09:35 08.08.2023

We will increase production from 15-20% to 33-35% with stabilization of water supply to plant, to 50% after repair of blast furnace No. 6 - ArcelorMittal Kryvyi Rih CEO

28 min read
We will increase production from 15-20% to 33-35% with stabilization of water supply to plant, to 50% after repair of blast furnace No. 6 - ArcelorMittal Kryvyi Rih CEO

Exclusive interview of CEO of PJSC ArcelorMittal Kryvyi Rih (Dnipropetrovsk region) Mauro Longobardo to Interfax-Ukraine.

Text: Yuriy Guly

1. In mid-June after Russian occupiers blew up Kakhovska HPP dam ArcelorMittal Kryvyi Rih due to the problems with providing the plant with technical water reduced production to 15-20%. This forced the company to build a new pipeline for the city's water supply and full coverage of production needs. How is the water supply currently working and when will the plant resume production and to what extent? Recently, the press service reported that one blast furnace, four rolling mills, a converter shop and one CCM are currently in operation at the plant. Has the situation changed?

Of course, the situation with Kakhovska dam has created big issues. At the moment of that attack, we were operating with two blast furnaces. We thought that we could eventually extend the operation of two blast furnaces in parallel for a longer period of time and to keep the level of production between 40-50%. But, unfortunately, as soon as the dam was destroyed, the level of water in Kakhovska reservoir started reducing and because most of the water coming to Kryvyi Rih was pumped from there, we immediately suffered lack of water. At the time of the attack, we were consuming around 2500 cubic meters per hour of industrial water. And after the attack we actually got to a level of 900-1000 cubic meter per hour.

So in these conditions, we decided first of all to anticipate the capital maintenance of one of the blast furnaces. So in the first days after the attack we were operating only with one Blast Furnace - Blast Furnace No 8 and pig iron casters, which are actually connected to that, plus two coke batteries and keeping other two on idle condition. All the rest of the rolling facilities were stopped.

Then we got more information about the water and what it would take to get back to the previous level. We understood several projects were on the table from government side, city side, but we decided to make our own contribution on that, and we had the opportunity to connect the Inhulets river that is actually flowing on the west side of our facility to the Pivdenne reservoir.

And how to do that? We have already existing pipeline that we used to use in the opposite direction, coming from the Pivdenne reservoir. We needed to create a link between the river and this existing internal pipeline that we have. This link is five kilometers long approximately and it's been built by us, utilizing pumps that we had in warehouse and utilizing pipes that we previously bought at the beginning of the year for another project we have - the construction of a big tailing dump Karta III. In approximately 20 days we have been able to build a pumping station, to build a pipeline from Inhulets river to the existing ArcelorMittal Kryvyi Rih’s pipeline that is positioned in the south of the facility. We've been able to restore the flow on the opposite side from west to east and finally, by the beginning of this week, we have been able actually to feed the Pivdenne reservoir with approximately 3,400 cubic meters per hour of water from the Inhulets. I think this was a pretty big success. The pipeline is already operating and now the water is going there and is replenishing the reservoir.

We think that in the next couple of weeks we will be able to get an additional 1000 cubic meter per hour from the reservoir. The first period while this pipeline is working is dedicated to replenishing the reservoir mainly for the city of Kryvyi Rih. So once after the water level is enough for the people of the city, we will get extra water to restart with our facility. Currently, what we are trying to do with the available water, every day we decide which facility should be in operation. We still have the coke batteries No. 5, 6 operating, the coke batteries No. 3, 4 are on idle, Blast Furnace No. 8 operating, we operate steel mill and rolling mills depending on the availability of water.

Starting from the second half of August we expect to be able to come back steadily and continuously to 25-30% of production capacity. Every day we have very big variability in terms of equipment operating. But after mid-August we much probably will be able to come back to pre-attack levels, now excluding the Blast Furnace no. 6 that we are now repairing as we anticipated the capital maintenance. Blast Furnace no. 6 will come back later during the year, probably in Q4, once the maintenance is completed.

We expect the production to be linked to the blast furnace capacity. In August we might have a production between 100 000 and 150,000 tons of hot metal. It then can be transformed in steel or in pig iron. We will see what the best combination is according to our order portfolio. And what is the issue here? For 100 000 tons, we have enough water available. But if we produce more hot metal, we will not be able anymore to operate the downstream lines in a different moment. We will have to operate all production lines together, because we will need to evacuate the production of the blast furnace.

