How is our steelworks doing? Can we make use of wind power? Are steel imports going to threaten our future? Are electric arc furnaces suitable for USSK?
We present an interview regarding the future of the steel industry with USSK Vice President External Affairs, Administration and Business Development Miroslav Kiraľvarga, originally published in Hospodárske noviny (Economic News) on December 13, 2021.
Košice Steelmakers are having a particularly good year. Last year throughout the first eight months they generated a loss of nearly 30M dollars. Now they are in the black by more than 700M. What is the reason?
After spreading of the pandemics, we could feel instant impact on citizens and the economy. But after lockdowns a market recovery came. We could see massive growth of demand for our products, especially in the field of construction industry. Strong recovery, until the chip shortage hit, was also reported by the automotive industry. Supplies for the chemical and food industry have also increased where our products are used primarily as packaging. The economic results reflect these trends as well as rising input prices and increases in the prices of our products. We are running to full capacity all year. We have contracts on volumes that reflect our production, and the result is that we have EBIDTA for three quarters more than 700M dollars against the mentioned last year loss.
How is the plant at the moment?
We run to full capacity. All three furnaces are functioning. One of them is currently undergoing the shutdown due to scheduled maintenance and refurbishment work. It will take two months, but we have ourselves prepared for it and took measures to meet all contractual deliveries.
Is it somehow possible to quantify the occupancy of the operation?
In our plant we monitor the so-called melt backlog. It's all about how much volume in tons you have contracted yet waiting to be produced. It is bad if the contractual volume is low and on the contrary too much means the long waiting time for the delivery of ordered products for customers. To have an effective production process we have a minimum volume for the given capacity of the operations. This year we have already been at more than double that minimum and now we are at roughly one and a half times that level. Despite the fact that the automotive segment currently is in weak condition due to the chip crisis.
Production inputs and sales prices went up. Within this context, may we expect record revenues and turnovers?
I have to say that we are part of U. S. Steel Corporation that is listed on the stock market. Therefore, we may not publicly comment any expectations. Anyhow, I can say that the fourth quarter should be still good in the area of demand.
Isn't it a paradox that on one hand the energetically demanding industry continuously complaints about the current situation and on the other hand this year will paradoxically achieve record economic results?
It is a holly true that on the one hand this year is generous to industrial production. On the other hand, no one can guarantee that we will have such profits next five - ten years. We also need to say that there is an unprecedented rise in prices of the electric energy and also that compared to foreign countries Slovakia has high tariff fees for the energy intensive industry. We do not get the same compensations related to the increased prices of electric energy due to CO2 emission costs from the environmental fund as our competitors. Of course, it reduces our competitiveness.
The rise in steel prices was really dynamic this year. In some cases, it was even a threefold increase. What will be the next development?
Yes, the prices of our products went up in the first half-year. Now we are already seeing a decline. However, we hope they will not drop below the tolerable limit and also that the next year will again be favorable for the steel industry.
The overall price is to a great extent also impacted by the price of input materials. Iron ore was on its ten-year maximums. Is this price slowly dropping too? What is the reason?
The price of iron ore within the last five years grows historically. This year in May it was almost four times higher against the end of the year 2017. Since the summer, we have seen a gradual downward trend, and this is reflected in the prices of our products by their reduction. The current decline in the price of iron ore is attributed to reduced demands for iron ore, particularly in China.
You advise the drop of prices of your products. What will be the reason? Do you expect an increase in imports?
Imports are here all the time despite protective measures that were implemented by the European Commission. They concern more than 20 steel products. Up to a certain volume of import to the European market they are not subject to a surcharge. Now after increased demand we can see also an increase in imports. On the hand we could say we do not like it. But the fact is that thanks to the high demand our production is covered and there is a broader marker space also for the imported steel. The current demand in Europe is thus covered by products from domestic producers and importers from third countries.
This is now. But do you expect that imports will again become an issue after gradual decrease in demand?
Definitely yes. The steel business is cyclical with the period of two to three years. As soon as the demand starts dropping there will be a natural pressure to reduce the prices that is even enhanced by the imports of producers from the countries outside the EU.
So, do you expect market deterioration in the near future?
Yes, after some time we again expect some recession. I remember a time when there were several-year cycles in the steel business. We noticed growth, peak, afterwards recession and so on. This last period is very short. The last significant market deterioration was in 2019 that was really bad for the entire steel industry. We could see it already at the end of 2018. Then in 2019 the prices start dropping so significantly that we had to shut down also one of our three blast furnaces. The situation did not improve even last year when there was a historical drop of the demand. Afterwards rapid recovery happened, and this year is really very good.
The year 2019 was so bad that you had to reduce the headcount. You terminated cooperation with 2,500 employees by agreement. Would you need them now after demand recovery?
