The pressure exerted by international sanctions on Russia, which is already unprecedented and is set to increase in the future, has critically affected the capabilities of local mills to export. Problems with the banks, payments, insurance and overall shipping operations along with reputational risks for customers, have led to a situation in which Russia’s export prices have lost the status of global benchmarks in all segments, including billet, slab, HRC, scrap and pig iron. While having trouble finding a customer, concluding a deal and fixing all deal details, Russian exporters still have to sell much below the regular market prices since buyers want to have compensation for possible risks and losses. However, the attitude of some markets, predominantly Asian markets, towards Russia is like that to a “second Iran” and low-priced deals and offers do not have much effect on the situation in the market overall. But in some regions like Turkey for example, aggressive pricing from Russia impacts the general sentiment and puts pressure on the related segments.
As time passes and sanctions tighten, more and more international buyers fear secondary sanctions and the number of the markets willing to work with Russia decreases. Still, Russia has so far managed to maintain its presence in the export markets, especially in the segments which have a limited number of alternatives of other origins.
Exports of ex-Russia slabs continue, trade flows changing
Russian semis suppliers remain present in the export markets, although the situation is somewhat different in the slab and billet segments. The market of steel slab in terms of ex-Black Sea shipments has been significantly reshaped as a result of the war. In the EU and Turkey, Ukraine and Russia had been the main slab suppliers for many years, but now the situation has changed. Ukraine is not considered to be a sustainable exporter now, as it has no access to its seaports due to the Russian occupation. Moreover, Metinvest’s principal assets for merchant slab production were located in Mariupol, which is temporarily not controlled by Ukraine. While the company is working to re-route its logistics to the European market, the restoration of slab supply for export is doubtful, given that Zaporizhstal’s slab production is based on old technology.
In Turkey, both Russia and Ukraine were the main suppliers with around 0.5 million mt of slabs each having been sold to this destination in 2021. At first, Turkey was receiving different offers from Asia and some lots were booked, but mainly the country continued buying from Russia, specifically NLMK, since the mill is not under direct sanctions yet. Some volumes were also purchased from Donbass-based Alchevsk. Overall, Russian and ex-Donbass material is negotiated at a significantly discounted price in Turkey, leaving a spread of around $160-170/mt with local HRC prices.
In the EU, right after the war started, a lot of customers started to panic, knowing there would be cancellations and delays in relation to orders. At that time, many cargoes were booked from India, Indonesia, Vietnam, Brazil and even China in order to compensate for the missing volumes. Currently, European buyers, who are in a regular need of slabs, are trying to source from Asia or Brazil, while some are still buying from Russia’s NLMK, given that semis imports from Russia are not banned in the EU, contrary to the situation with finished steel and raw materials. The same regulation allows NLMK to supply its own Europe-based assets with slabs from Russia (around 130,000-150,000 mt monthly), at least for now. Russia’s Severstal has completely exited the European market after the first sanctions issued against its primary shareholder, and has rerouted its slab trade to Asia.
In Asia, the main ex-Russia slab buyer has been China, with sales to this country being heard from the major Russian sellers, not only Severstal, who has lost its traditional markets, but also from NLMK, Evraz and MMK. “Sales to China can be in RMB. They are safe, but the price usually should be the lowest,” an Asian trader said. By the end of June, offers for ex-Russia slabs to China fell to $530/mt CFR and may come down further, according to sources, which is down sharply by $140-170/mt from deals at $670-700/mt CFR two months ago. Taiwan has also purchased some significant volumes of Russian slabs, while a few lots of Russian slabs were traded to Indonesia and Thailand, but, as demand itself in Southeast Asia was on the lower side, these countries were not the main buyers.
Moreover, while except for Asia, Russian suppliers failed to maintain their market shares in distant export markets, this is not fully correct for the slab segment. In particular, there were at least two sales of slabs from NLMK to Latin America in May.
Geography of ex-Russia billet exports narrows, volumes do not narrow much
Turkey and Egypt ended up being the main buyers of billet from Russia even despite the sanctions and related risks. One factor is that the countries did not join the international restrictions on Russia, and another is that both of them have figured out a way of paying and bypassing sanctions. Still, to be fair, in Turkey a lot of mills preferred to increase their own billet production via higher scrap usage or to cut merchant billet output instead of taking the risks of working with Russia. But re-rolling companies, which are the main buyers of billet in Turkey nowadays, have had no alternatives for imports as other billets of origins are either from Iran or expensive Asian billet. The number of local billet offers in Turkey has been limited for a long time. Nevertheless, it cannot be said that the billet trade in the region is very easy for the Russians. Suppliers are under constant pressure to provide discounts, to find a vessel, insurance and ways of collecting money. Lately, more traders have started to try selling ex-Russia cargoes, including those coming from the Donbass region, in increased volumes.
