2022-10-25T13:18:00+03:00 Publications 2024-05-15T18:48:37+03:00

Ukrainian news

Invasion Into The Future: Russian military aggression jeopardized the prospects of the green modernization of

Invasion Into The Future: Russian military aggression jeopardized the prospects of the green modernization of Ukrainian industry and climate goals by the EU

Russia, whose economy is based on the production and selling of energy resources, was inevitably going to suffer as a result of the European Union's declaration of climate neutrality by 2050 and the abandonment of fossil fuels. The full-scale Russian aggression against Ukraine, regardless of the outcome of the battles, makes it unlikely that the cherished goals of the Green Deal and the Paris climate agreement will be achieved.

And the thing is not that the old Soviet tanks, which are ironing the Ukrainian territory with their tracks, consume a gigantic amount of fuel and emit greenhouse gases into the air. The fact is that the war forced Europe and the world to reconsider their categorical "no" to coal fuel, which is much dirtier than gas. And in the fact that the post-war reconstruction of Ukraine will almost inevitably increase its CO2 emissions, making it difficult to fulfill obligations under the Paris Agreement.

On the eve of modernity

Before the start of the Russian invasion, the export-oriented Ukrainian industry actively built plans for the green modernization of their production. Several factors contributed to this: there were Ukraine's obligations under the Association Agreement with the EU, the high demands of the European market for the environmental friendliness of products, the pressure of the Ukrainian public, which does not want to put up with the depressing state of the natural environment in industrial cities.

The country's iron and steel industry – the second-largest generator of foreign exchange earnings and a significant polluter – ended 2021 with export revenues of $22.8 billion, which accounted for 33.5% of all Ukrainian exports. According to the World Steel Association, Ukraine exported 21.3 million tons of steel and ranked 14th in the world in its production. Investments by iron and steel companies exceeded $2 billion in 2021. At the same time, more than half of this money was invested in environmental projects.

During this time, the share of spending on environmental protection measures in the total amount of capital investments of iron and steel companies increased from 39.8% in 2017 to 53.8% in 2020. According to the State Statistics Service, the share of environmental investments in the entire industry in the total amount of investments and expenditures for the protection of the external environment of industry increased from 41.1% to 54.8%.

The share of investments in this industry in the total amount of investments and expenses of industry for environmental protection increased from 41.1% to 54.8%, according to the State Statistics Service.

In 2021, the world economy began to emerge from the corona crisis. It was a very good year in terms of global commodity prices. Thanks to this, Ukrainian companies were able to significantly increase their incomes, so they enthusiastically planned long-term investments.

In 2022, many projects related to the modernization of the primary production stages were planned to be completed. Next, manufacturers thought to focus on the development of products with a high share of added value, the production of DRI-coils and the development of electric steel-making capacities.

The main technologies that mining and steel enterprises have invested in, according to the GMK Center:

• Injection of pulverized coal in blast furnaces. Allows to achieve energy saving (by giving up natural gas and reducing coke consumption).
• Air emission cleaning. As the bulk of pollutant emissions accrues to blast-furnace and sinter production, all the projects related to these conversions went hand in hand with explicit environmental effects (reduction of dust emissions by 50% and more, in particular).
• Increasing Fe content in finished products. Higher quality of iron ore entails not only higher price premium for conventional products, but also more possibilities for reducing emissions of СО₂ and other pollutants in steel production.

According to various estimates, the industry would need approximately $25 billion to achieve carbon neutrality in the next 20-30 years.

Aggression against plans

Russia's military invasion of Ukraine at the beginning of 2022 fundamentally changed the life and economy of Ukraine. Tens of thousands of people died, a third of Ukrainians were forced to leave their homes, dozens of cities were destroyed, and thousands of businesses stopped operating.

According to the World Bank's October forecast, the GDP of Ukraine may decrease by 35% in 2022 due to the war. Although as early as January 2022, the World Bank predicted Ukraine's GDP growth by 3.2%. Thus, by the end of 2022, the gross domestic product may reach $130 billion.

