First Severstal iron ore shipment nears Ukraine border, report says

Iron ore products from mines of Russia-based Severstal (SVST LI) arrived at railway stations close to the Ukrainian border near occupied Donbas, the Interfax news agency reported on April 12, citing the Metal Expert agency. A Severstal subsidiary has already shipped to the Ukrainian border 11kt of iron ore concentrate, the agency said, estimating that Severstal and Metalloinvest (METINR) may supply to border with Ukraine about 60 kt of iron ore concentrate and 100 kt of pellets in April.

Both Russian iron ore producers continue to deny any shipments to Ukraine’s uncontrolled territory, Interfax said. Yet the same news report cited the blog of a representative of the self-declared Donetsk People’s Republic that Yenakiyeve Steel, a subsidiary of steel holding Metinvest (METINV), is expecting a shipment of iron ore in order to start iron/steel production as of April 27.

Recall, Yenakiyeve Steel, located on the occupied territory of the Donetsk region, stopped operations on Feb. 20 due to interrupted shipments of iron ore from mainland Ukraine. On March 16, Metinvest said it has lost control over Yenakiyeve Steel and other assets located on the occupied territory.

In response to the reports of iron ore possibly being supplied, Metinvest CEO Yuriy Ryzhnekov told the biz.nv.ua news site in an interview published on April 12 that he doubts Severstal or Metalloinvest would “put everything they have under risk” in supplying these enterprises. Having Western sanctions imposed will be an “unavoidable consequence of smuggling,” he said.

Andriy Perederey: Earlier, Russian media reports alleged that the Kremlin “advised” Severstal and Metalloinvest to supply raw materials to enterprises in occupied Donbas. Recent discounts for ore deliveries offered by Russian Railways  and the reports of ore being delivered to Yenkiyeve make the rumors credible. In which case, Severstal and Metalloinvest are being placed between a rock and a hard place as they are faced with spoiling relations either with the Russian government or their Western investors.

The negative consequences of the first option are more dangerous in the short term, while the risk of spoiled relations with Western creditors (and the risk of Western sanctions) is more distant. In our view, sanctions look possible, especially if a scandal is provoked by Metinvest, which has the ability to monitor the supply of raw materials to its seized plants.