Ferrexpo – Steeling Against the Pandemic
We learn how Ferrexpo has responded to COVID & is already looking beyond it.
“All commodity businesses are cyclical. We’ve focused particularly hard in the last five years to develop a customer portfolio which can support our business throughout the cycle,” explains Jim North, Acting CEO of Ferrexpo. “We have created long term relationships with crisis resistant customers who are looking for reliable suppliers with consistent quality to support their steel production. Our sales book is as good as you will find at any of the world’s major iron ore miners.”
The company’s mining operations are solely Ukraine-based; however, we have marketing offices all over the world located close to our key customers.
“We produce high-quality blast furnace pellets, with low levels of alumina and phosphorous, which makes our product highly sought after,” North points out. “We’ve been dipping our toe in the water in the DRI [Direct Reduced Iron] market and have delivered several trial cargoes to key customers in this market segment, and we will continue to expand our DR pellet sales into markets such as the US, Middle East and South-East Asia.”
Ferrexpo’s strategy is to grow and expand its footprint by positioning itself for growth and optimising its operations to ensure disciplined governance. The company’s strategy is built on the goal of producing and exporting high-quality pellets to premium steel mills around the world, targeting businesses that produce sophisticated steel products. Ferrexpo intends to be a low-cost, efficient producer with a reliable logistics infrastructure.
By positioning themselves as a low-cost producer with a continually improving output quality, Ferrexpo plans to develop a strong customer portfolio and maintain a social licence to operate. The company is setting out to optimise its operations by developing its resource base and logistics capabilities while acting as an efficient producer and continually training and developing its employees.
This strategy is built on a foundation of operating discipline that requires Ferrexpo to maintain high standards of corporate governance, evaluate relevant investment opportunities and maintain appropriate credit metrics and sufficient financial liquidity. The business is also committed to developing the Group’s significant resource base, improving the quality of the Group’s pellets, maintaining a competitive cost of production, and expanding the Group’s logistics capabilities while opening and developing new markets and customers.
Building the Brand
“When I have had discussions about our business, people have often said ‘you are those Ukrainian miners” says North. It’s true that we have a strong Ukrainian heritage but we are now a truly global organisation, with a highly skilled team operating in various locations across the world that shares our vision to be the world’s leading supplier of pellets to the global steel industry.”
“One of the other challenges we’ve faced when introducing our company to new suppliers is to assure them that Ukraine does have world-class businesses. We’ve transformed our business into a modern, efficient world-class operation since listing on the London stock exchange in 2007. We buy from major equipment suppliers all over the world, and we are quick to deploy any new technology or innovation into our operations.”
North makes clear that Ferrexpo is far from being the exception, but is emblematic of the transformation and development taking place within Ukraine.
“Ukraine is transforming and going through significant change. The government is in the process of a major reform of legislation, the way they work and developing standards comparable with anywhere else in the world,” North says. “We’re regularly talking with the government about modernising legislation to support our vision to deploy world-class technology.”
Protecting the Workforce
While 2019 had posed a number of challenges for Ferrexpo, the company was able to report a strong set of financial results for the year alongside progress on corporate governance matters. Ferrexpo’s operations continued to perform strongly throughout the year while increasing the production of high quality 65% Fe pellets from its own ore by 3% to 10.1 million tonnes while sales volumes increased to 10.3 million tonnes. Despite lower demand from some steel mills compared to 2018, the Group signed new long-term contracts for supply into Germany and Taiwan as well as renewing a long-term contract for supply into Japan. Last year was a period of geographic diversification for Ferrexpo’s sales portfolio, allowing the Group to maintain consistent supply to the market despite some periods of weaker demand from specific regions during the year. However, while Ferrexpo’s footprint was reaching around the world, so was something else.
From Ukraine to the US, everyone all over the globe has been affected by the COVID-19 pandemic. For Ferrexpo, the impact of the COVID-19 pandemic began with disruption to Chinese supply chains impacting the distribution networks of steel producers and their customers, which Ferrexpo cautioned could result in short-term volatility for the iron ore market as high levels of steel inventory built up and were released into the supply chain once normal operations resumed. The company also anticipated that the spread of the virus into Europe could result in further economic uncertainty.
Before the advent of COVID-19, Ferrexpo had been forecasting that steel profitability in Europe would show a mild recovery in key markets from the second half of the year onwards. However, even with the impact of COVID-19, Ferrexpo believes it remains well-placed to manage its way through the current uncertainties due to the company’s low-cost position relative to its peers, as well as a well-invested asset base, premium customer portfolio and strong balance sheet.
“The COVID-19 pandemic is unprecedented in the modern era. We haven’t faced anything of this nature in the last 100 years and it places a lot of challenges on most organisations and countries,” North admits.
Ferrexpo lost no time in responding to the crisis and the focus has been protecting its people.