The termination agreements were carried out in the sense of amendments to Collective Labor Agreements on which we have agreed with our unions. Overall, we paid against these agreements more than 50M EUR. In Košice we still have a five-shift operation and work calendars with reduced weekly working time. While to maintain the continuous operation, we need four shifts. This system is the legacy of former VSŽ from the nineties when the company agreed with the union on creating an additional shift. Therefore, we were seeking and still seek the way how to reduce this type of costs. It is illogical to maintain this system.
Is the fifth shift the reason why you are less competitive?
When we compare ourselves with our competitors then in terms of the number of employees per one ton of steel produced, we were not where we would like to be. We initiated several transformation projects with the aim to eliminate redundant activities, procedures and optimize the remaining.
Do you intend to eliminate the fifth shift in the near future? (I added the question)
The topic of the number of working shifts and weekly working time is part of negotiations with our social partners at modification of Collective Labor Agreements. We came to partial agreements. I believe that practice and real competitive environment will impact our negotiations in this area.
So, the plan is to reduce the headcount and increase efficiency?
The plan is to monitor costs that we may control with the aim of not losing our competitiveness. In certain moment it is not possible to enhance effectiveness without investments to production automation and digitalization when own invested money will bring, except for new technologies, also economic return for the reduced number of employees. This is the way forward. We have launched a large program via the Advanced Analytics process, for which we hired some new skillful employees. We started cooperating with the Technical University of Košice and University of PJ Šafárik in Košice. The goal is, simply speaking, collecting great amount of data from production processes and their analytical processing. For this we are using young brains that have ideas and assist experienced operating staff to produce more effectively, cheaper, and more perfectly.
Is it going well?
Yes.
It is possible to give an example how these steps (Advanced Analytics) helped at the improvement of production processes?
One of the examples is the developed SW named Value in Use model, which finds application in optimization of procurement of strategic raw materials, iron ore, metal scrap, coal, coke, ferritic alloys, and their processing in individual phases of the production process.
How do you perceive this year's price rise of energies? Does the steel plant have contracts for them, does it function through spot purchasing for shorter periods? How do you deal - or will deal with their growth?
I can say that we have our internal agent for procurement of energy utilities. It is our team of skilled experts who are very well familiar with the electric energy market and try to optimize the mix of long-term contracts with spot purchases.
Is the cost reduction effort in operation the way how to deal with insufficient compensation of energies from the side of the state?
What we can do is to control the things within our control. An example would be personnel costs, maintenance costs, electric power consumption and so on. What we cannot control is the prices of our input strategic raw materials that are regulated by the market and different fees set by state institutions and regulators. But it must be said that we do not ask for anything more or less as the level of the so-called level-playing field, so the same conditions as have our competitors in other EU countries.
Despite that it seems like the general public does not understand it. Frequent are the opinions that you ask for additional subventions. What is your answer?
The environmental fund is created from trading with emission allowances that each state receives for trading on the open market. Each country is then supposed to use the money also for industry support. But there is the stumbling block. According to Slovak legislation 7.5 % should flow for the support of the industry that belongs under trading with the emission allowances to compensate the prices of electric energy. The reason is that the price of electric power is also comprised of the cost in form of emission allowance. Therefore, we expect that 7.5% to be distributed. But for the previous five years it did not happen even once. Because there is a clause in the law that if the Ministry of the Environment and the Finance Ministry decide otherwise, it will be otherwise. It means that instead of compensation for the energy intensive industry on the level of 15M to 18M EUR, only 3M were assigned. Therefore, if in other countries more than 12% is divided and only 2% in our country, it is not fair. Consequently, we have higher costs than our competitors directly in the Union and this is because the government decided otherwise.
Probably it is hard to talk about competitiveness when Mr. Budaj himself urges energy intensive companies to go abroad.
I do not know if it is the exact interpretation of the statement. I will just say that we have a specific example here from previous two years. When we look at who and how the state budget was filled throughout the last two years then in Slovakia it is the industry who significantly fills the individual chapters of the state budget. If these factories were to close and production went outside Slovakia and along with them also other business entities connected through the trade-supplying chains by providing goods and service, who would replace them?
Some industry captains say that the environmental fund is basically a hidden industry tax. Do you see it that way?
The entire trade with emissions is additional taxation of the industry. However, we do accept the decision of the EU who participates in the emission of greenhouse gases by seven to eight percent on a global scale that has decided to set an example and show that we can transform the economy to zero carbon economy. As far as our environmental fund, first of all, it is used improperly. If it was used same as in other EU countries than all of us in the EU are on the same boat and live in the area where the same rules apply to everybody. Only in our country it works like part of buffer against the state budget.
Have you tried to communicate this issue with Mr. Matovič?
We opened this topic in our meeting with Minister Sulík. Later we opened this topic also at the tripartite meeting where the Finance Ministry is also represented. Last time we opened this topic at the meeting with Mr. Heger.