So Blast Furnace no. 8 might go from 3,500 tons per day production to 5,000 tons per day during August. The exact moment in which the blast furnace will go will be determined by the availability of the additional water that we are promised to receive during August. And we need to take into account that as soon as we go to the higher level of hot metal production then we are obliged to run all the downstream lines together and that will bring actually the water consumption higher. So the additional water needed is linked to the fact that because the production of hot metal increase, all the downstream plants must work together at the same time.

2. What are production results of the plant for the first six months of 2023 and in comparison with the same period last year?

The first six months of last year are not a good comparison because in the first couple of months the production was full. It's very difficult to compare the first half of the last year with the first half of this year. If you compare just the numbers, you will notice that this year we reduced the production compared to what was in the last year.

In the first half of 2022 we produced around 890,000 tons of crude steel and in the first half of 2023 we produced 390,000 tons – 43% of H1 of 2022. But if we compare the war period, I will say that we are on the same level on average. Of course, if you consider the two weeks where the energy was not available or the months in which the energy was available but not in the quantity that we needed. You will see peaks, down peaks and so on. But in average, operating with one blast furnace in our case, we will be always around 20-30% of the production.

We are now having three blast furnaces, that can be operated, but one of them, Blast Furnace no. 9, covers 50% of the production. Blast Furnace no. 8 can cover 30-33% of the production, and Blast Furnace no. 6, is the smallest one, around 20%. So, if you operate Blast Furnace no. 6, we will always be around 20%. If you operate Blast Furnace no. 6 + Blast Furnace no. 8, we'll be at 50%. If we have Blast Furnace no. 9, we'll be at 100%.

When the water will be available, we'll be in the opportunity to reach 33-35%. So we will get back to 50% only when Blast Furnace no. 6 will be back.

3. Is there a sufficient supply of raw materials, in particular coal or coke?

If we consider the level we are operating now with one blast furnace, we can say that the coal that we are able to buy in Ukraine is somehow enough to produce coke for this level of operation. We just have to buy a small amount from abroad in order to improve the quality of the blend that we use in the coke batteries.

So at 25-30% we are OK with a small amount of import coal to optimize and to maintain the quality of our blend. If the operation increases to 50%, then we will have to import the remaining part of coal. We also consider that if our operation will increase to 50% means that situation is better, the markets are better. The fact that the market improved, the fact that the situation in Ukraine will improve is not generating only an improvement in ArcelorMittal Kryvyi Rih, but in all mining and steel business so that the coal then will not be enough and should be imported.

Now importing coal from Polish ports, using the railway, for sure it will be a challenge from the logistic point of view, especially during the winter months, when the Polish ports are busy in importing thermal coal for energy production inside Poland. We had the same situation last year. When the winter came there was an order from the Polish government to prioritize the movement of the thermal coal to be used in their power stations and the cooking coal was somehow a second priority. In reality we didn't suffer so much because we were not producing so much but we know that in winter periods priority might go to thermal coal and importing big quantities of coal through the Polish ports and railway or even Romanian ports and railways might be a challenge.

4. How do you solve logistics problems? What should be done to remove this problem? Where does the company send its products now?

In the first half of this year, I will say that the logistics has been challenging for us but didn't represent the real obstacle to export to the European Union. And, of course, it is a big challenge in terms of business viability, because the extra cost that we are paying to ship the material all this distance compared to the cost that we had before, in many cases, makes us uncompetitive, makes us losing money instead of having a profit. But in terms of capacity available, at least during the first half of this year, we didn't suffer so much and the reason, as I mentioned, is simple. We have been producing between 20 and 30%. A lot of alternatives have been developed to export finished products to European countries without having delays or congestions.

The Grain Deal has not been extended. This is the peak season, so all these grains should be transported to another countries. This will add constraints and limitations to the available capacity.

In addition to that, there have been attacks to the port infrastructure. And we understand that a lot of work is now done to take out from the ports the material that is already stored there. Probably, soon there will be a congestion in the area of the ports, where all the agricultural ports operator will try to cooperate to remove the materials from the port and to redirect this material to the railway network.

So we do not have yet understanding of the limitations that we will face in the next months. It might be probably a congestion, especially in the next 30 days, if the situation will not go worst. And after that, probably the situation will be normalized, because the current moment is the worst moment. Peal season always was the worst moment even without the enemy’s attacks.

5.What is the share of sales in Ukraine?

In Ukraine in average during the first half of this year we have been selling around 30,000 tons per month. This is around 25% of what we used to sell to the market before the war. Before we had a domestic market of approximately 100,000-120,000 tons per months depending on, because some products have some seasonality.

Now we are seeing some increase, so let's see how we go. If we produce approximately 100,000 tons of hot metal per month, we can say that 30% was dedicated to the domestic market, 70% to export of which 50% is pig iron.

