Russia's war in Ukraine pushes Ukrainian steel production to the brink

ZAPORIZHZHIA, Ukraine — In this eastern Ukrainian city, a Soviet-era mural stands boldly in front of Zaporizhstal iron and steel works.

The mural shows muscular ironworkers handing a freshly forged sword to equally muscular soldiers who are rushing off to war. Today, however, Ukraine's iron industry is in rough shape because of war itself.

During much of the 20th century, a thriving industrial heartland churned in central and eastern Ukraine, fed by abundant coal mines and big, hulking steel mills. In several parts of the country, these plants still dominate the landscape, the local economy and even civic identity. Iron and steel production remains Ukraine's second-leading industry after agriculture. And prior to the Russian invasion this year, it was a major supplier of iron ore to Turkey, China and parts of the European Union.

While the war with Russia has raised serious international concern about getting Ukraine's vast production of wheat, corn and sunflower oil — normally its top exports — to global markets, the invasion has been even more devastating to the country's metalworks. Exports of bulk iron ore, for instance, that are shipped by the ton in massive cargo vessels have stopped entirely from Ukrainian ports.

Just half of the plant's blast furnaces are on

Inside the sprawling Zaporizhstal industrial compound, the plant's giant blast furnaces normally convert tons of raw iron ore into a stream of molten orange pig iron.

But Serhiy Safonov, the manager of the blast furnace shop, says that only two of the factory's four blast furnaces are currently operational.

The furnaces are designed to run constantly, he says, and normally would never be shut down over their 30-year life span. But earlier this year all four furnaces had to be dialed back to what Safonov calls a "low idle" as Russian troops threatened to advance on Zaporizhzhia. Moscow's forces never reached the area, but tens of thousands of people fled. Much of the city shut down, and the factory that used to employ 11,000 workers is now operating at less than 50% of capacity.

Yuriy Ryzhenkov, the CEO of Metinvest Group, which owns the Zaporizhstal plant, says they have enough raw materials inside Ukraine to keep pumping out rolls of sheet metal and bars of cast iron. The problem is they can't get those products to market. Metinvest and other Ukrainian steel producers now have huge backlogs of processed metal sitting in Ukrainian warehouses.

"The main difficulty is the logistics," Ryzhenkov says. Traditionally, all Ukrainian steel companies, of which Metinvest is the largest, export their products via the Black Sea ports or Azov Sea ports. "At the moment," Ryzhenkov says. "The ports have been blocked by the Russians."

There's no deal for shipping steel

While a few ships carrying grain have been allowed to leave Ukraine recently, there's still no agreement to allow vessels ferrying other goods to transit the Black Sea.

Some steel and iron ore is getting sent by rail to ports in Poland and Romania, but it's a slow and expensive process. Adding to the logistical challenges, Ukraine's railways operate on a different gauge track than the Western Europeans, meaning cargo has to get transferred at the border.

"This was never envisaged as the main export route for the steel industry in Ukraine," Ryzhenkov says.

As difficult as it is to get steel to customers in Turkey, Italy and North Africa, the Zaporizhzhia factory at least is still in Metinvest's hands.

Russian and Moscow-backed separatist forces seized the company's two steel mills in Mariupol. This includes the Azovstal plant, where Ukrainian soldiers made a final stand against the Russian occupation of the city. Russian forces blew apart the mill to capture it and finally take full control of the southern port city.

While Azovstal is now better known, it was actually the smaller of Metinvest's two steel plants in Mariupol. The other, Ilyich Iron and Steel Works, spread over more ground and, with 14,000 employees, had more workers than Azovstal. Ilyich was seized by Russian troops in April. Ukrainian fighters held out at Azovstal until mid-May.

"At some point in time we'll come back to Mariupol and see what is the state of Azovstal and Ilyich mill and see if they can be restored," he says.

The plants were insured, "but insurance doesn't typically cover the wartime risks," he says. "And that's the big problem."

The company's lawyers are looking at ways to file a claim against the Russian Federation for billions of dollars in damages, Ryzhenkov says — but making a shrug, as if it's a longshot.

There isn't a definitive tally of monetary damages in Mariupol, but the human suffering after months of bombardments has been extensive. Ukrainian officials say more than 20,000 civilians were killed in the Russian siege of the city. U.N. officials have documented a lower number of civilian casualties but still estimate the number killed in the city is in the thousands.

With the city under Russian control, Metinvest has urged customers globally not to buy steel from Mariupol. The company says there's a "high probability" that the occupying Russian forces are selling off some of the more than 200,000 tons of steel products Metinvest had stored at its two plants there.

Earlier this year, Metinvest was paying its idled employees two-thirds of their salaries, including at the Mariupol plants now controlled by the Russians. But in June the company had to lay off thousands of workers.

With limited revenue, two of its largest factories gone, and few options to export their industrial products to customers overseas, Ryzhenkov says the company right now is just focused on survival.

"We are making sure that whatever we still have control over we keep intact," he says.

"And we are waiting for Ukraine to kind of win the war and take back what belongs to it." But he's under no illusions that that is going to happen quickly.

Plants and raw materials are behind enemy lines

The challenges facing Metinvest are similar for other Ukrainian steelmakers and industrial firms, particularly in the east of the country.

"There are a number of really problematic trends that will compound over time," says Andrew Lohsen, who up until last year was based in Ukraine as a monitor and an analyst for the Organization for Security and Cooperation in Europe.

"One of them is the fact that these industries are highly dependent on coal that is mined behind enemy lines now or close to the fighting."

He says the industrial capacity of Ukraine right now is severely strained because so much of its manufacturing sector is in or near the intense fighting in eastern Ukraine.

This has been part of the problem for Metinvest. Prior to 2014, Metinvest was based in the eastern Ukrainian city of Donetsk. When Russian-backed separatists seized Donetsk in 2014, Metinvest relocated its headquarters to Mariupol, a city on the Sea of Azov. This year, when Russia grabbed Mariupol, the headquarters were displaced again, this time moving to the capital, Kyiv.

Ryzhenkov at times sounds weary talking about the impacts of the war, the export bottlenecks, the assets stolen by the Russians, the layoffs. But when asked if the company might be able to somehow restart operations in Mariupol or elsewhere near the fluctuating front lines, he answers quickly.

"The position of our shareholders is very clear on this," he says. "We will not operate in any occupied territory, under any occupational regime." He insists they'll operate only in areas under Ukrainian control.

Hanna Palamarenko contributed to this report.

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