In the face of stiff sanctions, Russian steel companies are capitalizing on experiences gained during the coronavirus pandemic, urgently stepping up their marketing in Turkey and the Middle East, building ties in atypical markets such as Asia and looking for spare parts from outside Europe.
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Like other Russian companies and entities, the country's steel industry faces sharp sanctions from the EU over the Russian war in Ukraine.
"A month ago, no one was considering alternative markets, although the prospect of paying CBAM (Carbon Border Adjustment Mechanism) that may reach Eur150/mt when introduced later this decade, should have stimulated mills to gradually start diversifying away from Europe," said an industry source. "The moratorium on rolled steel sales to Europe will speed up this process."
Russia in 2021 exported 40 million mt of steel -- more than half of its 76 million mt output. Rolled steel shipments to the EU that will now have to cease represented 4.4 million mt, or 15%, of Russia's total exports, with Severstal's products comprising two-thirds of that. This volume will now have to be directed elsewhere.
Finding alternative outlets is seen as crucial to ensure uninterrupted operations of blast furnaces, and will be done, albeit with the impact on Russia's high value-added steel output, according to industry insiders.
Though it has banned almost all finished steel imports from Russia, the EU has left the door open for semi-finished steel imports. In 2021, semis comprised 1.4 million mt, or 13%, of Severstal's 11.1 million mt total steel sales.
As in H1 2020, at the dawn of the pandemic, Russian steel companies are again expected to ramp up their shares of export-destined slabs and hot-rolled coil versus value-added products, mainly distributed domestically, to export as much as possible under the current circumstances and through that sustain decent utilization rates at their furnaces and rolling mills.
As Russian shipments to the EU have effectively stalled, which happened even before the EU's latest ban on rolled steel imports from the country, sales agents at Russian mills are busy talking to steel rerollers/users in Asia, from China in particular, a source at one of the mills told S&P Global Commodity Insights.
Back in the April-June quarter of 2020, when pandemic-weakened demand in the domestic and European markets prompted Russian companies to step up their presence in atypical markets, Severstal's shipments to Southeast Asia reached 4%-5% of its sales.
Among other steel makers, striving to avoid idling blast furnaces back those early pandemic days, Severstal relied on its competitiveness and said that only a significant slowdown of Southeast and East Asian markets, first of all China, could justify production cuts at its flagship Cherepovets Iron and Steel Works, or CherMK.
"Chinese orders are not the best alternative for us, but we may bid for them," Severstal CFO Alexey Kulichenko said back in April 2020, and this is when common quality HRC sales fetched the company $320-$330/mt FOB Black Sea.
Two years on, HRC price values increased fourfold. On March 15, they varied from Eur1,310-1,400 ($1,440-$1,540)/mt ex-works in Europe to $1,300-$1,350/mt ex-works in Turkey and $835-$842/mt on FOB and CFR bases in China and Southeast Asia. The FOB Black Sea HRC price – in the absence of actual trade – has lately been assessed nominally at $1,085/mt.
"With such prices that we are seeing today, Russian major steelmakers may reach out as far as Far East and India," said a bank analyst, who asked not to be identified, adding that Russian steel sales to the Middle East and North Africa will become more common. "When you have a slab price in excess of $1,000/mt, routes and destinations previously deemed unprofitable are becoming viable, and no market is too far."
By contrast with slab market prices, between H1 2020 and Q4 2021, the production cost of slab in Russia on a nonconsolidated basis increased less than twofold to $520/mt, up from $270/mt, which implies the cost of slab production and margins on its sales now being comparable, if not equal, values.
Major repairs on hold
"Severstal, NLMK, Evraz and MMK number among world's top 10 most efficient steelmaking companies, they will survive without doubt," said the bank analyst. "I think more so than sustaining sales volumes and making inroads into new markets, these companies are concerned with finding new sources of spare parts and consumables they need to maintain equipment in working order but can no longer get from Europe."
Severstal planned this year to idle for 240 days one of its five blast furnaces -- No. 5, the largest at CherMK -- for major repairs. This upgrade is meant to extend the furnace service life to over 20 years and cut its operational costs.
It is not clear, however, whether all the necessary Danieli-made equipment have arrived and if not, whether sanctions, especially those the EU imposed on Alexey Mordashov, Severstal's major shareholder and the chairman of its board, will now affect these supplies or make them impossible.
"The upgrade has been put on hold for now," a source close to CherMK told S&P Global.
Severstal declined to comment on the state of the project.
The issue of foreign shipping companies refusing to deliver Russian cargoes revealed that none of the Russian steel majors own marine vessels, while the country's commercial fleet is too small. And yet, this sabotage of all things Russian is not expected to encourage ship ownership within the steel industry.
"Aside from the sheer burden of cost, there is a factor of long shipbuilding cycles and long queues," said an industry analyst, who also asked not to be named. "So if ordering today, say in China, you may get your vessel ready by 2028, and who can look that far ahead from the point of today's instability and volatility."