Aug 25, 2022
Six months of war: How has it changed the global steel market?
2022-08-29
August 24 marks six months since the beginning of Russia’s unprovoked invasion in Ukraine on February 24. Here, Fastmarkets highlights the major changes the global steel market has faced as a result of the war.
Ukraine
The loss of control over two large mills based in Mariupol (Azovstal and Illych Steel, which belonged to major Ukrainian steelmaker Metinvest) as well as logistical and procurement problems resulted in a massive drop in Ukraine’s steel output.
According to the World Steel Association (Worldsteel), the country produced 4.82 million tonnes of crude steel in January-July 2022, down by 62.14% from 12.73 million tonnes produced over the same period last year.
At the same time, Ukrainian steelmakers have faced port blockades and seizures by Russian forces.
According to a map published by the UK ministry of defense on August 22, all major ports on the Sea of Azov, as well as the port of Kherson, which has a river connection with the Black Sea, are controlled by Russia. Meanwhile, the major Black Sea ports remain blocked for all vessels except those shipping grains and associated products and fertilizers, including ammonia, in accordance with a recent deal made with the Russian government.
There have been discussions in political circles that steel products may be included in the grain deal, too, in exchange for the easing of western sanctions against Russian steel, which could help enliven steel export shipments. Nothing official has been announced yet, however.
As a result of the port blockages, Ukrainian steelmakers have had to use alternative options for transporting their products, but those are not sufficient to maintain decent export activity. Some alternative routes include the delivery of goods to Europe by truck and rail, as well as shipments from Black Sea ports in Romania and Bulgaria and from Baltic Sea ports in Poland.
“Before the war, Ukrainian business exported 80% of ferrous metals and 70% of iron ore through the ports of Odessa and Mykolaiv,” Volodymyr Tkachenko, the head of Kiev branch of ArcelorMittal Kryvyi Rih, was quoted as saying in media reports.
“The available railway crossings are able to let through not more than 1,900 cars per day, while the country’s export capacities need a minimum 3,400 cars per day,” Olexandr Kalenkov, the president of national steelmakers’ union Ukrmetallurgprom, said in the same publication.
Russia
Steel output in Russia also decreased during the reviewed period.
Over the first seven months of the current year, Russia produced 41.43 million tonnes of steel, down by 6.96% in a year-on-year comparison, according to Worldsteel.
In August, though, an official from Russia said that “there is also a significant decline in domestic consumption. As a result, the steel industry’s capacity utilization has dropped to 80% from an average of 93%.” He added that the capacity utilization rates for Magnitogorsk Iron & Steel Works and for Severstal stood at 62% at 72% respectively.
The drop was mainly driven by the effects of western sanctions imposed against the country for its invasion in Ukraine.
The European Union only seven packages of sanctions against Russia, including general sanctions that hit banking, insurance and shipping services as well as those which hit the steel industry and some of its main participants directly.
For example, sanctions against Severstal’s owner Alexey Mordashov – combined with a ban on finished steel shipments from Russia to the EU – pushed Severstal, which was Russia’s main flat steel supplier to Europe, out of this market and forced the steelmaker to concentrate on the domestic market or look for support in alternative outlets. Before the war, the company was mainly concentrated on lucrative finished steel sales in Europe, but recently it had been heard offering slab in Turkey and Asia at comparatively low prices.
The western sanctions significantly reduced the number of buyers willing and able to touch products made in Russia.
Turkey, Mexico, China and Taiwan became the main outlets for Russian exports. And while the number of potential buyers decreased, prices also started to fall, creating significant pressure for the global market.
Russia used to export 40% of its steel production.
“It is clear that part of the export market is closed for us,” Vladimir Lisin, the main shareholder in the country’s Novolipetsk Iron & Steel Works (NLMK), said.
Neither NLMK, nor its shareholders, have yet been hit by direct sanctions.
“There is also a decrease in activity in the Russian market, [and] a surplus of 40% has been created [which traditionally used to be exported], out of which [only] 10-15% can still find the outlet,” he said. “Where does the rest to go? The domestic market has never consumed so much.”
In the first half of 2022, NLMK reported a 1-million-tonne fall in sales from the level predicted. According to the company’s forecasts, the entire Russian metallurgy industry will lose 30-50% of its budgeted sales because of the country’s war on Ukraine.
Mounting pressure on prices
As the initial shock from the war – and an accompanying surge in steel product prices – has waned, Russian prices started to fall as suppliers tried to attract customers despite the sanctions.
This stimulated competition globally, particularly in semi-finished steel segment (billet and slab account for the largest portion of Russian steel exports), which in its turn had a negative effect on the finished steel market.