“We sent approximately half our workforce to home isolation and have requested them to stay there as a precautionary measure. We particularly focused on those with pre-existing conditions and employees in the higher age bracket,” he says. “We have taken all the necessary precautions for ensuring that the virus is kept away from our operations and doesn’t spread within the community.”
Ferrexpo also went on to cancel all business trips in accordance with respective government advice and enforce a working from home policy in locations where the COVID-19 had a more severe impact. The company is continuing to follow advice from health authorities in Ukraine, as well as other jurisdictions where its employees are based.
At the same time, Ferrexpo has worked to support the community beyond their business, as North explains, “We provide support to local hospitals in terms of protective equipment, ventilators and X-ray machines. We’ve contributed to local medical facilities to ensure the local and regional hospital are well equipped to handle any necessary COVID response.”
Out of Ferrexpo’s 9,000 employees, to date, only three have returned a positive COVID diagnosis. North is thankful for the good fortune but insists that it isn’t just down to luck, in his opinion, it is more to do with the organisation’s response and preparedness, as well as effective communication with the workforce and the local community.
“People have told me specifically that we’ve been very lucky, and there may be some element of luck. However, I respond that the success to date has been due to our team, and the excellent management of the situation. We acted early and we focused on communicating the need for precautionary measures to be effectively implemented,” he says. “Over-communicate! I tell the team ‘When people say they’re tired of hearing the message, you know they’re hearing the message.”
Despite the pandemic, Ferrexpo has managed to adapt to the situation in such a way that, to date, the company has seen a minimal impact on its operations.
“Our production lines have not stopped and our marketing team have done an amazing job. Some of our European customers reduced their demand for pellets as a result of lockdown measures implemented throughout Europe,” North recalls. “Our marketing team moved quickly to redirect the displaced volumes to other destinations and they’ve been successful. Everything displaced from the European market we’ve placed in other markets and in addition, we have drawn down our product stockpiles.”
Indeed, in Ferrexpo’s Second Quarter results the company reported that its facilities have continued to operate with minimal impact on operations to date, even as it continues to closely monitor its workforce. Ferrexpo has also continued to engage with local communities surrounding its operations and confirmed that the infection rate in those communities remains low. Ferrexpo has maintained its good safety performance indicators into 2020 and has suffered no fatalities in 1H 2020 while keeping the Group’s lost time injury frequency rate below 1.0x.
This excellent safety record hasn’t been at the cost of production either, with second-quarter pellet production for 2020 up 5% to 2.9 million tons, compared to 2.7 million tons for the first quarter. 1H 2020 pellet production is up 5% to 5.6 million tons, compared to 1H 2019’s figure of 5.4 million tons, while 1H 2020 sales volumes increased by approximately 21% to 6.1 million tons, compared to 5 million tons for 1H 2019.
Bringing Home the Innovation
Like many businesses, the COVID crisis has given Ferrexpo cause to reconsider how we operate.
“What we’ve had to work through for the last few months has made us reconsider how we operate,” North says. “For instance, while working remotely is less than ideal, a lot of things can be done that we wouldn’t have previously considered. We’ve learned through this process and its made us rethink how we need to manage the organisation going forward.”
“In terms of technology and innovation, one thing we benefit from substantially in Ukraine is it’s a low-cost environment to operate,” North says. “However that hasn’t stopped us increasing focus on automation and using data to drive our decisions.”
Automation might seem like a counter-intuitive avenue to pursue in a country known to have a lower cost of labour, but as North points out, the technology journey isn’t about the cost of labour, it’s about reducing the exposure of the workforce to hazardous working conditions and increasing the utilisation of capital deployed.
“When people ask why we are investing in automation and technology when our labour costs are comparatively low, I reply that we must plan for the future, and we expect labour costs to increase over time in line with the development of the country,” North says. “More importantly, if we look at the younger generation it is increasingly difficult to attract young people to what they consider to be low-level occupations, such as truck driving, and there is the perception that mining is a dirty job. More broadly there is a lot of concern regarding climate change and a perception that the mining industry is a major contributor. We need to appeal to the next generation of miners so that they understand that mining is high tech and that Ferrexpo specifically is very focused on the issue of climate change and reducing our carbon footprint.”
Perhaps the most recent representation of our intentions regarding technology deployment is our autonomous haul truck project. We commissioned the first fully-autonomous CAT793 late last year, in partnership with ASI Mining and Epiroc.
“Because of COVID 19, we suspended the project, however, we intend to restart the project in July and our aim is to have our first fleet of autonomous trucks running by early in 2021,” North says.
This project is a real first, not just for Ferrexpo, but for Ukraine and Europe as a whole. It’s something North takes no small amount of pride in.
“This is a big step for us. When you think about mining companies embarking on fleet automation, it’s usually the major miners who come to mind, not companies of our size,” he says. “So to be the first in Europe to do this, we’re pretty excited.”