The total losses of the economy from the war (loss of GDP, investments, labor force, etc.) according to joint estimates of the Ministry of Economy of Ukraine and the Kyiv School of Economics range from $600 to $750 billion. The cost of reconstruction and recovery needs, as of June 1, is estimated by the World Bank, the European Commission, and the Ukrainian government in more than $349 billion. This exceeds the GDP of Ukraine in 2021 by more than 1.5 times.

The war creates a very high level of uncertainty regarding the further development of events. Both pessimistic and optimistic scenarios are possible. If it drags on, economic recovery will begin only in 2024. But as regards the Ukrainian industry in general and the mining and iron and steel industry in particular, we can already speak of such consequences of aggression.

The war led to the fact that:

• Iron and steel industry lost more than 40% of its capacities. The war destroyed the largest Ukrainian steel enterprises – "Azovstal" and Ilyich Iron and Steel Works. The surviving enterprises are also located in the southeast of Ukraine. These regions are currently either occupied or in close proximity to hostilities.

According to the data of the "Ukrmetallurgprom" Association, the average level of loading of operating enterprises is 15% at steel plants and 25% at mining and processing plants. According to the association's forecasts, metal enterprises will at best produce 6.5-7 million tons of steel by the end of 2022. Whereas in 2021, Ukraine exported 21.3 million tons of steel and ranked 14th in the world in its production, according to the World Steel Association.

• Enterprises have logistical difficulties. Russia blocked Ukrainian ports through which iron and steel products were traditionally shipped for export. Ore and metal did not become part of the "grain deal", as Ukrainian producers had hoped. The warfare, in fact, blocked 3/4 of Ukraine's land borders. The only route left for Ukrainian exporters is the railway line to Europe through the western border. This increased logistics costs by about three to five times to $100-130 per ton for iron and steel producers.
• An energy problem has arisen. As a result of massive Russian shelling, which has been ongoing since October 10, 2022, a significant part of Ukrainian infrastructure has been damaged. According to some estimates, up to 30%. Power outages have forced iron and steel enterprises to stop production or limit capacity.
• There is a shortage of personnel. Due to the departure of a part of Ukrainians abroad, moving to the western regions, or the mobilization of employees, enterprises have a shortage of qualified personnel.
• Prices on foreign markets fell. The war changed the dynamics of the world economy. Instead of the growth predicted at the beginning of the year, the world is sinking into recession. Worldsteel forecasts a decrease in global steel consumption in 2022 by 2.3% compared to 2021, to 1,796.7 million tons, amid persistently high inflation and rising interest rates around the world. Reduced demand for the metal lowers prices. For example, ore prices fell from $159/t in March to $99/t as of September 1. Investment bank Goldman Sachs predicts a drop in the price of ore in the third quarter to $70/t.
• Enterprises stopped long-term investments. "The active phase of investing will begin only after the end of the war," – said CEO of Metinvest Yuriy Ryzhenkov. Mauro Longobardo, general director of ArcelorMittal Kryvyi Rih, also says about the rejection of large-scale investment plans: "We are currently suspending some of our investment projects. We make an exception for those without the implementation of which our production may stop completely."

Ferrexpo, whose assets were least affected by the war, continues to invest in projects that provide short-term benefits. In the first half of 2022, according to the company, its capital investments amounted to $102 million. Due to the absence of a significant debt load, Ferrexpo now has the highest credit rating among Ukrainian iron and steel producers: "ССС+". "Metinvest" has a rating of "ССС", and "Interpipe" - "ССС-".

However, Ukraine still remains a promising supplier of iron and steel products to European markets, especially considering the sanctions against Russian producers. Ukrainian mining plants were almost unscathed. For example, 21.4 million tons of iron ore were delivered to the EU in 9 months of 2022. The main consumers were Slovakia with a share of 19.45%, Poland accounted for 16.99% of the volume, and the Czech Republic - 16.03%.