For example, as of August 24, Fastmarkets’ steel billet index export, fob Black Sea, CIS averaged $521.33 per tonne in the month to date, down by 22.44% from an average of $672.20 per tonne in February.
“Sanctions against Russian products created a new market for them, which depreciated Turkish long steel prices,” one Turkish source said.
Fastmarkets’ price assessment for steel reinforcing bar (rebar), export, fob main port Turkey averaged $641.60 per tonne in the month to date, down by 14.02% from an average of $746.25 per tonne in February.
A United Arab Emirates-based producing source said that cheap Russian billet pressured Iranian billet prices, which in its turn prompted domestic buyers to reduce asking prices for rebar.
Fastmarkets’ weekly price assessment for steel billet, export, fob ports Iran averaged $448.88 per tonne to date in August, down by 23.38% from $585.88 per tonne in February.
“Russia is offering very low prices, some say even dumping to markets where they were not sanctioned yet, like in the Far East, Turkey, the Middle East and Africa,” one trader from Turkey said.
By volume, the most-exported final steel product from Russia has been hot-rolled coil.
Fastmarkets’ price assessment for steel HRC, export, fob Black Sea, CIS averaged $540 per tonne fob in the month to date, a drop of 39.66% compared with the February average of $895 per tonne.
The price assessment for steel HRC, import, cfr main port Turkey – the key typical destination for flat steel exports from Russia – averaged $591.67 per tonne in the month to date August, falling by 35.47% compared with $916.88 per tonne in February.
Meanwhile, in Europe, Russian war against Ukraine caused a wave of a panic-buying during February-March, with prices for flat and long steel surging dramatically, reaching the new historic peaks and breaking the records set in summer 2021.
For example, Fastmarkets’ calculation of its daily steel hot-rolled coil index, domestic, exw Northern Europe averaged €1,278.50 per tonne in March 2022, up by €326.49 per tonne from €952.01 per tonne in February and up by €489.60 per tonne from €788.90 per tonne in March 2021.
Market sentiment, however, has soured recently, mainly due to slowing end-user demand and overstocking that resulted from the earlier panic-buying.
Notably, automotive output in Europe has declined due to acute component shortages that are not expected to be resolved until the end of 2022, sources said.
As a result, Fastmarkets’ most recent calculation of its daily steel hot-rolled coil index, domestic, exw Northern Europe was at €720 per tonne on August 24, down by €247.14 per tonne from €967.14 per tonne on February 24.
Trade flow changes
The disruption of trade flows was another major effect of the war on the global steel market.
In particular, the disappearance of Ukraine from the export market has opened opportunities for European and Asian suppliers.
In 2021, Italy imported 2.39 million tonnes of slab; Ukraine was its top supplier, accounting for 73.6% of that total, followed by Russia.
Once Ukraine stopped exporting slab to the country, buyers turned to suppliers from Asia – namely, India, China and Indonesia – to fill the gap.
A similar situation has been noted in the plate market.
“Our regular buyers of plate in Europe, and in the Middle East and North Africa region, I suggest were impacted the most because we had a large market share,” one supplier from Ukraine said, adding that these volumes have since been replaced with material from Asian and European suppliers.
Fastmarkets discontinued its price assessment for steel heavy plate, 8-50mm, export, fob Black Sea, CIS (MB-STE-0013), due to a substantial reduction in market activity.
“The pig iron market in the United States was impacted a lot as well, because Ukraine and Russia covered around two-thirds of its import pig iron supply,” the Ukrainian supplier said. “Buyers there refused Russian pig iron completely, while we [Ukrainian suppliers] still can ship rather limited tonnages.”
Pig iron buyers in the US have been forced to cut their pig iron consumption and increase their hot-briquetted iron (HBI) consumption. At the same time, US pig iron bookings from Brazil intensified in March.
“Every single tonne of pig iron which could be produced in Brazil was produced, even those producers who normally focused on billet supply have been selling pig iron,” one supplier of pig iron from Brazil said.
And while the western world was looking for substitutes for Ukrainian and Russian volumes, Russian suppliers found support in Asian customers.
Low prices and comparatively few problems with handling payments at banks turned Taiwan into a regular importer of semi-finished steel and HRC from Russia’s Far East in April and May.
Shipments of semi-finished steel products to Taiwan from Russia jumped to 162,699 tonnes in May, according to Taiwanese customs figures, up by 57.4% year on year from 103,363 tonnes in May 2021. Russian semi-finished steel products accounted for 59.3% of all arrivals in May, up from 35.3% a year earlier.
