One year on – after invasion of Ukraine, Russian steel output, exports drop less than expected

Russia’s output of steel products, local demand and export sales all dropped in 2022 due to trading sanctions imposed after its invasion of Ukraine on February 24, 2022 - but the reductions were smaller than the markets expected

Local demand and steel output were partially supported by Russia’s government. And exports remained high despite the restrictions of the sanctions, mainly on demand among countries that did not impose them and because imports of semi-finished steel products from Russia were not banned in the EU.

Personal sanctions were imposed on the owners of many Russian steel-sector companies. These included: Alexey Mordashev, majority shareholder in Severstal; Alisher Usmanov, co-owner of USM Holdings, which includes Metalloinvest; Roman Abramovich, co-owner of Evraz; Victor Rashnikov, co-owner of Magnitogorsk Iron & Steel Works; and Evgeny Zubitskiy, co-owner of Industrial Metallurgical Holding.

TMK was also affected, but Dmitriy Pumpyanskiy, who owned a 90.6% stake in the company, exited as a beneficiary in early March 2022.

The UK implemented a total ban on supplies of iron and steel products from Russia in April 2022.

And the EU banned supplies of rolled steel, and welded and seamless pipes.

Local market, output

“Despite heavy sanctions imposed on Russia, steel demand is expected to contract less than was forecast at the beginning of the war, mainly due to high oil prices and government measures [to support the] construction [sector],” the World Steel Association (Worldsteel) said in its latest short-range outlook.

According to that outlook, Russia’s finished steel products usage was 41.3 million tonnes in 2022. That was a year-on-year drop of 6%, 2.6 million tonnes, from 43.9 million tonnes in 2021. Earlier in 2022, Worldsteel had expected that the slump in local demand would be as much as 20%, with consumption falling to 35.1 million tonnes.

Construction remained the main steel-consuming industry in Russia, with a share of more than 65%, according to Fastmarkets’ estimates.

As a result of the invasion of Ukraine and the subsequent sanctions, rebar prices fell last year from March onward, and continue to be lower in year-on-year comparisons.

Fastmarkets’ weekly price assessment for steel reinforcing bar (rebar), domestic, cpt Moscow, Russia, was 47,000-48,000 roubles ($624-637) per tonne, including 20% value-added tax, on February 20 this year, compared with 69,000 roubles per tonne a year earlier.

The economic uncertainty caused the postponement of mortgage offers, while the partial mobilization of Russian military reservists, announced in September 2022, has led to a significant number of people leaving the country to avoid being compelled to participate in the country’s military action.

This situation had only a minor effect on steel consumption by the country’s construction sector in 2022, but the turmoil in the real estate market was expected to have further consequences in 2023, according to Russian sources.

In 2023, steel demand is expected to show a deeper contraction, with the sanctions becoming more biting over time

“In 2023, steel demand is expected to show a deeper contraction, with the sanctions becoming more biting over time,” Worldsteel said. It expected a reduction in steel usage by 10% this year.

The Russian construction sector showed that it was relatively stable and less affected by external factors compared with other sectors of the country’s economy, because of its low dependence on imports and the lesser effects arising from changes in external relations or disruptions to international trade.

But other steel-consuming industries, such as the automotive and engineering sectors, were hit hard by component shortages, supply chain disruptions, and shutdowns of production facilities. The automotive, machinery and white goods sectors combined, however, were responsible for only 5-10% of steel demand in Russia, market sources estimated.

The oil and gas complex accounted for around 20% of steel usage in the country, and it increased consumption by 28%. This growth was linked to national utility provider Gazprom’s large investment program over the past five years, which boosted demand in this sector, according to local business publication Kommersant.

Russia produced 71.5 million tonnes of steel products in 2022. This was 7.2%, 5.5 million tonnes, less than the 77 million tonnes in 2021, according to Worldsteel.

Exports

Russian steel products became ‘toxic’ to buyers who were sensitive to the Western sanctions, and exporters lost part of their traditional markets. But at the same time, this resulted in Russia-origin steel products being priced lower than material from other origins, making them more attractive.

According to Russia’s Ministry of Industry and Trade, sanctions affected the export of 3.9 million tonnes of finished steel products, 700,000 tonnes of semi-finished steel products and 200,000 tonnes of pipe.

Russia currently does not disclose export data, making it difficult to calculate the exact volumes. Fastmarkets therefore collected estimates from market participants as well as available reverse statistics from some buying nations.

