Metinvest, Ferrexpo see risks of shutdown due to new energy import requirements

MOSCOW. July 5 (Interfax) - Representatives of Ukraine's largest industrial companies have urged the government to reconsider its decision to increase the share of electricity imports from 50% to 80% in order to avoid restrictions on power supplies to consumers, but the country's Energy Ministry believes it is not possible to reduce the share of imports at this time due to the significant shortage of capacity in the energy system.

The current situation could lead to the shutdown of production at major steel and iron ore producers such as Metinvest and Ferrexpo, Ukrainian media reported, citing materials from a meeting on issues concerning electricity imports by industrial enterprises that was held Thursday under the aegis of the Employers Federation of Ukraine.

First Deputy Energy Minister Yury Vlasenko said at the meeting that there is a major energy shortage in the country. "We're not talking about reducing [the share of] 80%, only about increasing," he said, adding that Ukraine now imports 1.7 GWh of electricity and negotiations are being held on increasing this to 2.2 GWh.

Businesses were also urged at the meeting to build their own power generating facilities. The president of steel industry association Ukrmetalurgprom, Alexander Kalenkov said the finance and economy ministries need to be involved in this process in order to resolve financing issues. He also called for deferring power plant repairs to reduce the energy shortage.

Kalenkov also said the resolution to increase the share of electricity imports to 80% was made without discussion, although this issue is critical for many energy-intensive production facilities. "Eighty percent was unexpected. It should have been discussed," he said.

GMK Center chief analyst Andrei Tarasenko said the cost of electricity in Ukraine exceeds prices in European countries and now amounts to 112.30 euros/MWh. However, in the European Union, energy subsidies due to electricity price increases totaled 181 million euros in 2022 and 194 million euros in 2023.

The energy situation is hitting mining and metal companies the hardest, Tarasenko said. Electricity accounts for 60% of production costs for iron ore concentrate, 32% for pellets and 3.5% to 24% for steel products. Given the drop in world prices for iron ore products, Ukraine's exports of these products are expected to fall 15% to 2.7 million-3 million tonnes in the second half of 2024.

The director of strategic raw material and energy resource purchasing at Metinvest, Maxim Zhuravlev said the company operates on world markets and production costs are extremely important amid tough competition. Electricity accounts for over 40% of its production costs.

"Now, after the adoption of the resolution on 80%, our production becomes loss-making. We're trying to cut costs, but producing products with a negative value is impossible. We will simply shut down and production will decrease. A compromise of 50% would be a compromise for both power companies and industry," Zhuravlev said.

He added that increasing electricity imports to 2.2 GWh could, to some extent, reduce the speculative element in auctions for electricity imports.

Ferrexpo acting marketing director Yaroslavna Blonskaya said her company has been hit very hard by developments in the electricity sector, which have coincided with a drop in world prices for iron ore products.

"And this forces us to think about halting production," she said, urging both ministries and parliament to analyse the situation.

The Employers Federation of Ukraine earlier asked the Cabinet to repeal the May 30, 2024 resolution that amended the regulation on electricity imports into Ukraine under martial law, increasing the share of imports to 80% to eliminate restrictions on power supplies to consumers.

Under the resolution, system operator Ukrenergo will now guarantee electricity supplies to importers, freeing them of scheduled supply restrictions, if imports amount to at least 80% of their consumption, up from 50% in the period from October 2023 to April 2024 and 30% from May to September 2023.