As a result, ex-Russia billets are sold at a huge discount, pulling down prices in the related segment. In particular, in late June, the spread between the latest import billet and rebar prices in Turkey stood at around $130/mt on average, while in Egypt the spread was $230/mt minimum. The rolling cost from billet to rebar in both countries is around $60/mt. Along with Egypt, Russia’s billet is also being traded to other North African countries like Tunisia and, overall, has created an unhealthy competition environment in the region. Specifically, Turkey has a hard time exporting its billets at decent prices and has to look far beyond its usual outlets.
In Asia, ex-Russia billets have been at big discounts compared to other origins, though less than in other outlets, with discounts of $20-30/mt. The only destination in Asia where sales from Russia have fallen significantly is the Philippines, as they have very tight connections with the US and banks are advising mills there not to purchase from Russia to avoid possible consequences. A few lots were sold when the war had just started, but all further rumours of sales have been widely denied by customers. China and Taiwan have been the main billet buyers from Russia, with the latter even managing to open LCs in US dollars for payments. It helped such large producers as Evraz, which usually sells all major billet volumes to Asia, to not cut production much and keep its market share.
No sales of ex-Russia billets have been reported to Latin America, which was usually buying from Ukraine, Russia or Turkey. Not only payment issues, but also huge freight costs (up to $300/mt) have made this destination impossible for Russia.
Finished steel exports from Russia in trouble, mainly represented by HRC
In general, despite the increasing rate of the local currency and trouble selling overseas, Russian mills continue trying to deal for any volume and any destination they can find in order to get cash. Longs producers have concentrated on square billet sales rather than finished products, taking into account also that even before the war ex-Russia rebar and wire rod exports were not significant, while buyers had a choice of alternatives such as Turkey, the GCC and Asian countries. As a result, in recent months Russia’s finished steel exports have mainly been represented by HRC.
The key targeted markets are Turkey and North Africa, along with Asia. Moreover, Turkey has been one of the main sales destinations for Russia although the situation differs depending on the seller. While NLMK is not under direct sanctions, though still under financial and other restrictions, it can sell to Turkey relatively easily, although at a discounted price. Severstal has more problems selling and its prices are considered workable only if they are at least $20-30/mt lower than NLMK’s prices and lower by around $50-70/mt than the local prices in Turkey. MMK, according to sources, has been giving material to its own asset in Turkey MMK Metalurji and no sales have been heard to third parties. “They can give HRC to Metalurji since they are basically the same company and there is no payment issue. Maybe they are giving over 100,000 mt per month,” one source commented
Asia is for Russian HRC exporters more attractive as in this region not many countries have applied or supported the international sanctions. However, the biggest markets, particularly Vietnam, refuse to deal for HRC from Russia, fearing secondary sanctions, especially since local re-rollers have experience of being punished for buying cheap ex-China feedstock and selling it to the US in the form of coated steel. As a result, Russia deals only with certain markets in Asia, but this cooperation cannot be considered to be sustainable. Within the past months, Severstal sold two 30,000 mt HRC cargoes to India at a huge discount, especially given the effect of the recently introduced export taxes in the country. Another 30,000 mt lot was sold to Indonesia not so long ago. Another mill, supposed to be NLMK, sold 45,000 mt to Nepal. Cheap ex-Russia HRC offers have also been reported to Pakistan and China.
Conclusion
The common view regarding the effectiveness of the sanctions on Russia steel exports is that any effectiveness is limited for now and cannot lead to a significant reduction in sales volumes from the country. “Steel is flowing, and the sanctions have not stopped any activities,” one market source stated, summarizing the situation. However, sanctions have visibly altered the business process as at all stages from negotiations to payments and transportation Russian steel exporters are facing problems. Moreover, their sales destinations have changed with some customers increasing their purchases due to the discounted prices as compared to materials of non-Russian origins, while others like Europe, especially, are avoiding doing business with Russia. The weakest impact of sanctions has been seen in upstream product sales, while there has been a more significant impact on downstream product sales, where customers have more alternatives.
Four months after the start of the war by Russia against Ukraine, the market has adapted to new conditions, but anticipated secondary sanctions, which may be imposed by the US and Europe, could trigger further changes in trade flows. One thing is certain: doing business with Russia is possible, but it is not “business as usual” anymore.