Investment of up to USD 40 billion needed for Ukraine’s green recovery of the iron and steel sector
Investment to help drive decarbonisation beyond Ukraine to Europe
- Preparation for a Ukrainian “green Marshall Plan” must start now
- Iron and steel sector to be the backbone of a green recovery, which will help to drive decarbonisation beyond Ukraine to Europe, building on Ukraine’s competitive nuclear capacity, onshore wind potential and iron ore mining and processing
LONDON, 19 June 2023 – This week, the UK and Ukraine will jointly host the international Ukraine Recovery Conference in London on 21 and 22 June. The conference will include important discussions on how to create a pathway for the world’s first ‘green recovery.’ Achieving this will require a focus on the decarbonisation of the iron and steel sector, which is critical to the Ukrainian industrial economy and vital for European manufacturers. The prospects of a green recovery are promising and to drive these efforts, the Government of Ukraine is announcing a coalition that will bring together major players in the iron and steel industry to support reconstruction. The coalition is being developed by Systemiq in collaboration with the Ukrainian government and supported by Breakthrough Energy through philanthropic funding.
The world’s first green recovery
Ukraine has a unique set of circumstances that could enable the world’s first green recovery. There is the potential of Ukraine’s natural resources to unlock decarbonisation, including renewables potential and excess nuclear capacity to supply low-carbon energy, and ores of iron and minerals that are critical for green technologies. Plans were initiated to upgrade Ukraine’s industry and infrastructure even before the war started, and there is a concentration of skilled labour to realise these. Importantly, Ukraine’s location gives it the opportunity to feed European and global supply chains with low-carbon feedstocks, materials and products.
Historical precedents such as the Marshall Plan, South Korea’s post-war reconstruction and Indonesia’s 2004 tsunami recovery, indicate there are four prerequisites to a successful recovery: a holistic recovery strategy, prioritisation of large sectors with structural competitive advantages, a timely start and gradual upscaling of recovery efforts and an early engagement of industry and investors to facilitate flows of private capital in combination with government and international financial institution (IFI) funds.
“Typically planning for post-war recovery starts once peacetime prevails. But history shows that we should and can start now,” said Rostyslav Shurma, Deputy Head of the Office of the President of Ukraine.
The potential for an iron and steel-led green recovery
The iron and steel sector is expected to remain central to Ukraine’s economy. In 2021, iron and steel accounted for a sizable share of GDP (~10%), exports (33% of export revenues), taxes (#1 contributing industry) and the employment of around 600 thousand people. It is also one of the largest emitting sectors. The iron and steel sector alone was responsible for 47 Mt CO2 emissions in 2021, representing 15% of Ukraine’s total.
The fundamentals for a green recovery of the Ukrainian iron and steel sector are strong:
- Significant reserves of magnetite iron ore that is well-suited to low-carbon iron production, in sufficient quantities for both domestic use and substantial export, enabling Ukraine to become the fifth largest supplier globally
- The potential to produce cost-competitive green hydrogen for low-carbon ironmaking production powered by underutilised nuclear power capacities, as well as attractive onshore wind and complementary solar potential
- Proximity to a large and growing European market for low-emissions steel, which will face deficit of raw materials (DR-pellets or green DRI/HBI) reachable from Ukraine via railway, river and sea, with low Scope 3 emissions compared to overseas supplies from competitors
- Existing asset base, infrastructure and metals and mining capabilities
“As Ukraine continues to deal with the impacts of a terrible war, entire sectors that are traditionally major greenhouse gas emitters will need to be rebuilt,” said Julia Reinaud, Senior Director, Breakthrough Energy. “It will take resolve, innovation of new technologies and deployment at scale, global coordination and the development of new value chains but there is a unique window for Ukraine to use breakthrough technologies to establish thriving green iron and steel industries.”