In the meantime, we have been developing some neighbor markets in European Union. Before the war we had a quota to export to Europe steel products. So we never actually thought this was a good market for us, because there was not enough capacity in this quota to have export there. In June 2022, the European Union removed quota, so it was possible for us to develop this new market.

Now, developing the new market doesn't mean that in one month we can quickly sell the material. We had to go through the process of certification for all our products. The European Union doesn't have a unique product specification that is valid for the full area of the EU27. Each country has its own certification, so finding the customers goes in parallel with certifying of our products.

Only in 2023, we started seeing some orders from the neighbor countries in Europe and this is linked to the fact that the logistics represent a big extra cost. So we will never be able to transport our goods in economical proper value to west of Europe without the ports of the Black Sea open.

For us steel market in Europe has been opening in the first half of this year. But in reality in order to find customers to certify, to make a trial order, it took some time.

Currently the European market for the products that we produce is depressed. The prices are extremely low, even European companies are in difficulties to keep the facility open. We have extra cost for logistic, and additional extra cost, because we kept all our workforce. If steel market in Europe will be better we will produce more steel rather than pig iron.

In previous years it was easy to plan each product at the beginning of the year for the full year unless big disturbances occurred, we were able to maintain the same product portfolio. In this situation it might change weekly. It's difficult to give you the precise data, because next week the split between the products might change. Suddenly the price of some products increases or decreases and so we need to adapt our production to actually cope with this market fluctuation. In our case are very impacting due to the extra cost.

6. After the de-occupation of a part of Kherson region, the work of ArcelorMittal Beryslav has been resumed, increasing the shipment of limestone for metallurgical production of ArcelorMittal Kryvyi Rih. How is the situation at the moment?

Yes, it is in operation. I personally visited the site as soon as the area has been liberated. And actually, at that time, we had some material in stock that we were not able to actually ship out, when the war started and the area was occupied. And as soon as the situation improved, we tried to find a way to resume the shipments to our facility using this stock material. And this has been done.

In the first months of this year, we already shipped out all the stock that we had here to ArcelorMittal Kryvyi Rih. And thanks to the support of the different authorities, military authorities, even from Kryvyi Rih, not only from Kherson, we were able to restart production. By the way, exactly the military authorities of Kryvyi Rih helped with demining of the territory. Our facility was occupied by the aggressors. They used our facility as a base that has been destroyed lately. All the area that was adjacent and close to our facility has been mined. It took some time to demine the area and to allow the equipment to come back to the mine and to restart the production. Now everything is working.

We think that by the end of the year we might be able to have 200,000 tons of limestone shipped out from Beryslav to ArcelorMittal Kryvyi Rih, including the material that was in stock before. But you need to consider that the production of this facility in a normal situation could be 60,000-70,000 tons per month. So in a year could be even around 800,000 tons of limestones. So also here we will be more or less shipping 25% actually of what is the real capacity of the mine. Currently we don't require a bigger quantity.

7. ArcelorMittal Kryvyi Rih recently sent documents to the Ministry of Environmental Protection and Natural Resources of Ukraine again for approval of the construction of tailing storage facility – Karta III. As far as I remember, this is already the fourth submission of documents for approval of the construction of this tailing dump. What are the new requirements put forward by the Ministry of Natural Resources and why did the approval for construction take so long?

This is just a part of the normal workflow of the process that is not the quickest.We do not see issue there, we are not facing any problem now.

Karta 3 project is one of the flagship eco-friendly projects in our mining department that we are having currently. Karta 3 will be a state-of-the-art tailing dump in terms of ecological perspective. And the project is on time, it's ongoing. I’d like to thank ArcelorMittal Group to allow us, even considering our negative financial results, to continue this project and the finance must go ahead. This year, overall, including Karta 3, we plan to have a capex expenditure of around $130 million, of which Karta 3 is playing an important role, a little bit more than half of it sum.

Now good weather allows us to proceed even quicker. We are not forecasting any problems for this project. And in terms of the permits, we hope that everything can be solved out quickly.

7. As reported, on June 27, The National Commission of the State Public Utilities Regulation established new maximum price caps for electricity on the day-ahead market, intraday market and balancing market, which took effect on June 30. How did it affect the additional costs of AMKR? How much have deductions for electricity increased?

Yes, this is a big issue for us. Before the war, honestly, Ukraine, taking the advantage of the nuclear power stations, was able to have a competitive price of electricity – on the level of $70-80 per megawatt. Anyway, always lower than the electricity price that is paid in Europe. Now, of course, Europe also has big differences, depending on the country, but in average we were always lower than the European price.

