Multi-billion-dollar metal markets fork as Russia pursues assault on Ukraine
Hope is scarce that Russia’s war in Ukraine will end soon, after it decided in April to refocus its assault on the east of the country. NATO- and EU-aligned traders in metals of which Russia is a major supplier must continue to adapt to greater restrictions on doing business with the country as a result.
A notable correlation with the war in the metal markets has been the bifurcation of prices for some materials in countries that have not aligned their trade against Russia’s war compared with countries that are in, or aligned towards, the sanction-imposing EU and NATO.
For industries that depend to a greater or lesser degree on Russian supply within the sphere of the latter group, traders are continually weighing up a range of pressing questions, price among them.
These include their outstanding contracts with firms in Russia, the extent of their moral commitment to cease trading with companies in the country and their capacity to self-sanction. How and at what cost can they procure alternative supply in markets where some manufacturers have limited alternatives to their certified Russian material? Even if they are willing to buy new Russian material in the current environment, will ports and logistics suppliers support their capacity to do so?
Behind these daunting issues loom questions of whether, when and how prescriptions on their capacity to buy from Russia will be mandated by governments? Second, how supply chains and production will be reshaped as the war continues in markets that are already transforming in response to decarbonization and the problems inherent in global, just-in-time supply chains shown by the Covid pandemic?
Consider the pig iron market. Both China and the US have historically been significant importers of this crude steel product from Russia. In 2020 the former, albeit it is a swing purchaser, bought 1.4 million tonnes of Russian material, the latter 1.58 million tonnes, at broadly comparable market levels, especially in the context of price moves following the invasion.
This is a substantial business. Last year, US mills imported a total of 6 million tonnes of pig iron, a basic steelmaking ingredient, at a total cost of $3.4 billion as buyers looked for steel units in a tight rising market.
Prices in China and the US moved from rough parity at the start of 2022 to US pig iron imports trading at around $1,000 per on a cfr Gulf of Mexico in April, which is about a $400-per-tonne premium compared with cfr China prices.
(This spread is only like to increase after sources said that the EU decided on April 8 to impose sanctions on the co-owner of Russian industrial company IMH, whose assets include pig iron producer Tulachermet. Prior to the news pig iron prices cfr Italy were trading at a premium of over $200 per tonne above prices in China).
The divergence in prices in metals is also pronounced in the markets for alloys, which are essential in steelmaking and strategic applications.
Russia’s largest single trading partner for ferro-alloys in 2021 was the US, which imported almost $500-million’s worth of the steelmaking raw materials, UN Comtrade figures show. This dwarfs that of other countries, where imports from Russia are still considerable. Europe’s two largest steel producers, Germany and Italy, for example, bought alloys worth $83 million and $22 million respectively. India bought alloys worth $46 million in 2021 and, in 2020, China $19 million.
The spreads between ferro-chrome prices in the US and Europe and prices in China have also ballooned out to multi-year highs. This has been driven in part by a slowdown in demand in China on its continued zero-Covid policy and increased domestic production, but it is reasonable to ask whether increasing availability of units from Russia also plays a role. China imports ferro-chrome, ferro-titanium and ferro-vanadium from Russia, though it is largely self-sufficient in ferro-silicon.
This is a sensitive area where there is little clarity yet, but it bears close attention.
A proxy for the discussion exists in the energy markets, where China’s state-owned refineries appear to be paying attention to Beijing’s call for caution on trading oil now it has been sanctioned by the US, by honoring existing contracts and not taking up new ones. A senior diplomat told Reuters earlier this month that Beijing is not deliberately circumventing sanctions on Russia. (The same report notes that India had booked 14 million barrels of Russian oil since February 24, almost its total volume for 2021). On the other, Reuters also reported that China’s trade with Russia rose 13% to $11 billion in March. Metals from Russia, broadly, are not yet subject to official sanctions.
The spreads in pig iron and alloys prices may appear inconsequential in the context of the devastating plight of Ukraine on one hand, and perhaps likely to be traded out through arbitrages over time on the other. But if the fork in prices becomes a bifurcation in supply chains, with more production from commodity long Russia flowing towards commodity markets in China and non-aligned countries such as India, it will necessarily alter how companies in countries aligned with NATO and the EU organize and secure their supply chains.
Tracking of companies’ activities in Russia is increasing. So too will discussion about the provenance and sustainability of commodity flows of a wide range of materials that the country produces.