to 16.69mn tonnes. Gloomy prospects are also in store for the relatively small aluminium sector, which is expected to see production halve to just 50,000 tonnes. The days of cheap, readily available credit, which helped fuel an average rate of real GDP growth of 7.4% between 2000 and 2007, are now gone. To this end, the key factors underpinning growth prospects for the Ukrainian metallurgical industry through 2013 will be the expected economic recovery in Russia and the eurozone, in addition to the likely benefits arising from hosting the 2012 UEFA European Football Championships. Although we expect a full recovery in aluminium by 2013, this is dependent on RusAl maintaining operations in Ukraine. RusAl indicated even before the financial crisis that it may close the 130,000tpa Zalk smelter as it was unprofitable to keep it running. With output set to nosedive and the debt-ridden company already facing severe financial problems, it may consider permanent closure and sale. If RusAl can find a way to improve efficiency, BMI believes the smelter can be returned to full capacity after the recession, assisted by a recovery in supplies to the automotive industry. However, until RusAl announces that it will close Zalk, BMI will forecast a return to full capacity within five years. Ukraine's sole aluminium smelter, Zaporizhsky Alyuminievy Kombinat (Zalk), has capacity of 113,000tpa and is 100% owned by Russia's RusAl. Ukraine is a net exporter of aluminium, with domestic consumption amounting to 68,200 tonnes in 2007, a large portion of which is dedicated to the automotive industry. Per capita consumption is extremely low at just 1.5kg, which is just 6.6% of the European average. Exports are mostly in the form of ingot and amounted to 151,000 tonnes in 2007. Imports are low, but mostly in the form of milled products, totalling 36,000 tonnes. Ukraine recycles 70,000 tonnes of scrap aluminium annually. During the Soviet era, Ukrainian aluminium ingot production was sent for milling in Russia. The break-up of the Soviet Union and moves towards trade liberalisation fragmented the aluminium industry, weakening the link in the Ukraine-Russia supply chain. While the Russian and Ukrainian economies exhibited strong growth, the aluminium industry was viable and operating at maximum capacity. However, the downturn that began in 2008, coupled with growing disputes between the Russian and Ukrainian governments, has cast doubt over the industry's future. In July 2008, RusAl indicated it may close Zalk, claiming it was unprofitable. In February 2009, Zalk announced that it would suspend operations at its alumina refinery due to high electricity prices. The move came after the local government's failure to secure discounted power prices, despite a central government directive ordering it to do so. BMI believes that a temporary stoppage in primary aluminium production is inevitable and permanent closure is possible. RusAl is in deep debt, owing US$4.5bn to state bank Vnesheconombank (VEB) as well as loans from foreign banks. It will not be able to increase its borrowing in the current market and is likely to dispose of assets, with Zalk likely to be one of the first to go.
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