The Avdiivka coke factory is in trouble, and that’s bad news for Ukraine’s industry

The Avdiivka coke factory. Photo: UNIAN

The Avdiivka coke factory. Photo: UNIAN  

2017/02/03 - 18:30 • Analysis & Opinion, Economy

After a period of relative stagnation, the situation in Donbas is experiencing the largest escalation in two years. Avdiivka, a small town in the government-controlled outskirts of Donetsk, is seeing the most of it. On the night of 30 January, Russian-separatist forces of the “Donetsk People’s Republic” (“DNR”) hit the city with salvos of Grad MLRS rockets, weapons that were supposed to have been withdrawn from the frontline in accordance with the Minsk peace agreements which were outlined to negotiate a ceasefire two and a half years ago.

Read also: Escalation in Avdiivka, Eastern Ukraine: key facts and sources

Though there is an escalation of attacks along the whole frontline, the situation in Avdiivka is especially dire, since the city’s 16,000 inhabitants are left without water, electricity, and heat in temperatures reaching -16°C in the night. The artillery strikes of the “DNR” cut off the electricity lines connecting Avdiivka to the Kurakhiv power plant. The Ukrainian forces’ return fire damaged the Donetsk water filtration station which provides water to Donetsk and Makiivka. Both cities, including Avdiivka, are left without water. As a result of damaged power lines, the city’s coke factory is working at a critically low 20% of potential. In result, Avdiivka lost its central heating, as the plant is integrated into the central infrastructure and heats the city with the products of its production cycle.

Avdiyivka Avdiivka Avdeevka

Read also: Why Avdiivka is the most vulnerable spot for the Russian-separatist army in Ukraine

35,000 had lived in Avdiivka at the start of the war in Donbas in 2014. Now, only 16,000 remain. Due to its strategic location, the city has been a target for attacks over 2.5 years of war. The Avdiivka coke factory, the largest coke producer in Europe, had lived through it all, though it was forced to halt production 13 times, had 320 rockets explode on its territory. 10 of the factory’s employees were killed, with the most recent victim dying in the recent shelling, and 50 were wounded.

Now the danger of the factory shutting down endangers the Ukrainian industry as a whole.

The main cog in the machine

If the Avdiivka coke plant doesn’t resume production soon, Ukraine’s metal industry will suffer a 25% fall in production and the budget will lose $2 bn

Ukraine’s metallurgical complex is the basis of its industry, developed in Soviet times on the basis of ore deposits of eastern Ukraine and coal deposits of Donbas, and despite to a roughly 25% loss in production as a result of the war, is still the second largest faction in Ukraine’s economy, accounting for 22.8% of exports during January-May 2016. The Avdiivka coke factory, the largest producer of coke in Europe, produces 23% of the Ukraine’s needs in coke and is part of the Metinvest group of Ukraine’s largest oligarch Rinat Ahmetov.

Read also: Oligarchs: good old buddies who own Ukraine | #UAreforms

Because the Avdiivka coke factory is running at a critically low capacity, two Ukrainian steel factories in Mariupol and one in Zaporizhzhia are also cutting production. All of them are on territories controlled by the Ukrainian government. However, the factory also supplies the Yenakiyevo metallurgical factory on “DNR” territory.

According to Oleksandr Sukov writing for dsnews.ua, production at the factory fell from 3.9 mn tons (out of the 17.6 mn tons Ukrainian total) in 2013 to 2.8 mn tons in 2016. From this, 2.4 mn tons were supplied to the steel factories.

Coke is used to produce cast iron, from which steel and rolled steel is made. To melt one ton of cast iron, 400-530 kg of coke are needed. This means that if the plant is stopped altogether, Metinvest will have a deficit of 5.5 mn tons of cast iron, resulting in a 45% loss for the company which produced 12.4 mn tons of the product in 2016.

According to Ukrainian industry exports analyst Oleksandr Krainikov, decreased supplies of coke to a metal factory leads to a decrease in the whole “cast iron-steel-rolled steel” production chain. A severe fall in coke supplies brings severe consequences for a steel factory and leads to increased expenditures, in which the production costs of the metal could be higher than its market price.

Sukov writes that if the Avdiivka coke factory doesn’t resume its activities soon and Ukraine doesn’t find where to import the needed coke, the Ukrainian metal industry can expect a 25% fall in steel production, which would result in $2 bn of losses for the budget. This would also mean cuts in overall Ukrainian industry production, in which metallurgy plays a significant role, which would lead to the overall decline of the GDP.