Global reaction

The war in Ukraine led to a decrease of the world production. Russia's gas supply restrictions have caused an energy crisis, rising food prices and global inflation. The World Bank predicts an increase of global inflation to 8.8% in 2022. Inflation in the Euro zone will be 7.6% (and 8.3% in the EU), according to the forecast of the European Commission. High energy prices have a negative impact on European industry, and the need to change energy supply routes causes imbalances in energy chains.

The taxonomy has changed. Europe had to include nuclear power and natural gas in the taxonomy as fuels contributing to the transition to a carbon-free economy. It became obvious that giving up fossil fuels is not so easy. Investments in its development are growing, which means emissions in the mining process will decrease more slowly.

However, the general course of the EU to abandon fossil fuels has remained the same. Moreover, Russia's gas blackmail convinced Europe that the chosen path was correct.

"Modernising and decarbonising energy-intensive industries must therefore be a top priority. The European Green Deal sets the objective of creating new markets for climate neutral and circular products, such as steel, cement and basic chemicals. To lead this change, Europe needs novel industrial processes and more clean technologies to reduce costs and improve market readiness. For instance, the Commission will support clean steel breakthrough technologies leading to a zero-carbon steel making process. The EU Emissions Trading System Innovation Fund will help deploy other large-scale innovative projects to support clean products in all energy-intensive sectors",  the European Commission's communication about The New Industrial Strategy For Europe says.

Legal formalities

Although Ukraine has done a great job by adopting the National Emissions Reduction Plan and the updated Nationally Determined Contribution to the Paris Agreement, the war has brought its corrections.

It accelerated Ukraine's European integration with the EU. On June 23, 2022, Ukraine acquired the status of a Candidate for membership in the European Union. Now Ukraine will have to accelerate reforms to truly enter the European family.

Among the "important reforms" that Europe demands are the fight against corruption, the rule of law, the fight against money laundering, the fight against oligarchs, changes to the law on national minorities and harmonization of Ukrainian audiovisual legislation with European legislation.

It says nothing about climate goals. But obviously, if Ukraine goes against the green policy of Brussels, its entry to the EU will be difficult. Therefore, Poland, Lithuania and the Czech Republic are currently helping Ukraine to introduce new legislation for better environmental protection.

Recovery prospects

The direct damage caused by the war to the environment of Ukraine is so far estimated at $35.3 billion. Most of the country's environmental risks are associated with damage to industrial facilities and residential buildings (possible asbestos emissions), energy infrastructure (destruction of power plants, oil storage facilities, oil refineries, gas supply infrastructure) and ecosystems (forest fires and land mines).

The war caused great damage to Ukrainian industry. Its restoration will almost inevitably lead to an increase of emissions. According to the estimates of the Minister of Environmental Protection and Natural Resources of Ukraine, Ruslan Strilets, 79 million tons of greenhouse gases will potentially be produced during the post-war reconstruction and the infrastructure of the cities and villages rebuilding. The minister spoke about cities and villages, not about industry. Its restoration will be the concern of the owners. Until the end of the war, they are not eager to discuss future investment figures and what exactly they will restore.

Although the state already has a rough action plan. The war is not over yet, and the final amounts of damage it caused to the economy are still unknown. At the same time, the National Recovery Plan of Ukraine, presented by Ukraine in July 2022 in Lugano, Switzerland, envisages investments of $750 billion.

Unfortunately, there is no clear program for the restoration of the industry itself. Among the many plans that have been prepared for the conference in Lugano are plans to restore infrastructure, rebuild the defense-industrial complex, restore and develop the economy, even a plan to restore a clean and safe environment.

However, it cannot be said that the state does nothing for industry. Measures useful for it are scattered among 15 programs of the Recovery Plan of Ukraine. For example, there is the program "Development of sectors of the economy with added value", which requires financing for approximately $50 billion.

Among other things, there are four projects for metallurgy, which should be implemented in the coming years - 2022-2023. They provide for the construction or modernization of rolling mills for the production of finished products, taking into account domestic demand. It is expected that coated steel, plates, rails and beams will be needed to rebuild damaged infrastructure in Ukraine.

