In addition to Russian strikes. How the price of electricity is hitting metallurgists and what to do about it

Ukraine's metallurgy is going through very difficult times – entire metallurgical combines are stopping due to shelling, and their business model is being undermined by the high price of electricity.

Russia continues to deliberately attack one of the largest sectors of Ukrainian industry – metallurgy. After the August attack 16 partially halted the work of Ukraine's largest metallurgical plant ArcelorMittal Kryvyi Rih. 27 in August, the enemy delivered a second strike on Zaporizhstal. At present, it is unknown when the plant will be able to resume operations. Since the beginning of the year, metallurgists have been forced to reduce production and exports due to the blocking of sea ports and the introduction of a carbon tax at the EU border at the start of this year. This drastic picture for the sector was compounded by the growth from 1 August of tariffs for railway transportation and the high cost of electricity. How expensive electricity undermines metallurgists The cost of electricity for Ukrainian industry often exceeds the price in Europe. For example, over 9 months of last year, the average price of electricity on the “day-ahead” market in Ukraine was 106 euro per megawatt-hour, during the same period in France it was 61 euro, in the Czech Republic 94 euro, and in Germany 80 euro/MWh, according to data from the analytical company GMK Center. Although in recent months the cost of electricity for industry has somewhat decreased (due to lower demand), the price of this energy resource remains high for end consumers, especially for large metallurgical plants. Read also: What scale is the current crisis in metallurgy? Electricity costs comprise a significant share of the cost structure of metallurgical products. For example, in the structure of iron ore concentrate price, the energy component is 50-60%, for iron ore pellets 30-35%, and for steel, which was produced in electric furnaces, this indicator is 10-15%, the GMK Center analysts told the publication. Electricity occupies a substantial share in the steelmaking process (ArcelorMittal Kryvyi Rih) This price situation is deadly for energy-intensive enterprises. Industrial policy in Ukraine should aim to ensure that the price of energy for industry is the lowest in the EU, believes M.P. and Deputy Head of the Parliament Committee on Economic Development Dmitry Kisilevsky. High domestic electricity prices worsen Ukraine's vulnerable position in the international market. After all, China and Turkey, which are competitors for Ukraine in the European metals market, directly support their industries. In China there is a favorable electricity price for ferrous and non-ferrous metallurgy, and Turkish companies continue to buy raw materials from Russia at a substantial discount. EU countries also provide substantial support to their producers. One of the European Commission programs is the compensation of indirect carbon costs, provided to energy-intensive and high CO2 emitting enterprises. Until 2030, another EU program—the Clean Industrial Deal—exists, which funds industry to reduce its energy consumption. “F effectively, this is subsidizing part of the energy costs of enterprises,” says GMK Center analyst and candidate of economic sciences Andriy Hlushchenko, adding that billions of euros are directed to financing these programs each year. Read also: How much GDP could the EU carbon border tax take from Ukraine? Such countries as Italy and Germany have separate programs to support their own metallurgy, which has become a hostage to high world energy prices. “This is the result of thoughtful industrial policy,” Kisilevsky believes, adding that Ukraine should move along the same path. What the results of the first auctions for long-term contracts were To provide industry with large volumes of electricity at an affordable price, the government allowed auctions, under which contracts for quarter, half-year, and year would be concluded. The obligation to sell electricity was assigned to state companies Energoatom and Ukrhydroenergo. Long-term contracts will allow electricity producers to insure themselves against price drops that typically occur in May-June, and consumers against price rises typical for January-February. In Europe, industry purchases about 70% of all electricity exactly on the long-term contracts segment, comments the MP and Head of the Parliament Committee on Energy and Housing and Communal Services Andriy Herous. Nuclear power plants are the largest source of electricity production in Ukraine (Khmelnytska NPP, Getty Images) The first such auctions took place in the second half of July. The trades offered small volumes from two generating companies (up to 4% of forecast production), auction participants concluded contracts with deliveries for 2, 5 and 11 months. Read also: Parliament calls not to delay appointing a new head of Energoatom For the results of the auctions, the majority of electricity buyers were traders, not end industrial consumers. This is explained by the fact that the volumes offered were divided into quite small lots, the guarantee deposit was not clearly defined, and the price rose to a level that did not meet the expectations of large industrial enterprises like ArcelorMittal Kryvyi Rih, RBC-Ukraine reported from the company. What needs to change in the auction model The participation of traders does not allow forming a price that could be an objective indicator for the end consumer, so to improve the auction model it is worth removing traders from the participants. It is also important to increase the volume of lots, for example, to 20 megawatts. This value more closely matches the consumption profile of a large industrial enterprise compared to the 2-5 megawatt lots used in the first auctions. Metallurgical combines have a significant consumption volume, which requires larger lots (Getty Images) To ensure the price in the auctions more accurately reflects the business model of industry, it is necessary to revise the algorithm for determining the starting price. A justified approach would be to use a weighted average price for the previous corresponding period on the day-ahead market, but with a 30% discount. To adequately meet demand, it is worth increasing the supply of electricity from state companies. It would be appropriate to double these volumes. Read also: How shelling could reduce iron ore exports? Important nuances of the trading are the maximum number of participants – five buyers. This requirement should be canceled, because current rules do not prohibit buyers from submitting bids below the starting price. To increase the predictability of the financial model, it is necessary to fix the bid deposit rate that the seller must apply. These proposals were voiced by a number of electricity buyers surveyed by RBC-Ukraine. Auctions should enable industry to conclude direct contracts with generation. If this does not happen, the purpose of their introduction is lost, believes Anatoliy Kinan, President of the Ukrainian Union of Industrialists and Entrepreneurs. The ability to obtain energy resources at an affordable price will improve the current critical situation of metallurgy and give thousands of industry workers confidence in the future.

Remind that 27 August, the head of the Subcommittee on Industrial Policy of the Verkhovna Rada Committee on Economic Development Musa Magomedov stated that metallurgy finds itself in a critical situation and needs urgent government support. 31 August, the president of the association Ukrmetallurgprom Oleksandr Kalenkov expressed the assumption that by the end of this year production in the industry could decline by at least 50%. In July, pig iron production fell by 37,6% year-on-year to 432,2 thousand tons. Steel production declined by 21,3% to 457 thousand tons, and rolled metal by 30,7%, to 382,7 thousand tons.