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Ukraine’s economy hinges on Avdiyivka plant

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Employees are seen at work at the Coke Plant in Avdiyivka on Feb. 21. (2017)
Photo by Volodymyr Petrov

AVDIYIVKA, Ukraine – Avdiyivka Coke Plant plays a big role in Ukraine’s economy. Without it, steel and metals production — two key exports — can’t take place and the economy tumbles again.

But the plant, the biggest one of this kind in Europe, and owned by billionaire Rinat Akhmetov’s Metinvest company, is in a very dangerous spot — only a few kilometers from Russian-controlled Donetsk.

With Russia’s three-year war heating up again, the plant’s operations remain in danger. Since the war began, 10 plant employees have been killed and 50 wounded as the plant has been hit by as many as 320 shells.

Moreover, there are dangers on the economic front as well: A month-long blockade of the occupied territories, led by Ukrainian Donbas war veterans and lawmakers, has cut off vital supplies of coking coal to the enterprise, bringing its stocks to worryingly low levels.

Avdiyivka Coke Plant is typical of such struggling enterprises, because it was designed to do business with industries that are now separated by a war front, its director general, Musa Magomedov, explains.

“The blockade activists do not understand this complicated, balanced and very interdependent network of industries here in the Donbas,” Magomedov says. “These are highly populistic and completely irresponsible actions. It sounds good – ‘stop trading with the occupants.’ But nobody wants to face the real consequences. Whole industries in the region are collapsing, as vital supply and production chains are broken. And many of these enterprises in the occupied zone are registered in Ukraine, paying taxes to Ukraine, and producing huge metal exports for Ukraine.”

Trade in blood

Over 95,000 wagons loaded with industrial commodities have been halted by the activists’ blockade on three rail lines that cross the front line. The activists are demanding that the government stop what they call “a trade in blood,” and accuse the nation’s top officials and oligarchs of taking part in corrupt deals with Russian-backed forces even as the nation wages war with them.

The blockade is already having an effect. In the occupied territories, a metal works in Yenakievo and the Krasnodonugol coal mining complex in Krasnodon have already shut down due to shortages of fuel and raw materials.

The plant is a key element of Ukraine’s steel industry, accounting for over 20 percent of the country’s coke output. It also produces benzene, coal tar, coal oil ammonium sulphate and coal gas.

It takes the output of the local coal mines and converts it into an input for metals production in Mariupol and Zaporizhia. Coke not only provides a source of fuel to fire blast furnaces, its carbon is a reducing agent and an alloying constituent in steel.

If the plant stops operating, coal mining and steelmaking will face a downturn strong enough have economic effects that will be felt far beyond the Donbas.

And the renewed fighting imperils the future of the plant.

Weak hopes

The latest surge of fighting, as with the blockade, has come as a blow to the plant, which was starting to recover slightly from the economic turmoil brought by Russia’s war on Ukraine.

“But now, because of the blockade we’re working at only up to 50 percent of capacity, which means we’re operating at a loss. We’re producing only up to 5,000 tons of coke per day. The plant isn’t earning money, so as a result we’re paying even fewer taxes to Ukraine’s state budget.”

Up to 20 percent of the coking coal needed by the Avdiyivka plant used to come from the now-occupied zone – in particular from the recently shut down Krasnodonugol mining complex, which also belongs to Akhmetov’s Metinvest.

“In order to be fully supplied with raw materials, we have been ordering coking coal from Australia, the United States and New Zealand. But foreign supplies take rather a long time to come, and are expensive, and there’s not enough coking coal for us from other parts of Ukraine. When we don’t get enough raw materials, we decrease our productivity and thus increase our losses,” Magomedov adds.

Loss of earnings

Just to break even, as many as 450 of the giant coke plant’s 520 coking ovens must be operating, consuming at least 10,000 tons of coal per day. But due to shortages, only 320 ovens are operating now.

The shortages of materials ripple down the industrial chain – the steel , lacking enough coke (producing a ton of cast iron requires at least 400 tons of coke) have been forced to scale back production of steel and pig iron.

According to the director general, the plant’s current stockpiles of raw materials and fuel will be exhausted in only about nine days, and after that the enterprise will have to switch to using expensive natural gas to maintain the temperatures of its coking ovens. If the temperature of the ovens falls below 700 degrees Celsius (their operating temperature is 1,100 degrees), the ovens could suffer irreparable damage when fired up again, and the plant will be impossible to restart.

Once the Avdiyivka coke plant is stopped, the Azovstal and the Ilyich Steel and Iron Works, the two giant metalworks industries in Mariupol, as well as the city’s cargo port, would also shut down in days, a senior manager at Metinvest, Yuriy Zinchenko, said on Feb. 26. He said up to 120,000 people would lose their jobs in Mariupol alone.

According to Dmytro Solohub, the deputy head of the National Bank of Ukraine, the consequent slump in steel production in the Donbas would cost the country $2 billion in foreign currency revenues, given that the metallurgical industry still accounts for up to 40 percent of the nation’s exports.

Oleksander Kalenkov, the head of Ukraine’s biggest steel industry association Ukrmetalyrgprom, is even more pessimistic. During a government meeting hosted by Prime Minister Volodymyr Groysman on Feb. 28, he estimated the probable losses at least $3.5 billion in 2017, calling the blockade effect “a catastrophe”.

And there are local effects from the disruption of the industry as well. The production cutbacks mean that the salaries at the plant will soon be halved for all 4,000 workers. Besides, the city’s centralized heating system depends completely on thermal power from the plant. At the height of the fighting, with the plant facing shutdown, Avdiyivka was repeatedly on the brink of being left without heating, even as temperatures plunged to -20 degrees Celsius. Magomedov, who even in his own office always wears red-and-gray work clothes like the other plant workers, says the plant might even shut down for good if conditions don’t improve.

Building a wall

Apart from the blockade on the Ukrainian-controlled side of the front line, the self-proclaimed authorities in the occupied territories are prohibiting Metinvest from repairing all of the electricity wires getting to the coke plant.

“We’re now facing two blockades – Ukrainian activists are blocking raw materials, and the separatists are preventing energy supplies,” Magomedov says.

“I sometimes wonder if they all are acting in some coordinated plan to suffocate us.”

However, Magomedov also lays the blame on the Ukrainian presidential administration and the government. They have not offered a strategy either to develop the country’s economy, or come up with specific policies on the Donbas, he says.

“First we need to decide if we really want to bring the occupied Donbas back to Ukraine,” Magomedov says. “If we do, we must not abandon the millions of people living there, leaving them without jobs and any hope for a future in Ukraine. The nation has been at war for almost three years – why isn’t there a decent law on connections with the occupied zones?”

“Just now this blockade, and the government’s reaction to it, makes it look as if we’re building a concrete wall segregating our own land from us. We’ve already lost Crimea, and we’re deliberately cutting part of the Donbas off.

“What region will be next to be cut off in the same way?”

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Very difficult times for the workers and others who depend on these businesses. It is also very difficult from a national leadership viewpoint. But the article is right on, Ukraine's leaders need to lead, to develop plans to deal with these issues and to work the plan. Leaders need to stop following and demonstrate leadership. I am not sure how long the nation can WAIT!!! Time is running out! Time is like water in many ways, one cannot hold either back and leakage easily occurs. Making wise use of the time Ukraine has is the right thing to do. But who is willing to do the Right Thing these days?

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