The developers of the Recovery Plan also have an idea to join the added value chain of green steel: build or modernize iron ore beneficiation and build new pelletizing capacity to produce DR-grade pellets, build H₂-compatible direct reduction iron/ hot briquetted iron modules, the production of green steel in electric arc furnaces.

The total estimated cost of iron and steel projects are $5.8 billion. This includes private and state investments. Most of the investment is expected to come from private players following the introduction of competitive interest rates, war zone insurance and measures to improve the business environment.

The National Economic Revitalization Plan also has programs for ecological restoration, but they are not very specific. Ukraine is requesting $20 billion for the "Environment and Sustainable Development" program. Another $130 billion is for the "Energy Security and Transition to a Carbon-Neutral Economy" program.

The details of the plan are currently being actively discussed by stakeholders. The existence of such a discussion shows that no one doubts the prospect of Ukraine's recovery. For Ukraine, the most important signal is that the methods and means of achieving the goal are being discussed, and not the goal itself. Restoration will necessarily begin after the end of the war, and in some regions, perhaps even earlier.

For the West, the important is that Ukraine doesn't call into question the need for transparency and control over the spending of funds. And also, the fact that the country is ready to restore its economy in such a way as to synchronize it with the European economy as much as possible in the future.

Not a very green revival

For green modernization, the industry needs three things: technology, green energy and financing. And there is also a necessary desire, which in business is usually determined by economic expediency.

Now almost half of the iron and steel industry has been destroyed. The surviving part is not going through the best of times, and not working at full capacity. Problems with logistics prevent the timely delivery of products to customers. That is, the economic meaning of the transition to green technologies for Ukrainian industrialists is under great question.

Technologies, firstly, are expensive, and secondly, they are still far from perfect. Even before the war, during discussions about the green transition, experts repeatedly said that it would be much more profitable for Ukraine to wait for green technologies develops –when they become cheaper and more efficient, and only then to start using them.

Due to the war, the iron and steel business has suffered losses and does not have access to cheap financing. Powers of renewable energy, which were located in the south of the country, have either been destroyed or are located in the occupied territory. Rising energy prices and gas shortages are forcing a return to fossil fuels. Accordingly, the green transformation has actually been put on hold.

The war, unfortunately, destroyed the more modern steel productions of "Azovstal" and Ilyich Iron and Steel Works. The last open-hearth furnaces in Ukraine and in Europe in general remained at the Zaporizhstal Iron and Steel Works. And they survived.

In April, after a month of conservation, the open-hearth furnaces started working again. "First of all, a sinter shop and two blast furnaces were launched. After that, a full cycle: the open-hearth furnaces and rolling shops of the plant were put into operation. We have restored the production chain, and now it is operating at 40-50% of its capacity," said Oleksandr Myronenko, general director of Zaporizhstal Iron and Steel Works.

The open-hearth furnaces give a large carbon footprint. Doubtfully that the owner will quickly close the outdated production. Previously, such a project was estimated at $1.5 billion, and there was no money for it for years.

More than half of Ukrainian steel exports are semi-finished products. These are the "dirtiest" stages of production. Finished rolled metal (the product of the next redistribution) is "cleaner" from the point of view of environmental requirements. But it is more often subject to anti-dumping measures and quotas on the European market. Ukrainian manufacturers usually extract raw materials and produce semi-finished products in Ukraine, and try to produce finished rolled products outside Ukraine, closer to customers.

Manufacturers will likely continue this practice for the next few years after the war. After all, the main task of the state, business and the population will be the restoration of the domestic economy, housing, social and transport infrastructure, and in general, overcoming poverty. Therefore, there is a risk that the revival of the Ukrainian metallurgical industry will not be too green.

TEXT: Anna Kibovskaya, Oleksandr Berdynskykh. GRAPHICS: Olha Khvorost

This research was developed with the support of journalismfund.eu

The full version of the research is available at the link