Conflict has added a large dose of uncertainty to industry projections.

Several steel companies recently reported healthy performance levels for 2021 and through the first quarter of 2022. To cite a couple of examples, Timken Steel, the Canton, Ohio-based manufacturer of bars and tubing, posted a revenue increase of over 28% and a more than doubling of its earnings per share in the recent quarter. U.S. Steel, the global, Pittsburgh-headquartered integrated giant, saw revenues increase by 43% in the first quarter and an earnings-per-share spike of over 280%.

But, to paraphrase the boilerplate investments caveat, “Past performance is not necessarily indicative of future results.” This year saw the Russian invasion of Ukraine, of course, which threw a monkey wrench into raw materials availability and pricing, transportation and logistics, and the overall outlook for global economic recovery. As a result, the World Steel Association (WSA) recently forecast that steel demand will grow by just 0.4 percent in 2022. A decline in iron ore production may represent an earlier indicator of future developments.

This year’s 0.4% growth expectation represents a big change from the 2.7% increase in global steel demand seen in 2021, when recovery from the pandemic turned out to be stronger than expected in many regions. “The expectation of a continued and stable recovery from the pandemic has been shaken by the war in Ukraine and rising inflation,” said Máximo Vedoya, chairman of the WSA Economics Committee.

Ukraine War Impact on Global Steel Production

The magnitude of the war’s impact has included an immediate and devastating effect on Ukraine, a major steel and ore producer, consequences for Russia, also a metals giant, and a large impact on the European Union, which is more dependent on those two countries than some other global regions. Higher energy and commodity prices—including higher prices for raw materials for steel production—and continued supply-chain disruptions are all in the offing. A surge in COVID infections in China and the resulting shutdowns in that country have not helped improve the global steel demand picture.

The mining industry had been one of the biggest winners from the post-lockdown economic recovery and the supply disruptions resulting from Russia’s invasion of Ukraine. Many metals and minerals hit record prices in the last year, boosting companies’ revenues and profit. But it’s not clear that the situation will persist.

Rio Tinto, the Australia-based mining company, one of the world’s largest, reported that iron ore shipments declined 10% in the first quarter, including an 8% decrease from its mines in Australia’s Pilbara region from the same period a year ago, and a 15% drop in Pilbara from the fourth quarter of 2021. The company warned that rising inflation caused by the Russian invasion of Ukraine, and a resurgence of COVID cases would likely suppress market expectations.

Rio Tinto also produces copper, diamonds, aluminum, and other ores and metals from sites around the world. The company recently reported decreases in the production of copper, aluminum, and titanium oxide slag. These conditions were not confined to Rio Tinto alone. Its competitors the Australian BHP Group and Anglo American Plc, based in London, also recently reported lower iron ore production numbers and higher costs.

“Recent input cost increases are the largest raw-material cost hike since the oil crisis in 1973,” said Jakob Stausholm, Rio Tinto’s chief executive. “Rising interest rates globally pose downside risks to economic growth. Further downside risks include a prolonged war and other geopolitical tensions, and extended labor and supply shortages.”

U.S. Steel is directly exposed to the consequences of the Russian invasion of Ukraine through its integrated mill in Košice, Slovakia, a facility which supplies customers in that country as well as in the Czech Republic, Poland, Hungary, and Western Europe. Before the war, Košice was dependent on Russian iron ore transiting Ukraine via rail. Needless to say, the supply picture has changed since the Russian invasion in February.

Sourcing a Response

As of late April, some Russian ore was still trickling into Slovakia, but Dave Burritt, U.S. Steel’s president and chief executive officer, noted, “there’s not so much coming from Russia anymore.” Russian coal, another key raw material for steel production, has stopped altogether.

U.S. Steel’s procurement team built up a 78-day inventory of iron ore at the Košice plant in response to anticipated supply disruptions. The company was beginning to consider working off some of that inventory in late April.

The company’s procurement teams in Slovakia and the United States also worked to mitigate the impact on the raw-material supply chain by drawing on other sources of supply. “We are leveraging new and existing relationships to secure a supply of iron ore, coal, and other raw materials while continuing to profitably meet customer demand,” said Burritt. “The teams in Slovakia are procuring raw materials from alternate sources, including the seaborne market, and limiting our exposure to the conflict area while continuing to run this facility.”

U.S. Steel logisticians have also developed alternative transportation routes, said Burritt, and established new sites to offload raw materials. “Despite the continuing conflict in Ukraine, our operations are running at high levels of utilization,” he added.

The performance of U.S. Steel’s operations in Slovakia during the first quarter of 2022 represented the third-best quarter in its history, according to Burritt, and “have demonstrated consistent earnings.” The plant, and the company as a whole, he added, have “seen the rise in raw material costs but it’s all supported by higher steel prices.” Steel rebar prices on the London Metals Exchange have risen over 27% since December 2021.

The question remains; however, how long rising steel prices can absorb higher raw materials costs. “Speculating beyond the second quarter and what’s happening with the Ukraine war is hard,” said Burritt.

Officials at the World Steel Association would no doubt agree. Following the measly growth prospects of 0.4% in 2022, the WSA sees steel demand growing to 2.2% in 2023. But that projection assumes that the war in Ukraine will come to an end during 2022, a condition which may prove to be dubious. In any event, the WSA concluded, “the outlook for 2023 is highly uncertain.”