This process indicated that exports of hot-rolled coil, traditionally the most commonly exported finished-steel product from Russia, came to about 3.5 million tonnes in 2022. That was a drop from 6.5 million tonnes exported in 2021, according to the International Steel Statistics Bureau (ISSB).

Imports into Turkey, the largest importer of flat steel products from Russia, dropped to 1.2 million tonnes, compared with 1.9 million tonnes in 2021, the Turkish Statistical Institute (TUIK) said.

“Cheap HRC from Asia became available in Turkey,” one trader based in Turkey said, “and the Russians found it hard to compete with them. Moreover, buyers have been expecting prices from sanctioned Russian exporters that were even lower than those from Asia.”

The annual average of Fastmarkets’ price assessments for steel hot-rolled coil, export, fob Black Sea, CIS, was $704.18 per tonne in 2022, down by 19.01% from $869.47 per tonne in 2021.

Export assessments on an FOB Black Sea basis mostly reflected supply from Russia in 2022, because Ukrainian ports have been closed since late February 2022 due to the war. This meant that Ukrainian suppliers had to ship material via alternative routes.

Fastmarkets’ steel hot-rolled coil index, export, fob main port China – which is the benchmark in the global market – was $680.03 per tonne on average in 2022, down by only 18.43% from $833.72 per tonne in 2021.

Exports of steel slab, historically the key steel product export out of Russia, were around 10 million tonnes in 2022, market sources estimated. That was an increase by 1 million tonnes compared with 2021.

According to TUIK, Turkey imported a total of 3.4 million tonnes of semi-finished products from Russia in 2022, 1 million tonnes more than in 2021. Of the total, around 2 million tonnes were slab.

China imported slightly more than 2 million tonnes of slab from Russia over the first 10 months of 2022, according to ISSB. In the corresponding months of 2021, it was just 136,000 tonnes.

A European trading source said that the absence of Ukraine from the export slab market was one of the main factors that drove Russian sales in 2022.

In 2021, Ukraine exported 2.27 million tonnes of slab, according to ISSB. In 2022, however, exports from the country were almost eradicated by Russia’s invasion and the subsequent destruction of its major slab-rolling mills — Ilyich Iron & Steel Works and Azovstal, both located in Mariupol and owned by Metinvest.

Meanwhile, a Russian trading source cited the unfavorable exchange rate for the rouble as the reason for higher slab sales.

“The rouble was strong for around six months in 2022 [owing to the government stimulus measures],” this source said. “When you trade cheap slab at unfavorable rates [for exports], you are either fine with profit, or sell at a small loss in the worst case. But if you trade hot-rolled coil, the loss is much more significant.”

Following the shock depreciation of Russia’s currency from 130 roubles to $1 in late February and early March last year, due to the sanctions, the exchange rate then strengthened from May until December. Staying near a strong resistance level around 65 roubles to $1, the exchange rate was now making Russian exports more expensive.

On February 23, 2022, one day before the invasion of Ukraine, the exchange rate was 79.96 roubles to $1. On the same day this year, it was 75.06 roubles to $1, according to the exchange rate website Oanda.com.

Fastmarkets’ weekly price assessment for steel slab, export, fob Black Sea, CIS, averaged $584.04 per tonne in 2022, falling by 22.81% from $756.59 per tonne in 2021. Meanwhile, the annual average price assessment for export HRC went down less dramatically, by 19.01%.

In comparison, the annual average price assessment for steel slab, export, fob main port Brazil – the main competitor for Russia-origin slab globally – was $747.45 per tonne in 2022, down by just 9.93% from $829.86 per tonne in 2021.

“For customers, if slab is cheap, it is preferable to import it rather than to produce their own, and save on emission fees, furnace lining and other costs,” the European trading source added.

The absence of direct sanctions on slab was another reason for higher sales of the product, according to the same source.

Europe remained the main destination for Russian slab. Suppliers shipped 3.24 million tonnes of slab to the EU in January-October 2021, and 3.9 million tonnes of slab through the full year of 2021, ISSB statistics showed. In January-October 2022, such exports totalled 3.03 million tonnes.

But in October 2022, the European Council voted in favor of an eighth package of sanctions against Russia. This package included a ban on Russian semi-finished steel imports, but with a two-year transition period that included quite generous quotas that were almost equivalent to the historical slab volumes imported from Russia into the EU.

Several sources told Fastmarkets, however, that slab supply volumes from Russia to the EU could shrink in 2023 because of opposition to that two-year transition period.

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