Russian mill group urges government to drop steel tax, cut back severance duty

The Russian steelmakers' association has asked the government to drop the excise duty on liquid steel and abolish the increase in mineral extraction taxes, or METs, on ore and coking coal implemented from Jan. 1, an official of Russkaya Stal confirmed to S&P Global Commodity Insights May 30.

In May, domestic steel mills began to incur losses on certain sales due to the loss of premium markets, Russkaya Stal said, warning of the risk of redundancies should the government decide to not take any action to alleviate concerns hurting the Russian steel industry.

After Russian mills lost access to premium European steel markets following the EU-imposed ban on the bloc's imports of Russian steel products in response to Moscow's invasion of Ukraine, they began to redirect 4 million-5 million mt/year of steel elsewhere and find alternate avenues for these tonnages in Turkey and Asian countries, mainly China, according to Russkaya Stal.

The share of exports going to Asia already exceeds 50% of Russia's entire steel exports, up from 10%-20% before Russia's invasion of Ukraine, it said.

According to Russkaya Stal, Asian and Turkish buyers are taking advantage of the situation and demanding discounts.

While selling slab, Russian producers have to accept $250/mt discounts on published quotations and a large part of their exports of semi-finished products (slabs, billets and pig iron) have incurred negative profit margins since the start of May, according to Russkaya Stal.

In the week that began May 23, Platts assessed slab Black Sea export price at $595–$605/mt FOB, according to S&P Global Commodity Insights data. In contrast, Brazilian slab was assessed at $810-$850/mt FOB.

At 63.5 rubles/1$ rate -- the Russian central bank's rate stood at 66.4 rubles/1$ on May 28 -- sales to China of products made via the blast-furnace-basic oxygen converter route are generating revenues that are just about equal, and in some cases lower than production costs.

Russia's domestic market is not in a condition to bail out mills, as it has been in decline throughout May -- both in terms of demand and prices -- and this year, the country's steel consumption could drop by 30%, according to Russkaya Stal's March forecast.

While their profitability is plunging, Russian steelmakers are having to deal with sharply higher logistics costs, with Vladivostok-China freight rate doubling from what it was pre-invasion.

In the face of these challenges, steel producers are finding it hard to keep paying the excise steel tax and increased severance levies that together raise their production costs by 10%, forcing some to reduce production volumes, according to Russkaya Stal.

In January, Russia's MET for iron ore increased twofold, tax on coking coal grew by a minimum of 25% and the country introduced an excise on liquid steel, payable on every ton produced, including unsold volumes.

The tax code revisions followed the expiry of the 15% export duty on steel valid from August to December 2021 and were prompted by steelmakers' record high earnings. The 2021 EBITDAs of major steelmakers Evraz, MMK, NLMK and Severstal increased by 2.3-2.8 times to $4.3 billion-$7.3 billion per company.