Metinvest reduces metal production due to attacks on Avdiyivka

The Mariupol-based Ilyich Steel Plant of Metinvest (METINV) had to shut down two of its four operational blast furnaces (BFs) due to a deficit of coke, director Yuriy Zinchenko wrote on Jan. 31, as cited by Interfax-Ukraine. The plant’s coke stockpiles are only enough to operate two remaining BFs at their minimum load during 2.5 days, he said.

The sole supplier of coke to Ilyich Steel is the Avdiyivka Coke Plant (AVDK UK), which is currently under attacks from pro-Russian forces. As a result, the plant has had its electricity supply disrupted. Its natural gas supply remains intact, for which it needs an uninterrupted supply to preserve its production equipment from technological failure. The plant is also currently providing heat to local residents. Active shelling of Adviyivka started the morning of Jan. 29, and resulted in both civilian and miltiary casualties and injuries.

Avdiyivka Coke is Metinvest’s biggest producer of metallurgical coke, accounting for almost 2/3 of the holding’s total 2016 coke production. Located a few kilometers from the separation line, the plant halted its operations 13 times since war erupted in mid-2014, based on Interfax-Ukraine calculations. The most serious stoppages occurred in response to infrastructure damage in July and August 2014. Ilyich Steel accounted for 43% Metinvest’s hot iron production in 9M16.

Alexander Paraschiy: The attacks of pro-Russian separatists near Avdiyivka are continuing this morning, which makes it impossible to repair damaged power lines. The risk that the coke plant will be cut entirely from natural gas supplies remains solid, and so is the risk of irrevocable damage to the plant’s main equipment, coke batteries.

If Avdiyivka Coke’s equipment suffers, Metinvest will lose its main source of coke supply. In which case, its internal coke production (with no external coke sales) will be enough to cover production of hot iron (and steel) at rates of 25-30% less than in the second half of 2016.

At the same time, the holding may shift to purchases of coke from third parties, but that would take some time (a couple of months) and additional costs. We expect some selling pressure on Metinvest bonds owing to the attacks, but we maintain our bullish long-term view on them.