Russian exports to Taiwan have mostly been concluded by traders based in either China or the UAE and have taken place despite Taiwan’s strong ties with the United States, according to sources.
China – which remains a very close ally with Russia despite the war – also has imported significant volumes of Russian semi-finished steel.
China imported 239,496 tonnes of steel slab in June, up 917% year on year. Some 122,423 tonnes of that total were purchases from Russia, according to Chinese customs statistics.
On the other hand, the war has led to a reduction in trade between Russia and another US ally, the Philippines. The main difference between the situation with Taiwan and that with the Philippines is that most Filipino banks still refuse to handle Russian cargo, making payment very difficult, according to market sources.
The Philippines imported zero tonnes of semi-finished steel from Russia in May, down from 23,930 tonnes in May 2021, according to customs stats. April semi-finished steel import volumes were 68,469 tonnes, down from 134,962 tonnes in April 2021.
Growing production costs in Europe
The price uptrend in the European energy market that started in autumn 2021 has continued into 2022, with the situation getting even worse after February 24.
For example, in July 2021 average electricity prices in Italy were around €400 per MWh, up from about €271 per MWh in June 2022 and sharply up from €103 per MWh in July 2021, according to local energy service company Gestore dei Mercati Energetici (GME). During the week ended August 21, average electricity prices in Italy surpassed €500 per MWh.
On August 5, the European Commission approved a plan encouraging EU member countries to voluntarily reduce gas consumption by at least 15% between August 2022 and March 2023.
While there is no evidence that countries will self-impose energy restrictions, if this did happen, energy prices would keep going through the roof. This in turn would force steel mills to increase prices, Fastmarkets has heard.
But European steel market fundamentals have been too weak recently to support a price rise, sources said.
Notably, overstocking – coupled with contracting end-user demand – has been pushing flat steel prices in Europe down in recent months. As a result, European mills might be faced with the need to cut output further or even stop operations completely.
“In theory, the gas rationing suggested by the European Commission [may] result in even more capacity being put offline,” a trading source told Fastmarkets.
Starting in June 2021, an increasing number of European flat steelmakers have been reducing output in order to balance demand and supply and spare flat steel prices from a sharp downtrend.
Still, despite those efforts, the downtrend in Europe’s hot-rolled coil market resumed in August, with prices continuing to sink.
Effects on Middle East markets
The Egyptian steel market has been affected by the war between Russia and Ukraine in several aspects, according to sources.
The war resulted in “lower availability of billet even with low prices, combined with scarcity of foreign currency to pay for procured material,” according to an Egyptian trader.
Egypt has been suffering from a shortage of foreign currency recently, Fastmarkets understands.
“Sanctions [on Russian steel] added difficulties on payments, and freight rates skyrocketed backed by fuel high prices,” the trader said.
Furthermore, the war resulted in “lower export tonnages from Egypt to the European Union, due to lower demand backed by higher energy costs. The war affected the energy costs, and this affected the local production, especially lower raw materials stocks. As a result, local production in Egypt is hand to mouth only now – prices not reflecting the actual costs,” the trader said.
Turkey’s steel sector has also been directly affected because of low-priced imports from Russia, Turkish sources told Fastmarkets.
“The crisis has been affecting Turkey deeper every day. Turkey’s crude steel output decreased by 13% in June and 20% in July. Turkish exports decreased by 6.5% in the first six months of 2022, and decreased by about 8.5% by the end of August,” Ugur Dalbeler, chief executive officer of Turkish steelmaker Çolakoglu and vice president of the Turkish Steel Exporters Union (ÇIB), told Fastmarkets.
“The upcoming period seems to be even worse. Many companies stopped importing raw materials and intermediate products from Russia because these companies have relations with the EU and the US. They have to buy from other sources at a higher cost. On the other hand, Russian producers cannot export their products to many countries because of sanctions, so they export to Turkey at prices with about 50% discount. This results in big losses for Turkish producers and the outlook for the fourth quarter seems much worse,” Dalbeler said.
“Another danger is that Turkish products may be subject to investigations on circumventing sanctions, and new sanctions may be imposed on Turkish steel. The only way to avoid this is to impose sanctions on Russian steel like the sanctions imposed by the EU and the US,” Dalbeler added.
Notably, a Turkish trader claimed that the European Commission imposed anti-dumping duties on Turkish hot-dipped galvanized coil because the substrate used for some HDG produced in Turkey is of Russian origin.
Published by: Vlada Novokreshchenova, Julia Bolotova, Serife Durmus, Lee Allen, Marina Shulga
Elina Virchenko in Dubai also contributed to this report.
Source: Eurometal
