December 11, 2008 (The date of publication in Russian)

Konstantin Dymov (Ukraine)


Ukraine's iron and steel industry: either state-directed modernization, or collapse


With disintegration of the Soviet system of planned development that involved industrial specialization of regional and republican economies, a number of highly developed branches of heavy industry in Ukraine, as well as the associated scientific and designing institutions, were utterly deteriorated. From a huge number of plants, providing jobs for the urban population, only a few managed to survive by opening new foreign markets for their production.

During the transition period, major industrial chains in Ukraine's industry were disrupted. Mining industry, coke production, and ferrous metallurgy subsequently managed to revive due to the demand for their relatively cheap production in Western markets. The liberal economic approach, chosen by the independent Ukraine, ignored the available protectionist mechanisms, refraining from support of competitiveness of domestic machine-building. Therefore, mining and metallurgy were not guaranteed from fluctuations in global economy, and eventually found themselves highly sensible to the decline of demand for their production in the West.

During the last five years, mining and metallurgy, traditionally concentrated in East Ukraine, close to the major deposits of coal and ore, provided around one quarter of the gross national product, 40% of national exports and 12% of revenues, creating over 15% of jobs.

During this period of relative success, iron and steel industry absorbed the most qualified cadres with a background of universal economic education in best Soviet universities and broad experience in practical industrial research and development. The availability of natural resources, including iron and manganese ore, as well as large-scale industrial facilities, promised new success, even despite inefficient state management.

Ukraine's designers dreamed of implementation of unique technologies in transport infrastructure, like Anatoly Yunitsky's design of string transport. However, this could be possible only in case of a dirigist decision of the government to concentrated on this competitive technology which required an increase of string production on the base of specialized facilities in Odessa and Kharcyzsk. Meanwhile, the industry badly needed financial investments and novel equipment. By the time when the international financial crisis broke out, this problem, among a lot of others, remained unresolved.


Already in the period between June and September, the gross output of Ukraine's iron and steel industry declined by one third. The contraction of exports, starting in August, rapidly deteriorated the already poor foreign trade balance of Ukraine, becoming one of the preconditions for flight of capitals and deficiency of hard currency. By the beginning of October, Ukrainian plants closed 17 of 36 blast furnaces. Tons of unsold production overloaded the storages. In mid-October, 20 open-hearth furnaces, 3 converters and 12 rolling mills were stalled.

The once famous Krivoy Rog Metallurgic Plant purchased by Arcelor Mittal in 2005, reduced the output of pig iron by 13,9, steel by 15.4 and rolled iron by 18.8%. Mariupol-based Azov Steel Plant (Azovstal) reduced its output by 28%. At the huge Mariupol Metallurgic Plant, only one of the six open-hearth furnaces was in function. In an unprecedented move, the smelter's major shareholder Vladimir Boiko addressed the Government with a request of nationalization.

Optimistic reports about the revival of metallurgy don't surface any longer in national media. In November, experts envisaged the possibility of a total paralysis of national metallurgy.


Ukraine's mining and metallurgic industry rapidly developed in the Russian Empire. At that time, 90% of the industrial facilities were owned by foreign companies. Yuzovka, the original name of East Ukraine's major city, Donetsk, was derived from the last name of Welsh engineer and industrialist John Hughes, founder of the Novorussian Society for Coal, Iron and Rails Production.

Though the Bolsheviks nationalized all the industrial facilities, the output of metallurgy reached the 1913 level already by 1928, and in the period between 1928 and 1940, it increased 3.5-5-fold.

Though most of Ukraine's industrial facilities were ruined in World War II, the intensive reconstruction enabled the industry to reach the 1940 figures of output already by 1950. In Krivoy Rog, where the Nazi destroyed the productive facilities and deliberately flooded the mines before leaving the city, local specialists and workers managed to repair the plant within a month after liberation. The precious experience of postwar reconstruction should be thoroughly studied today.

