In the conditions of post-war economic recovery, the role of scrap in the steel industry will inevitably increase
Last year, the scrap industry's performance improved slightly as both scrap collection and consumption increased, although steel production in 2023 remained largely unchanged compared to the previous year. Industry experts expect a slight increase in scrap collection in 2024, hoping to increase exports.
Improving the situation in the midst of problems
After a four-fold drop in scrap collection in 2022, the scrap industry's performance improved slightly last year. According to the UAVtormet association, the volume of scrap collection in Ukraine in 2023 increased by 28.1% – to 1.27 million tons compared to 996.7 thousand tons in 2022. This approximately corresponds to the forecast balance of 1, 2-1.25 million tons.
Last year, scrap deliveries to steel mills totaled just 1.034 million tons (+15.4% y/y), while steel production totaled 6.23 million tons. In 2022, raw material deliveries to consumers amounted to 895.7 thousand tons with approximately the same casting volume.
There are many factors in the market that impede the growth of scrap metal collection. Industry representatives cite the following current problems:
- Staff shortage. Scrap logging companies are not among the “critical” companies that can protect their employees from mobilization. Now companies lack qualified loader drivers, gas cutters, etc. Staff shortage problems may arise when there is a need to significantly increase the volume of scrap harvesting for internal needs or external supplies. UAVtormet has the support of the Ministry of Strategprom in resolving the personnel reserve problem.
- Low domestic scrap price. This reason has long been cited as an impediment to the growth of scrap metal collection. But there are no calculations on the cost of scrap to understand the profitability of the business and justify the higher price. It is also unclear where additional scrap will come from with such a decline in machine building and lack of investment in infrastructure.
- Impact of the law on waste management. The ferrous scrap market should be radically restructured after the law comes into force. Market participants are required to obtain new authorization documents to work with waste. Interpipe Vtormet hopes the process will not be painless for the industry. The Ministry of Environmental Protection understands this problem and is developing mechanisms to minimize the negative impact on companies, in cooperation with the largest consumers. But there is little progress, as any new licensing in Ukraine faces several problems.
- Inspections by law enforcement agencies at companies in the scrap collection sector. Law enforcement agencies are increasingly carrying out inspections of enterprises in the scrap metal industry.
Export of raw materials
Over the past year there has been an increase in exports of ferrous scrap from Ukraine. This indicator grew 3.4 times and reached 182.5 thousand tons worth 52.7 million dollars. In other words, scrap collection grew 28%, while exports grew 3.4 times, which naturally worries scrap consumers. The volume of scrap exports ended up being much higher than expected, which at the beginning of last year was in the region of 50-80 thousand tons.
Ukrainian scrap is mainly exported to EU countries. The largest consumers of Ukrainian raw materials last year were: Poland – 160.6 thousand tons, Greece – 13.2 thousand tons and Bulgaria – 2.7 thousand tons.
The growth in exports of raw materials to the EU was promoted not only by geographic proximity, but also by the absence of customs duties of €180 per ton. The tax on scrap exports to Europe until recently was only 3 euros per ton, and since the beginning of this year it has become zero (in accordance with the Association Agreement). To export, it is enough to obtain a EUR.1 certificate confirming the Ukrainian origin of the raw materials.
«If until 2022 the export of scrap was carried out mainly to Turkey and Transnistria and from each ton the state charged 180 euros in duties, then for the entire year 2023 the Ukrainian state budget received practically nothing, except a symbolic 3 euros per ton. All 180 thousand tons were exported to EU countries. And from January 1, 2024, the export tariff was reduced to zero. Thus, the State budget is deprived of this source of revenue. But Poland, the main destination for Ukrainian scrap exports, is a surplus country in terms of market supply. Thus, Polish ports are, in fact, a transshipment base for Ukrainian scrap exporters and a way to avoid paying duties of 180 euros,” says Valentyn Makarenko, chairman of the board of directors of Interpipe Vtormet.
UAVtormet expects scrap exports to increase by 37% to 250,000 tonnes in 2024. However, this may be hampered by logistical difficulties (possible resumption of blockade of western road crossings, railway conventions). There is a potential problem. The EU is a net exporter of scrap (in 2022 – 17.4 million tons) and therefore the supply of this raw material from Ukraine is not very important and significant for consumers.