An estimated USD 20-40 billion investments will be needed for the build out of a green iron and steel value chain in Ukraine. This includes investments in iron ore beneficiation and pelletisation, clean power and hydrogen production, green iron and steelmaking and related logistical infrastructure. It would make Ukraine a global hub for green iron and green steel, supplying more than 30 million tons of green iron ore, or green iron and steel equivalents. That is equivalent to about a quarter of the iron ore demand of the European Union.
“Ukraine has an opportunity to become a green iron and steel powerhouse which would deliver significant economic benefits and unlock decarbonisation. At the same time the development of a green iron ore and steel sector in the Ukraine would provide the European Union with security of supply of these materials,” commented Eveline Speelman, Partner, Systemiq. “This would be a win-win.”
A recent McKinsey report found that the deficit for high quality iron ore is tightening, and is expected to increase to 100 million tonnes per year. Additionally, production of green iron and steel requires access to abundant low-carbon electricity. Ukraine has the potential to provide both.
What it would take – and what it would deliver
Not all parts of the green iron and steel sector in Ukraine are ready to be built out. As a starting point, de-bottlenecking logistics and investment into beneficiation (upgrading) of iron ore would increase exports. Secondly, facilities to prepare iron ore for use in green iron making should be developed, as well as low-carbon electricity generation and transmission. With this infrastructure in place, green iron making can be produced using iron ore and electricity-based hydrogen as feedstock. Lastly, green steel production will be ramped up to enable both domestic use and export. Each step requires increasing capital investment but brings great benefits to Ukraine in terms of GDP and employment.
Financing the green recovery will go beyond what is expected to be available from concessional sources. Blended concessional and non-concessional financing will be required and investors will need to navigate a wide range of conventional and war-related risks. Investments into iron and steel assets may be possible from debt financing and balance sheets, provided sufficient guarantees can be put in place for (international) investors. This can potentially be done through dedicated Ukraine investment vehicles and funds. Additionally, war insurance mechanisms are expected to be essential for all early investments.
Securing committed revenue streams from European steel producers is another important building block. Several producers have expressed interest in exploring offtake options.
Preparation should start now
The EU steel industry will need to make final investment decisions on low-carbon production capacity in the next few years to align with carbon-reduction targets. A decision to build low-carbon iron and low-carbon steel production capacity will depend on the availability of Ukrainian iron ore and Ukrainian green iron. It is, therefore, imperative that progress is made in the months ahead. The Ukraine Government, European and G7 partners are hard at work on recovery planning for Ukraine.
The newly formed Government of Ukraine’s Coalition for the Green Recovery of the Iron and Steel Sector will support the Ukrainian economy and people while being an engine to support Europe’s decarbonisation agenda. The Ukrainian government is calling on companies in the green iron and steel value chain, financiers, and other stakeholders to join.
The coalition aims to:
- Develop a pipeline of investment projects (up to pre-feasibility level) along the green iron and steel value chain, including an assessment of key risks
- Verify critical financial and policy prerequisites for implementation of such projects and propose specific mechanisms to address bottlenecks
- Coordinate with all relevant stakeholders, including iron and steel industry players, private investors, governments, IFIs and philanthropists to validate findings, seed ownership for (i) and (ii) above, and to ensure alignment of projects with a holistic vision for recovery
- Facilitate coordination between this iron ore and steel sector recovery initiative and other recovery initiatives (e.g., G7 Donors Coordination Platform)
- For Ukraine, the benefits of a green recovery are a strong, future-proof industrial sector that will provide employment and economic activity.
“With localising green steel production in Ukraine, the European continent will get one of the most cost-competitive steel industries globally,” said Rostyslav Shurma, Deputy Head of the Office of the President of the Ukraine. “Ukraine is therefore well positioned to become the key green steel supplier to Europe, supplying up to 50 million tonnes per year.”
Rostyslav Shurma, Deputy Head of the Office of the President of the Ukraine will be announcing the launch of the coalition at the Ukraine Recovery Conference in London on June 21-22.
ENDS