Nevertheless, Mr. Budaj said that the environmental fund is not an ATM. Do you see any hope for change after these meetings?
Yes. It is just necessary to explain the public how the entire system works. Some people think that we emit emissions and want money back. But the point is that we pay artificially raised energy prices due to the system of emission allowances. Therefore, the Commission allows energy intensive companies to compensate these disadvantage factors. This law should be subject to amendment. However, its modified draft has not yet been subject to the inter-ministerial comment procedure and therefore we have not yet been able to comment on it.
In some ways, however, you have been heard. What do you say about the new rules for the TPS fees?
TPS makes 55 percent of the sum of all tariff fees. We all pay the same, whether you are a citizen or a large enterprise. But again, when we compared ourselves with the competition in the Union, our overall fee on the level of 40€ per megawatt hour is several times greater than in neighboring countries.
Besides, I assume that the same company at lower fees will get higher compensation from the environmental fund.
We talk about two different things. I tried to explain the compensation from the environmental fund for the support of industry that is subject to trading with emission allowances in previous questions. But when I get back to TPS; the proposed change of the TPS fee depending on the consumption, proposed by the Regulatory Office for Network Industries (ÚRSO) in cooperation with the Department of Economy, Finance, is a huge step towards strengthening competitiveness of the energy intensive industry in Slovakia and they should be highly commended for this.
Are there any reasons why maybe one day U. S. Steel will not be here anymore?
For the previous eight years, give or take, the steel production capacity in Europe was reduced by ca 25%. This capacity was replaced by imports from third countries. If the steel demand in Europe will continue on the same level as today and the decarbonization legislation of the industry within the EU will lead to reduced industrial production, it will be replaced by import from the third countries. But we'll shoot ourselves in the knee. Because our ecological production will be replaced by import produced without any ecological standards. U. S. Steel has been here for more than 20 years and even if there is a change of ownership, it does not change the fact that Košice steelworks is a very good plant. Anyhow, the decarbonization way is the right way no matter under whose leadership it takes place.
Have you also made any investments in this context? Eventually, do you intend any new?
USS invested in Košice 700M in total into various environmental projects. We reduced the emissions of particulate pollutants by 98%. Compared to the year 1990 we reduced the overall emission of carbon gases by one million tons per year.
Only recently there has also been talk of the arc furnace technology. Is their arrival to Košice realistic?
If we are supposed to decarbonize the steel plant producing through blast furnaces, then there are technologies how to achieve it. We know the technologies that are applicable, feasible, and at the same time there is several prototypes that we do not yet know how to use in a large-scale production process. By this I mean hydrogen. Because it is true that this technology would help us eliminate greenhouse gas emissions in production. However, the technology of production, transport, and utilization of the sufficient amount of hydrogen is not yet sufficiently developed in terms of capacity and economy. The next option is to capture carbon emitting gases. But again, we have not developed the technology to capture the total volume of such emissions produced. We also do not know what we would do with the captured volume. The only currently realistic and usable possibility in the industry is switching to steel production from electric energy. But it should be green as well. We cannot satisfy ourselves by producing like ecological steel from energy produced from coal.
Can it be relied on? On average, it blew 40 percent less this year and we could see what it can make with energies and their prices.
Unfortunately, the electric power produced from water, wind, sun is not the type of energy that the steel industry can rely on. They are unstable. We have to have a stable source of energy, which is, for example, nuclear.
In this case would the installation of the two mentioned arc furnaces be possible?
It always is one of the potential solutions. This technology would help us dramatically reduce overall emissions in Košice. But this ecological investment requires co-financing from grant resources that the EU allows you to use.
Would you also fit into the commitments of the Union within Fit for 55?
With this technology we could reduce our emission by more than 60 percent. It would be a win-win situation. On the one hand the decarbonized steel plant producing green steel and on the other hand the commitment of Slovakia to reduce greenhouse emissions until the year 2030 by 50%.
Is it possible to make it and is it feasible?
It is. But as I say, we have to be sure that we will have a stable energy supply and that there will be sufficient capacity of the energy transmission system. Because switching from the current production in blast furnaces to production in arc furnaces would mean enormous increase of our electric power consumption. Without being sure at least in these areas there will be no decision to launch this important investment.
Who is Miroslav Kiraľvarga
Miroslav Kiraľvarga graduated from the Faculty of Natural Sciences at the Pavol Jozef Šafárik University in Košice. He worked in the east Slovak Ironworks and later he worked in the pension insurance company Stabilita. Since the year 1999 he worked in the common enterprise VSŽ U. S. Steel. From the year 2007 he has been working as Vice President Management External Services and Affairs. In 2011 he assumed the position of General Manager, Global Materials Management and Procurement Support in U. S. Steel Headquarters in Pittsburgh. In 2013 he returned to Slovakia as Vice President External Affairs, Administration and Business Development and from the year 2015 he is the President of the National Union of Employers.
