Ultimately, this could lead to the creation of parallel economies with their own pricing and trade practices, much like their geopolitical counterparts during the Cold War, when the Warsaw Pact nations faced off against the Western bloc over the Iron Curtain after World War II.
It could also mean restricted trade flows, with increasingly limited sourcing opportunities for both blocs.
While some countries now completely reject Russian steel - because of the sanctions imposed on the country for its aggression against Ukraine - other markets continue to accept it, buying at lower prices and in different currencies despite the imposition and tightening of those sanctions.
One such new settlement method is the sale of Russian steel to Southeast Asian buyers but priced in other currencies, such as China’s yuan. Russian mills such as Abinsk were also offering payment options in the Turkish lira, the Swiss franc or the United Arab Emirates’ dirham.
Details were scant on the first of those, although Chinese traders were said to be involved in such trades. Prices for such transactions were reported to be lower than spot price levels, but nobody with any awareness of the details was willing to disclose more, due to the sensitivity of the topic.
Other factors were lending weight to the idea of a nascent East-West economic divide. One was the emergence of trade practices such as transporting Russian steel by train across the Russia-China border and then re-exporting it as Chinese steel.
An open export arbitrage in billet also helped to explain why China has been exporting recently, despite the recent strength of domestic demand from its own re-rollers, while operating rates at blast furnaces have been lower due to emission and production controls.
Chinese steelmakers and exporters were seeing the opportunities in the global steel markets and have taken to exporting hot-rolled coil, wire rod, billet and slab to Europe, where buyers have been willing to accept prices higher than in the regional Asian markets.
And the reallocation of Russian and Belarusian quotas for steel imports into the EU to Turkey, India, South Korea and other countries was perhaps another precursor to a permanent structural shift in the make-up of the global marketplace.
The lucrative European markets were likely to draw volumes away from Asia, which was now the lowest-priced market in the world. This would allow Russian steel to fill the gap in supply.
But Russia’s own economy has been damaged - perhaps irreparably - by having to fund a war effort while international trading relations break down.
Russian President Vladimir Putin has warned of “deep structural changes” in the Russian economy, changes that will “will not be easy.”
The country’s ministry of industry and trade will start to monitor steel prices and will cap margins to 20-25% for steelmakers and 3-7% for traders and steel service companies, in a return to the controlled economy of the past.
Inflation could rise by a further 2.5 percentage points due to the war, the Organization for Economic Co-operation & Development (OECD) said in an outlook document published on March 17, and economic growth could be lower this year by more than 1 percentage point.
Russia has been struggling to contain domestic price rises for steel, especially those linked to international export price benchmarks. Steel prices have recently come down only through government intervention.
Slow return to normal? Or no return?
Steel prices may not immediately come down even when the Ukraine-Russia war ends, sources have said.
“It depends on whether Ukrainian steel mills can restart and get their materials to their traditional markets, such as Europe,” a senior trader in Singapore told Fastmarkets.
Price volatility was also likely to continue, especially against the backdrop of further Covid-19 outbreaks and strict government responses, such as the sudden lockdowns in major cities across China, traders said.
Fastmarkets’ steel research team expected the effects of the Ukraine-Russia war to subside eventually, especially if there is no permanent supply shortage and other steel capacities in the world take up the slack left by Ukraine and Russia.
The research team expected Black Sea steel export prices to peak in May this year, and prices in the rest of the world to top-out in June or July, assuming that the conflict ends in the second quarter and seasonal changes curb demand from the third quarter onward.
“Because the prices we assess are booking prices for forward delivery, they are leading indicators. So even if Ukraine can’t return immediately to supply Europe, the resumption of supply - either from Ukraine or not - will be priced-in before that,” Fastmarkets steel research head Alistair Ramsay said.
“There is no permanent change, such as environmental issues restricting blast furnace replacement, or any permanent demand destruction, so this is very temporary,” he added.
“Steel prices may remain elevated for now,” a steel buyer source in Singapore told Fastmarkets, “until more supply emerges in the spot market. It will also take time for the sanctions’ effects to be mitigated, even if they are removed or reduced.”