Can the EU steel itself for a future without Russian imports?

Russia continued this week to attack Ukrainian power infrastructure. It’s a strategy we’ve covered recently in detail. In part, it’s about immiserating ordinary Ukrainians, especially when winter arrives. But it’s also broader economic warfare. Nowhere is that clearer than in Ukraine’s steel industry, a major consumer of electricity across the supply chain. Previously, Ukraine was the world’s 14th largest global steel producer with 21.4 million metric tons of crude steel output in 2021, the last full year before the war. In many segments and geographic markets, it is a Yet, thanks to an EU compromise a ban on the import of Russian steel slabs was due to come into effect in just weeks, at the beginning of October, that ban has been postponed to 2028, providing that country’s steel sector with a crucial lifeline. As with natural gas and rare earth metals,  Europe continues to choose partial measures that are convenient in the near term while harming its own, longer term interests by ensuring continued dependence on resources under Moscow’s control even as Ukraine presents sustainable alternatives.

Russia has done its best to pummel Ukraine’s steel and mining industries into oblivion – yet it has failed to do so. In 2014, during the “hybrid invasion”, armed Russian proxies seized dozens of mines as well as steel production infrastructure. In 2022, in one of the worst atrocities of a conflict marked by Russian depredations, its forces besieged and leveled Mariupol, a city with a pre-war population of 430,000. Alongside the still unmeasured human toll, Russian forces appeared to have decimated the largest steel mill in the country, Azovstal, where Ukrainian troops made a heroic last stand. They also destroyed another steel mill and looted the city’s port, an export hub for the Donbas mining and metals industries. Since then they’ve ravaged infrastructure throughout Donetsk region, including in Avdiivka, and now threaten the industrial hub of Pokrovsk.

Yet, the steel industry was able to maintain total production volumes of crude and finished steel products at roughly the same level in 2023 as 2022. Yes, this was down 70% from 2021 levels, and the share of exports in total production declined, but this fall also fails to reflect the Ukrainian military’s reopening of Black Sea navigation in late 2023, one of the more decisive yet least heralded victories of the war. For an export-oriented industry, seaborne exports of iron ore and steel products (and receipt of inputs like equipment) are critical and hard to achieve by rail or road. Through a patient campaign, Ukrainian forces were able to break the Russian blockade, despite lacking most of the components of a Navy. Today, Ukraine continues to produce and process coking coal, iron ore and steel products for both the domestic market and export markets. Around 80% of the exported steel products go to the EU.

Two futures

Ukraine’s steel industry has not only survived the war to date, but it has also been and remains part of the EU (and UK) steel sectors, exporting both semi-finished and finished steel products. Ukraine’s Metinvest Group owns re-rolling mills in Bulgaria, Italy and the UK that re-roll finished steel products from imported slabs – semi-finished forms of steel. While the Russian occupation of Mariupol has reduced (but not eliminated) Ukrainian slab and finished steel exports, Ukraine’s surviving mining and metals industry provides the EU with a long-term source of both raw materials and generations of human capital crucial for meeting the bloc’s needs.

To ensure this future, Ukraine’s government and industry (and European partners) have outlined how to rebuild steel production infrastructure that meet European Green Deal and other low emissions commitments as part of a pathway for the country’s future accession to the union.  A World Economic Forum study found that targeted investments in green steel production in Ukraine could put US$415 billion in what it terms “gross value added” into the economy, compared to traditional steelmaking. For Ukraine, this means having the materials needed to rebuild the country after the war. For the EU, Ukraine can provide not only finished steel products, but also slabs for re-rolling and high quality iron ore products used in electric arc furnace (EAF) production and other low carbon steelmaking technologies across the bloc.

In the meantime, Russia’s steel industry has taken a very different path. In a January 2024 analysis for BNI Intellinews, Georgetown University’s Thane Gustafson charted how the industry was, during  the 2000s,  a rare example of a Soviet sector that had been reshaped through privatization into several profitable groups and made successful inroads into both the domestic and export markets (primarily to the EU, but some even bought US production assets to avoid tariffs). Yet, as he notes, the stagnation of the Russian economy over the past decade has inflicted a toll. Today, the industry is buoyed by a wartime economy. But, unlike Ukraine, it has not articulated a clearcut plan for decarbonization. It faces hurdles such as the EU’s implementation of the Carbon Border Adjustment Mechanism (in essence, a tariff on the carbon costs of a product) as well as increasing Chinese exports as mills in that country look for markets amid a slumping domestic construction sector.

Road not taken

Against this background, the European Union appeared ready in October 2022 to take steps that would all but eliminate Russian steel imports to the EU. As part of a broader sanctions package, the EU banned imports of rolled, semi-finished steel products from Russia in Oct. 2022, but granted a grace period for shipping some goods through the beginning of October 2024. Yet in December 2023, while tightening rules for pig iron and ferroalloys in the 12th Sanctions Package, it extended the period for permitted imports of slabs and steel billets, subject to quotas, by four years, to October 2028. An analyst for GMK Center, a Ukrainian metals and mining association, noted at the time that the extension, the perceived result of lobbying by certain European buyers, would allow Russian producers to “continue operating under the current business models for a long time.”

The extension appears to benefit a very specific EU lobby – the Belgian steel industry. A GMK Center analysis of European steel imports from Russia during the first two months of 2024 found that Belgium imported around 142 thousand metric tons of semi-finished steel products, down 31% year-on-year, the only significant EU importer during the period. As Bloomberg has reported, a Walloon joint venture importing slabs from a Russian producer – which has not been sanctioned by the EU – is a primary beneficiary of this deal. The Belgian side has reportedly argued that the grace period would allow it to invest in greener EAF production capacity.

In a recent interview with Italy’s Corriere della Sera, the CEO of Ukraine’s Metinvest pointed out that the deal to allow in more Russian steel rewards Russian steel producers for their roughly 15% cost advantage due to lower energy costs even as Moscow targets Ukrainian power plants. Notably, he also argued that the deal also harms EU producers, such as the Acciaierie d’Italia steelworks in Taranto, Italy, which the Italian government nationalized in January 2024 and which also cannot compete with Russian imports. And it again raises the wider suspicion that large parts of European industry believe that a status quo ante bellum will be quickly restored when the current war ends, and they will continue to profit from cheap Russian resources. It is a sense that pervades other discussions, such as EU dithering over plans to seize Russian assets parked in the Euroclear system, also based in Belgium – an issue that saw its fair share of lobbying. It’s a perspective that ignores that investments in Ukrainian green steel and the wider economy as part of an accession process (like in Poland and other Central and Eastern European countries before and after the 2004 “Big Bang” accession of ten countries) can foster a sustainable economy, expand a huge market for the EU and secure the eastern flank for the bloc for decades to come.