Then the full-scaled war started, we had the attacks on the energy infrastructure, mainly electricity. We didn't have electricity available. But by February-March 2023 the situation in terms of availability of needed electricity was solved, but the price never came back to the original figure. And we have been explained that damages to the electricity assets and to the grid, of course, despite the financing from outside, from other countries, should be repaid. Everything should be rebuilt. The maintenance of the facilities should be done.

Now, the fact that The National Commission of the State Public Utilities Regulation put a new cap is trying to confirm that this situation will be not coming back where we were before. The big issue here is that if we have the extra cost for the logistics, if we have the extra cost because we want to maintain our people and to help them to stay there to live not a normal life but at least to survive this war. We pay them 66% of the basic salary even if an employee is not at work. And now we have also this increase of electricity. This is very mathematical calculation for us. We can change every day but as much as the utilities are increasing and nothing changed on the logistic point of view and nothing changed in the market we will end up having a cost that is higher than the price. When we have a cost that is higher than the market price it's more convenient not to produce. How can we produce if we need to inject more money than the money that we will receive?

You know about the losses we record during 2022 and probably this year we will have again losses. Increasing of prices for utilities will increase our losses in the proportion in which energy is utilized. We would like to understand how the government can impact that. Can a transition exist? How the government intend to support the industry in this moment, not after the war in reconstruction period? We need Definite transition to survive. We do not consider that increasing the tariff is a good support in the current mode.

8. How is ArcelorMittal Kryvyi Rih currently operating - profitable or unprofitable? Last year, you attracted significant credit funds under the guarantees of ArcelorMittal Group. What is the situation now? How much did investment in production decrease?

Last year we had a consolidated net losses of around 1.3 billion dollars. And we had negative cash the Group had to inject in our company of approximately 600 million dollars. We were coming from good 2021 year, so we had some reserves at beginning of 2022. Of course, we have already used all these resources.

For this year we will probably have again negative results according to what I'm seeing now. I cannot say now, how much it will be negative, hopefully, will be less negative than last year. That is our hope and we are trying to reach better results than in 2022. But if tariffs rise, these negative results will be more negative than expected because our operating forecasts were different.

So far we are still in negative. A lot of uncertainties every day affect our forecast. So let's see. The company cannot survive if the situation continues in this way. State support can be a decisive factor. There is another factor, of course, that is the market. And if the market suddenly will improve and the prices will increase in Europe, then we might be able to improve our financial situations.

But so far all the forecasts that we are seeing are not showing sharp improvement of the situation during 2023. We might see some results in Q4, but it will be an effect of only three months. The impact of these 3 months will not be so big to compensate what was during the first 9 months of the year. Even if the situation improves today, we will see the effect only in Q4.

As market determine our price, we are trying to do our best to maintain, to mitigate and to reduce our cost, but then there are some part of the cost that we do not control. We cannot rule over the price of electricity. We can only improve the consumption of electricity, but we cannot rule on the prices.

10. Does the company have problems with VAT refund? What is the state's debt to ArcelorMittal Kryvyi Rih for VAT?

No, we don't have any overview over VAT refund. In this case, I really praise tax authorities and government to take care of us in this case and to allow the normal flow of VAT to be refunded according to the rules. We are happy that we could reach this level of VAT refund flow even in these conditions.

11. How acute is the company's problem with personnel, how do you solve the situation with a shortage of workers?

We kept all our workforce at payroll, even if a half of them were not at work for several months. Before the war, we had around 26,000 people, and all our employees are still at our payroll, including the contractors.

Now, approximately a half of personnel are at their workplaces. 2,700 of our employees went to the Army. Sometime, in some specific job positions we have more people going to the Army. And when we are going to search for this position the market is not so easy to find. However, we still have some people at home and we are trying to implement plans of retraining to help people train for different positions. So, for example, if we see that some of our assets will not restart in the short term, we try to invite our employees to retrain and to occupy another position inside our organizational chart. At the current moment with 25-30% of the plant’s load, the fact that there are not so many people available, that is also true, is not affecting our operation. At the current moment. We expect that we will start feeling it once we will be steadily around 50%. And it will become definitely a big problem, when the plant will ramp up to 100% hopefully when ports will be reopened.

What we are doing now: we keep the people at payroll even if they are idled. When they are at home, they receive 66% of their basic salary, while when they are at work, they receive 100% of their salary and whatever additional payment that they should get. The fact that they can be retrained to do another job would allow them to come back immediately to the plant and to work and get the full salary. Now this is for the short term.