In 1980s, Ukraine's metallurgic plants produced more steel than the German and French plants taken altogether. Only Japan and the United States produced more steel than Soviet Ukraine.

Though the share of Ukraine's metallurgy in the total Soviet output was declining due to construction of new plants in the Urals and Kazakhstan, Soviet Ukraine extracted 52% of USSR's iron ore, 35-40% of rolled iron, 48% of pig iron and 47% of ferroalloys. Ukraine produced over 1000 kg of steel per capita, while in the whole USSR this amount did not exceed 600.

In the Soviet period, Ukrainian metallurgy also pioneered in implementation of new technologies. Oxygen conversion was introduced at the Dnepropetrovsk Metallurgic Plant in 1956, only four years after this method was successfully approbated in Austria. Dneprospecstal Plant was the world's first industrial facility to introduce the method of electroslag refining enabling to produce steel of highest quality. Subsequently, the largest world's facility, using this method, was built at the Nikopol Ferroalloy Plant. In 1980s, Ukrainian metallurgy also pioneered in implementation of automation, the number of automatic control systems exceeding 130.

Thus, the independent Ukraine has inherited a highly competitive industry with most optimistic perspectives in case of adequate management. However, this potential was wasted and increasingly deteriorated in the following years, when the effects of liberal approach to economic policy multiplied to the decline of economy in the whole of the former USSR where Ukrainian metallurgic production was not required.


Only by 2007, the most successful year in the sovereign Ukraine's metallurgy, steel production reached 80% of the 1990 level. Other figures were even less impressing.

In 1983, Ukraine produced 6.5 million tons of steel pipes. By 2007, this figure did not reach 3 million. By that time, the domestic industry used only 1 million tons of pipes, thrice as less than in 1980s.

Extraction of iron ore, reducing from 100 million tons in 1980s to 50 million in 1990s, elevated only to 73 million tons in 2007. By that time, Russia managed to reach the Soviet-time level of ore extraction.

The number of functioning mines in Krivoy Rog has reduced from 24 to 10, while the Kamysh-Burun Enrichment Plant that earlier supplied Azovstal with high quality iron-ore concentrate is lying in ruins since 1990s.

Soviet Ukraine was the largest world's producer of manganese. In 1980, the output of manganese ore reached 7.8 million tons. Even in 1990s, manganese production was above 3 million tons. By 2004, it reduced to 2.3 million and by 2005 to 2.2 million. The Marganets Enrichment Plant that produced 3.5 million tons of concentrate, reduced the output 3 times in 2000. By that time, attrition reached 71% of the underground and surface facilities. Astonishingly, Ukrainian metallurgic tycoons prefer to purchase manganese from Ghana, Gabon, South Africa, Brazil and even Australia, instead of investing in modernization of domestic facilities.

Production of coke has similarly declined. In 2005, Ukraine produced only 18.5 million tons (in 1940, the output reached 15.2 million). The reason is the same: reluctance from investment in modernization. Only a few of Ukraine's industrial enterprises were modernized during the last year – particularly, Azovstal and Avdeyevka Coke-Chemical Plant. These examples comprise a tiny exception from the technologically and morally outdated level of today's Ukrainian industry.


The current decline of Ukrainian metallurgy is broadly discussed from the standpoint of the global financial crisis. The reference to international market turbulence that undermines the demand for ferrous metals is convenient for the government, as well as for the oligarchic "captains of business".

This explanation is not complete Ц at least regarding the fact that in the conditions of the global crisis, Chinese and Russian metallurgic production appears to be more competitive. In fact, the global crisis most painfully affects the weakest economies, branches and enterprises. Strong and modernized enterprises even succeed in the situation of crisis, merging weaker neighbors along with cadres. Outdated and poorly managed economies and industries fall behind, exposing their weakest points, and failing to compete at the market.

