Did Western sanctions really impact Russian steel industry?

• Sanctions left the door open for iron ore, and semis export to EU
  
  
• Russian mills circumnavigate sanctions
  
  
• Crude steel production likely to drop by year-end
  
  
• Newer markets like Turkiye sought with discounted prices
  
  
• But exports not profitable due to dumping, strengthening rouble, higher logistics
  
  

Morning Brief: After 6 months of war, steelmakers from the Russian Federation are experiencing difficulties with exporting products and buying spare parts for equipment.

Western sanctions did not work against the Russian steel industry as much was desired. However, Russian steelmakers are being forced to scout for newer markets and logistics routes for deliveries of their steel and semi-finished products and raw materials, as per a report by GMK Center, A Ukraine-based market intelligence entity.

Canada, the UK, the US and the European Union introduced sanctions against Russian steel products. The EU imposed sanctions on finished rolled steel and pipes, but left the door open for iron ore and semi-finished products.

It is difficult to accurately assess the impact of the sanctions on the Russian steel industry. Starting from June 2022, the Russian Federation stopped publishing official statistics on steel production.

Production drops
According to the World Steel Association (WSA), steel production in the country for the first 5 months of 2022 fell by 2.3% y-o-y, to 31 million tonnes (mnt). According to WSA estimates, steel production in Russia in June 2022 was 5 mnt (-22.2% y-o-y), in July the rate of decline slowed down and monthly production reached 5.5 mnt (-13.2% y/y). Thus, for January-July 2022, 41.4 mnt were produced (-7% y-o-y).

A significant decline in the volume of steel production in the Russian Federation is not expected. This is because exports from Europe were reoriented to the markets of Turkiye, China and some Middle Eastern countries. Although the search for sales in these directions was problematic, discounts of 15-40% were provided.

Export-oriented Russian steel companies suffered the most.

According to NLMK's forecast, by the end of 2022, Russian steelmakers will reduce production by 15% y-o-y, or by 11 mnt. The largest decrease in the production of flat products will be 23% y-o-y. The production of long products will decrease by 15% y-o-y. The output of semi-finished products will fall by 6% y-o-y.

The trend of decreasing production and finances will appear closer to the end of the year. Due to problems with budget financing, Russian steel producers will not be able to actively support the domestic market, and the decrease in prices in world markets will reduce the opportunities for conducting an aggressive trade policy.

At the same time, according to WSA estimates, steel consumption in Russia will fall by 20% in 2022, to 35.1 mnt, against 43.9 mnt in 2021.

Newer markets but lower prices
Sanctions against steel products from the Russian Federation forced producers to look for new sales markets, in particular in Asia. Russian steelmakers chose countries that did not join Western sanctions - China, India, Turkiye, etc. In particular, in 8 months of 2022, total Russian exports to China jumped by 50% y-o-y - up to $72.9 billion, while imports into the Russian Federation from China increased by only 8.5% y-o-y, to $44.2 billion. In January-August 2022, Russian exports of semi-finished products increased many times over the year to China. However, the Russian steelmakers will not be able to fully reorient steel supplies from Europe to Asia.

On the other hand, some of the Russian steel products (mostly semi-finished products) were in great demand, in particular due to the cessation of supplies from Ukraine. In particular, Russian semi-finished steel products were sold to Turkiye at significant discounts, which strengthened the competitiveness of local steel rolling companies.

Price dumping was not a decisive factor for Russian producers, who had the world's largest margin of profitability and received, after all, state support. Russian semi-finished products in Turkiye, for example, were more profitable than buying scrap, which caused a drop in scrap prices. Therefore, such agreements were beneficial to buyers, and Russian steel found a market too. But sales with large discounts had a negative impact on the financial indicators of Russian producers. But prices rose in the second quarter of 2022 due to the disruption in supply chains which helped the Russian mills.

However, such a situation could not last long, after Russian semi-finished products, finished rolled steel from the Russian Federation came to the Turkish market. Local steel companies were not interested in such supplies. According to the vice president of the Turkish Steel Exporters' Association, Uhur Dalbeler, Russia reduced the prices of steel exported to Turkiye. This negatively affected the competitiveness of Turkish producers.

India impact
In the summer of 2022, India increased its purchases of steel products from Russia, as prices were very attractive. In July 2022, the import of ferrous metals from the Russian Federation increased five-fold y-o-y, to 297000 tonnes. According to some reports, in August 2022, India's imports of finished rolled products were up 11.8% y-o-y, to 442,000 tonnes.

Bypassing sanctions
Russian owners of rolling mills in Europe invent their own methods of circumventing sanctions. Thus, NLMP supplies products to the EU market through the Belgian subsidiary NLMK Belgium Holdings SA and SOGEPA. Under this method, Russia delivered more than half of its steel exports to the EU in January-May 2022 - 4.7 mnt. According to official data, in January-May 2022, the EU accounted for about 40% of steel exports from Russia.

Causes and consequences
Bypassing Western sanctions is not impossible. However, it takes time to find new buyers and establish new logistics routes. Western countries threaten companies with secondary sanctions for circumventing established procedures.

However, Russian steelmakers are already complaining about the unprofitability of export supplies due to dumping, the strengthening of the rouble, and logistics costs. In such conditions, exports become pointless, says NLMK. No less acute is the problem of an export surcharge in the tariffs of the Russian railway operator RZHD.

Europe is gradually abandoning Russian energy resources (coal, self-limitation of gas consumption by 15%, with which not all European countries agree). At the same time, supplies of Russian iron and steel remained outside the focus of the EU (supplies of iron ore, semi-finished products continue). They bring billions of dollars to the Russian Federation. However, in order to ensure the consistency of sanctions, Ukraine should have been given the opportunity to supply these products to the EU market instead of Russian, says the GMK Center report.