For the long term, I agree with you, this is a big issue. And this is a problem not only for our plant. When the situation improves, everybody will go to search for new resources. And we do not expect that the resources to come back at 100% of capacity for all metallurgical plants of Ukraine will be available.

We are trying to understand how to solve this. Another program that we have is the work with the universities. They are working, and we have plans to extend the program that we started, when we announced our Nova Fabryka project, in which we try to attract the students from universities. We put them in the loop, we train them, we have a program of double degree. And when they finish their studies, they are already available to work for us. I think that is another big point that we can work on even increase the number of students that we follow, and we try to attract as soon as the war finishes to our plant.

Once we will restart with our investment program and we will put in place new strategic investment with new technologies and new assets, we will need people exactly after the universities, because all the new plants are very technological. The manual work is limited to the minimum. So people have to be able to work in systems, to work with the computers. All the investment that we are looking at in current moment, they have a high level of technology inside. It is important to attract the students now, to give them a perspective for the future. Exactly these people will be useful to us for the plant of the future.

Of course, the availability of resources in metallurgy and mining industry is a country’s issue that will have to be addressed if the country really wants to proceed and increase the capacity of this industry in the future.

12. How do you assess the initiative of the Office of the President to create a coordination platform that will consider problematic issues between business and law enforcement agencies?

Of course, positively. It's much better if the relationships with government will be via central institutions, which can collect all the issues and to make the full picture. Such a company like ArcelorMittal has the interactions with the government because of the size of the company. Our company is a member of business associations, EBA, American Chamber of Commerce, etc. So we are able to actually raise the issue and it will be sooner or later considered. Now we understand that there are the companies that are not of the same size and they need also to be able to raise their issues.

This is normal that in order to find the solution first need to listen, what is the problem. And having full understanding of the problem coming from different perspectives is very good. So I praise this initiative of having a structural way of receiving the issues linked to the relationship between the authorities and the business. This is a good way of collecting information and based on that prepare an action plan and a strategy to solve the problems that can arise.

13. How do you assess the situation in MMC of Ukraine and in worldwide in general? What is the forecast for the economic situation?

Metallurgy in Ukraine will be always great industry as it was always. And this will be Green Metallurgy. The industry itself is going to this direction for many years. Some countries work quicker. Some countries are a little bit slower. In less than 25 years, in 2050, we will see the famous target of decarbonization. And even today, as soon as you try to modernize the facility and to change some equipment, there is only the environmentally friendly one available to buy. Technologies and speed of the modernization will bring this industry in Ukraine and outside Ukraine to the green.

The main issue I see in the metallurgy world is there is much more capacity installed than demand. In order to survive, the company must be competitive. Otherwise, someone else will come that is more competitive and will take share of your market. I'm not talking about some special products, I'm talking about commodity business. Big volumes of steel are sold as a commodity.

Today in Europe, there are almost 10 million tons of unutilized capacity. There is not even the market for that. Now, this will determine the fact that only the competitive players will be able to survive.

How do we survive in this very competitive environment? First of all, we see that there are several countries in Europe, and also U.S., that are actually supporting specifically the steel industry in the transition to green. Europe, for example, is giving grants through different countries to several plants in order to facilitate the transformation of the industrial footprint to a full green footprint. In the U.S. there are the incentives on the taxes that these new plants will have to pay. Somehow there are de-taxation for the investment done in the green metallurgy sphere.

So my question is, what would be for the Ukrainian companies? Reconstruction of Ukraine will attract a lot of capital to the country. We must receive the same incentives that our competitors. We are trying to get inside the European Union as soon as possible. So as soon as we are inside, we will have more or less the same levels. Now, there will be rules to follow. Now, if we are inside, everyone will be more or less on the same levels. Rules will be set for everyone to follow. If we are inside, then we compete in the same market and should receive the same incentives.

It's a future of metallurgy for sure. We consider that Ukraine will be part of this, thanks to the resources available in Ukraine, specifically iron ore resources that are still there. But we must convince everybody that we need to value these resources. Because the resource itself, without help, without incentive aligned with the worldwide best practice, will be not enough to maintain our profitability. And we do not want to see Ukraine becoming a raw material supplier. This I do not want. Because if there are no clear incentives for investments in green metallurgy, much probably Ukraine will transform itself into a supplier of raw materials for Europe. This will be somehow a mistake if we are going in this direction. I would prefer to have a finished product coming out from Ukraine.

Often a company that annually produces 10 million tons of pellets might be only 1,000 people employed. A company that annualy produces 6 million tons of steel has 26,000 people employed. We need to analyze. So first of all, I would like Ukraine to develop the steel industry after war. So, if you are competitive and green, you will be one of the companies, surviving in this challenging market.