With cyclical peaks and troughs, not least being the 2009 economic crisis, the global steel market is a difficult one for the most competitive of metallurgical enterprises. The added weight of surging prices for fuel imported from Russia has made the past seven years extra hard for Ukraine’s massive steel industry.

Yet, while the country’s economy remains heavily dependent on foreign fuel, its steel sector is making headway in its efforts to break a longstanding addiction to once cheap, but now expensive, Russian natural gas.

It is doing so by switching from Soviet-built steel production technologies – such as gas-burning blast and open hearth furnaces – to more efficient and environmentally friendly pulverised-coal injection and electric arc systems.

Blessed with some of the world’s largest reserves of ore and coal – and favourable logistics for getting steel to domestic and foreign markets – Ukraine was identified by Soviet state planners as an ideal location to smelt, mould and roll natural resources into various steel products.

In the decades that followed independence in 1991, industrial behemoths rebounded from economic collapse and crony capitalism, and gradually fell into private ownership.

Ukraine’s modern-day steel barons are the billionaire oligarchs who greatly influence the country’s economy and politics.

A critical point in the industry’s fate was sealed after the 2004 Orange Revolution. Relations soured with Russia, now a competing steel-producing country and Ukraine’s former imperial master.

Kiev embarked on a steady course out of Moscow’s orbit towards the European Union. Gazprom, the Kremlin-controlled gas company that had fuelled Ukraine’s economy, increased prices.

Today, Kiev pays what local officials describe as a “discriminatively” high price for Russian gas imports, more than $400 per 1,000 cubic metres. That is higher than many European countries pay, despite being farther from Gazprom’s production fields.

The price increases hit margins of energy-intensive Ukrainian businesses, including producers of steel, a top source of foreign currency. In response, domestic tycoons are investing heavily in energy efficiency.

Interpipe Steel is the nation’s first new steel mill to be built in 40 years. It is small but efficient and profitable.

Thanks to a $700m investment by industrialist Victor Pinchuk, its electric-arc furnace technology is poised to produce 1.3m tons a year of higher quality steel for Mr Pinchuk’s Interpipe railway wheel and pipe-making conglomerate.

As if to anticipate brighter days ahead, the art-loving businessman-turned-philanthropist also had the steel mill designed to function as an art exhibit. Five large works designed by Olafur Eliasson, the Danish-Icelandic artist known for his grand-scale installation art projects, are integrated into the mill’s interior and exterior.

Located on the mill’s territory in the industrial Dnipropetrovsk region and formally called “Dnipropetrovsk Sunrise”, one of the displays is a massive yellow ball that lights up day and night. At night it appears like a sun, or second moon, shining over the mill.

It’s a “metaphor of the industrial renaissance of Ukraine”, Mr Pinchuk said when he opened the mill late last year.

According to Dragon Capital, the Kiev-based investment bank, Ukraine’s steel industry has cut gas consumption from 9.6bn cu m in 2005 to 4.8bn cu m last year.

Steel production has fallen during this period, from 37.7m tons to 32.3m. Yet, for Ukraine, the big challenge is not about churning out more, but to produce higher quality steel more efficiently and profitably.

Interpipe decided to build its new mill after Russia starting raising gas prices.

With the new plant, Interpipe says it has cut energy costs by half, emissions of pollutants by 60 per cent and gas consumption per tonne of steel by nearly 90 per cent. Productivity, it adds, has improved four fold. Dragon Capital describes these developments as “very positive” for the company “and its debt profile”.

Interpipe is on track to improve its financial performance in 2013 with earnings before interest, tax, depreciation and amortisation expected at $370m, up from $320m estimated for 2012. Debt is expected to decrease to about $800m from $1bn as of end of 2012.

Market conditions are far from ideal, but Ukraine’s steel industry can thank Gazprom for putting it on course for a solid future, forcing it to become as efficient and competitive as the best of its European peers. Upgrades are in motion at the country’s other 13-plus mills.

ArcelorMittal, the global steel company and Ukraine’s largest investor, has pumped more than $1bn into improving efficiency at the country’s largest mill, at Kryvyi Rih, central Ukraine, acquired in 2005 for $4.8bn.

Gas consumption rates at this factory have been cut from 43 to 35 cu m per tonne. Modernisation is “continuing, despite the challenging global steel market situation”, the company says.

But the biggest impact is expected from Metinvest, ranked 28th in the world in steel production and number one in the Commonwealth of Independent States.

Owned by Rinat Akhmetov, Ukraine’s richest man, the group controls half of national steel output, churning out more than 14m tonnes in 2012 at four domestic mills. Steel is also rolled at its UK, Italian and Bulgarian plants.

Metinvest is closing open-hearth furnaces and introducing the more energy-efficient technique of pulverised-coal injection. This, in turn, spells fewer sales for Gazprom and more energy efficiency for Ukraine’s economy overall.

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