Steel factories are cutting down production already

Problems at the coke factory in Avdiivka have impacted Ukrainian metal factories already. The press service of Metinvest stated on 31 January that only 2 out of 5 blast furnaces of the Illich steel factory are operational and that there are little coke supplies remaining. The situation in the Azovstal factory, also in Mariupol, is a bit better – 4 out of 5 furnaces are operational.

Speaking on 112, Musa Magomedov, the factory director, informed that the factory is operating at 30% of capacity on their locally produced electricity, which is not enough for production but allows heating the city. Repairs of the electricity and water lines have so far been unsuccessful because of the intensive shelling which continued during the night of 3 February. The electricity generators run on gas, and the factory is now dependent on gas supplies in order to avoid a total closure, which would bring a possibility that the plant would “stop existing” altogether due to irreparable damage which would happen under temperatures of -20°C. Magomedov said that such a closure is possible at any moment, as during the night another rocket hit the factory, killing one of the employees, a single mother of 36 years.

Akhmetov’s business empire finances the Russian-backed militant forces

Paradoxically, Akhmetov brought the problems Metinvest is facing upon himself. Over the 2.5 years of war, the oligarch has managed to keep his business empire operational on both sides of the front. The industrial complex of Donbas constitutes a single entity and Akhmetov is called the “master” of Donbas, owning the majority of mines and plants there through the DTEK company, as well as 70% of the thermal power stations, which run on anthracite coal mined in occupied Donbas. Thermal power stations produce roughly 50% of Ukraine’s energy needs, and the government-controlled stations continue importing anthracite from occupied territories. Akhmetov’s managers insist that it is impossible to switch Ukrainian power stations to another type of fuel, but observers have their doubts – after all, it’s in Akhmetov’s business interests to keep his empire on both sides of the front operational and maintain Ukraine’s imports of anthracite from occupied Donbas. Every month, Ukraine receives 600 thousand tons of coal from the occupied territories. 42% of it comes from mines belonging to DTEK.

There have been many speculations about the nature of agreements that Akhmetov must have with the administration of the separatist “republics” that allow his enterprises to keep running in occupied Donbas, with most analysts agreeing that Akhmetov must pay some amount in taxes or informal fees to the administrations of the Russian-supported enclaves. However, only recently did documental proof of such a deal emerge, in which DTEK paid the “DNR” company Vikold to sell electricity to end consumers. The taxes paid from this operation will go into the coffers of the “republic,” not only keeping its economy afloat but also financing the Russian-backed militant groups waging war against the Ukrainian government.

Read also: Blood coal: oligarchs, terrorists and POW labor in Russo-Ukrainian war

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  • Alex George

    Akhmetov can’t sit or ride – too many splinters from sitting on the fence.

    Avdiika is an old Soviet “monocity” built around a single industry. The DNR terrorists clearly want to smash the factory, as well as kill enough civilians to persuade them to leave. So far they haven’t succeeded – the Russian army isn’t good enough.

    If this escalation ends up causing Akhmetov’s downfall, then that will be a good thing for Ukraine

  • Dirk Smith

    Iran violates their agreement, they have instant sanctions. ruSSia violates their agreement, crickets……………. At the minimum, deeper sanctions should be implemented yesterday.

    • Mykola Potytorsky

      was Russia officially put on notice for their aggression?

    • Tony

      One thing that puzzels me is Trump’s confrontational stance on China but accommodative stance on Russia.
      If the attitude is all about “not our problem” and russias strength then why tangle with the much stronger China over islands that also aren’t a US problem while giving Russia a free pass?

      • Dirk Smith

        Which takes us back to the theory of the ‘dossier.’

  • zorbatheturk

    Time for a tax audit on Akhmetov. Any Soviet era oligarch who can pay £136 million for a flat at Hyde Park One in central London is likely to be laundering surplus funds. A one-off wealth equalization tax of 50% should be applied to this guy’s billions. After all, he didn’t build those coke and steel factories… he just assumed control of them.

    • Tony

      Yes Vox advocates a similar thing and it makes sense because oligarchs like Akhmetov continue to corrupt Ukraine’s government and fund militants due to selfishness, they aren’t patriots and it’s time to screw Akhmetov hard. Metinvest is paying juicy dividends so they aren’t hurting for money, bill Akhmetov PERSONALY for Avdeevka defence.

      http://voxukraine.org/en/2017/02/02/four-steps-to-ukraine-s-freedom-en/

      • zorbatheturk

        Good link.