The crisis has revealed the fact that had been obvious for specialists of the metallurgic branch for years: without reconstruction and technological modernization, competitiveness is unavailable. Attrition of fixed capital in the mining and metallurgic complex of Ukraine reaches 70%. More than 54% coke batteries, 89% of blast furnaces, 87% of open-hearth furnaces, 24% converters and almost 90% of rolling mills are overexploited. Outdated technologies are excessively power-consuming and thus non-competitive.

By the time when the crisis broke out, the amount of coke used for production of 1 ton of pig iron reaches 450 kg, while modern facilities enable to reduce this level to 300 kg.

One of the technologies enabling to reduce the use of coke and natural gas is injection of coal dust into the blast furnace. This technology is broadly used in Japan that has no coke of its own. In Ukraine, this technology was implemented only at the Donetsk Metallurgic Plant. In order to re-equip a furnace, one needs investments of $20-40 million, and this innovation pays back already within one year due to a 10% reduction of costs. Though the importance of this innovation is of no doubt, the owners of enterprises are reluctant to invest.

Therefore, consumption of reference fuel for smelting 1 ton of pig iron in Ukraine reaches 750 kg Ц thrice more than in Western Europe. Precious natural gas, the subject of permanent debate with Russia, is still used in the blast-furnace process instead of the duff injection method.

In Germany, 70% of steel is produced in converters and 30% in electric furnaces. In Ukraine, 45.2% of steel is still produced in open-hearth furnaces, though energy costs are twice higher in this outdated method of production. The same is true for discharge of dust and hazardous gases.

Only the sharp increase of gas prices impelled Ukrainian oligarchs to correct their approach: in this year, major enterprises publicized plans of a full transition to the converter method.

One more method of reducing energy costs is implementation of continuous casting equipment. In Ukraine, the share of this method does not exceed 33%, while in Russia, 68% and in Germany, 98% of steel production is equipped with these facilities.

In Russia, one third of steel Ц 25 million tons Ц is produced in by modernized plants. Andrey Fedoseyev, president of Ukraine's Metal Trading Association, reports that the technological level, quality of production and labor conditions at the Magnitogorsk Metallurgic Plant reaches and even exceeds European standards. The technological level of steel production is increasing in China as well.

Not surprisingly, Ukraine-produced rolled metals are 20-25% more costly than Russian and Chinese production. Profitability of Ukraine's iron and steel industry has declined from 26 to 14% between 2000 and 2007. What was the obstacle for the vitally necessary modernization?


The culture of Ukrainian business is typical for a colonial country where owners are concentrated on extracting superprofits from industry by excessive exploitation of the labor force. However, that is not the only difference from nations that pursue new technological standards.

Visiting Warsaw, my friend was surprised with a small number of luxurious limousines in the streets of the Polish capital city. In Kiev, the lifestyle of "captains of business" reveals their obsession with self-enrichment, and not with technologies of advanced enrichment of ore.

Instead of replacing the outdated Siemens-Martin furnaces with converters, not only for economizing gas but also for improving labor conditions, Ukrainian industrial tycoons spend millions for purchasing soccer stars for the Donetsk- and Kiev-based clubs. Having acquired industrial facilities for a song, they are uninterested in technological and social progress.

The current crisis raises the issue of personal responsibility for the deterioration of the crucial industry of Ukraine, and at the same time, requires urgent transition to a new strategy of management. The same is true for the country as a whole. In case the "captains of business" don't recognize this fact as soon as possible, they are going to lose their source of enrichment. The example of the Mariupol Metallurgic plant, where top managers are urging the government to nationalize the industrial facilities, is quite illustrative. Survival and progress of Ukraine's heavy industry is available only in case of a fundamental change of management, involving deliberate and direct protection of national metallurgy, re-establishing of domestic industrial chains, and revival of domestic machine-building. This is the only way to reshape the economy and to guarantee its ability to survive in the conditions of the global crisis.

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