According to Volodymyr Bubley, president of the UAVtormet association, given the precarious situation on the European steel market, it cannot be excluded that scrap collectors from neighboring countries (following the example of the ban on the export of agricultural products) may begin to lobby for the introduction of restrictive measures against Ukrainian scrap.
Scrap has been and continues to be a strategic raw material for the Ukrainian steel industry, and the trend towards higher export volumes is a major concern for steel producers. Last March, Interpipe stopped production due to a shortage of scrap.
“The increase in export shipments will have a significant impact on the scrap market, as Ukrainian steel mills plan to increase steel production in 2024. Foreign market conditions remain favorable, and maritime logistics have improved. If in 2023 scrap exports amounted to 182 thousand tons, then in 2024 we can expect an increase of 2-3 times. This already poses a significant threat both to jobs in Ukrainian steel companies and to budget revenues at all levels,” highlights Valentyn Makarenko.
Steel companies talk about the shortage of raw materials, which affects technological processes and steel production indicators.
«Currently, the level of scrap shortage fluctuates between 20% (in 2023 it will reach 40%). This forces companies not only to exhaust their available scrap stocks, intended to ensure the uninterrupted operation of production facilities, but also to opt for a forced increase in pig iron consumption in the same open and conversion furnaces. Thus, the production cost increases significantly or production has to be reduced. And this is despite the current export tax on scrap worth 180 euros per ton,” says Ukrmetalurgprom President Oleksandr Kalenkov.
Ukrmetalurgprom has repeatedly appealed to the relevant authorities with the demand to impose a moratorium on the export of scrap metal, at least until the end of hostilities, but the issue remains open.
More than 65 countries around the world have imposed restrictions on scrap exports, including an outright export ban. Scrap is an essential raw material for steel production with low CO 2 emissions.
Prospects for scrap collection
The industry is expected to continue its recovery in 2024. UAVtormet forecasts an increase in scrap collection to 1.45-1.5 million t or 13.5-17.5% y/y this year. Scrap deliveries to consumers in 2024 could reach 1.2 million tonnes (+16% y/y), with an expected steel production level of 6.8-7 million tonnes.
«The main source remains depreciation scrap. If demand from steel mills grows, the industry will be able to meet it and increase the acquisition of scrap”, observes Volodymyr Bublei.
The outlook for scrap from other sources appears uncertain at the moment. For example, Ukrainian Railways sold 76.4 thousand tons of scrap in 2023, although it planned to sell 170 thousand tons. According to the president of UAVtormet, the state-owned company has not yet fulfilled its previous commitments – it delivered only 50% of the volumes sold last year at auctions, but the industry expects Ukrainian Railways to return to selling scrap on the open market.
«From the fourth quarter of 2023, Ukrainian Railways (UZ) stopped offering scrap for sale, although its volumes could have saturated the market. Such sales actions by UZ introduce a high degree of uncertainty into the market equilibrium. But UZ could have received additional funds from the sale of properties,” adds Valentyn Makarenko.
In 2023, Ukrainian Railways asked the government to free it from the obligation to sell scrap through the Prozorro.Sales system in order to be able to export raw materials under direct contracts to Europe. However, it was refused.
Another potentially large source is “conversion” (military) scrap resulting from military operations. Already in the primary phase there are problems with scrap collection and accounting, the need for sorting, etc. The Ministry of Defense does not have time to deal with this. The Ministry of Defense (owner of this scrap) does not have enough funds, people, nor the necessary skills. In the summer of 2023, the volume of military scrap was estimated at 730 thousand tons, but only 12+ thousand tons are accounted for. At the same time, crushed armored vehicles, for the production of which alloys are used, practically cannot be used as ferrous scrap. Currently, the Ministry of Defense already wants to have the right to export scrap metal independently.
«For almost two years there has been talk about extracting useful parts and assemblies from military equipment. However, the market has not yet seen the sale of at least one ton of this property and an established process for selling this scrap», adds Valentyn Makarenko.
According to Volodymyr Bubley, in 2024 the Ministry of Defense should not be expected to offer large volumes of military scrap. In this case, many regulatory and organizational issues were not resolved.
In the conditions of post-war recovery, the role of scrap for the Ukrainian steel industry will inevitably increase. The restoration and modernization of the sector's enterprises will occur with the use of new technologies – steel casting in electric arc furnaces (EAF) using scrap and DRI. The availability of sufficient volumes of scrap is the most important prerequisite for the decarbonization of the Ukrainian steel industry and the implementation of rehabilitation projects.
